If you owe money to both New York State and the IRS, you may be wondering if there’s any way out. Good news: New York State and the IRS each offer compromise programs that let you settle tax debt for less than you owe. But they have key differences in how they calculate your offer, what expenses they allow, and which taxes qualify. Knowing these distinctions could save you substantial money.
What Are Offer in Compromise Programs?
An Offer in Compromise (OIC) is a legal settlement allowing you to resolve tax obligations for less than what you owe. Think of it as negotiating with your creditor, except your creditor is a government agency with specific rules and calculations.
In 2024, the IRS approved 7,199 out of 33,591 offers in compromise, as reported by the Internal Revenue Service Data Book. That’s roughly a 21.43% acceptance rate. New York State doesn’t publish similar statistics, but tax professionals report similar acceptance rates for qualified applicants.
Both programs exist for the same reason: sometimes collecting less money now makes more sense than chasing uncollectable debt forever.
Key Differences Between NY State and IRS Programs
Expense Calculations: The Biggest Difference
New York State considers realistic expenses that you can justify. The IRS has pre-set standards for many of the expenses, according to tax resolution experts.
New York State Approach:
- Allows most reasonable living expenses
- Reviews your actual spending patterns
- More flexible with necessary expenses
- Considers local cost of living factors.
IRS Approach:
- Uses standardized expense tables
- Sets maximum amounts for categories like food, housing, transportation
- Less flexible with expense justifications
- Applies national standards regardless of local costs.
Real-World Impact: A taxpayer in Manhattan paying $3,000 monthly rent might get that full amount allowed by New York State. The IRS might only allow $2,200 based on their housing standards for the region.
Tax Categories Included
New York State OIC covers:
- Individual income taxes
- Business income taxes
- Sales and use taxes
- Employment taxes.
IRS OIC includes:
- Individual income taxes
- Employment taxes
- Corporate taxes
- Interest and penalties.
Federal Offers In Compromise never include sales tax because the IRS doesn’t impose a national sales tax. This means if you owe both income and sales taxes, you’ll need separate applications.
Application Fees and Payment Requirements
New York State Offer in Compromise
- Lower application fees (varies by case type): The New York State Department of Taxation and Finance does not charge a standardized application fee like the IRS. The application process is outlined in detail on their official site, but no set fee is listed for most cases, and any required payment is case-specific and typically lower than the IRS fee.
- More flexible payment arrangements: New York State reviews your financial information and you can negotiate payment terms based on your circumstances. The state may allow for installment payments or other flexible arrangements if justified by your financial situation.
- Can often negotiate payment terms: The state’s OIC program specifically mentions that payment terms can be negotiated and are not rigidly set, allowing for more flexibility than the IRS.
IRS Offer in Compromise
- $205 application fee (waived for low-income taxpayers): The IRS requires a non-refundable $205 application fee with every OIC submission. This fee is waived for taxpayers who meet low-income certification requirements.
- 20% payment required with lump-sum offers: For lump-sum OICs, the IRS requires an initial payment of 20% of the offer amount to be submitted with the application. This payment is also waived for qualified low-income applicants.
- Stricter payment requirements: The IRS has strict guidelines for payment. Lump-sum offers must be paid in five or fewer installments within five months of acceptance, and periodic payment offers require regular monthly payments while the offer is under consideration and after acceptance.
Financial Hardship Standards
Both programs focus on financial hardship, but they define it differently.
New York State Financial Hardship Requirements
Economic hardship exists when paying reasonable essential living expenses becomes impossible. Essential living expenses support the health, welfare, and income production for you or your family, as defined by the New York State Department of Taxation and Finance.
New York considers:
- Your age and health
- Employment prospects
- Dependents and their needs
- Local living costs
- Special circumstances (medical issues, natural disasters).
IRS Hardship Standards
The IRS uses a more rigid formula. They calculate your “Reasonable Collection Potential” or RCP using:
- Monthly disposable income × 12 or 24 months
- Plus equity in assets
- Minus allowable expenses (from their tables)
The IRS examines your assets, vehicles, bank accounts, real property, basic living expenses, where you live, current income, future income, and even how old your car is when calculating your ability to pay.
Which Program Should You Choose?
You don’t have to choose if you owe both state and federal taxes. Both programs allow concurrent applications. But understanding which might be more favorable helps you plan.
Choose New York State OIC when:
- Your actual living expenses exceed IRS standards
- You have significant sales tax debt
- Your local living costs are high, or
- You have unusual but necessary expenses.
Choose IRS OIC when:
- Your expenses fit within federal standards
- You have primarily income tax debt
- You qualify for low-income provisions, or
- Your assets are minimal.
Making Your Decision
The choice between New York State and IRS Offer in Compromise programs depends on your specific situation. Consider these factors:
- Types of taxes owed
- Your actual vs. allowable expenses
- Local living costs
- Asset values
- Timeline needs.
Most importantly, both programs require meeting strict qualification criteria and providing extensive documentation. Professional guidance often makes the difference between approval and costly rejection.
The Application Process: What to Expect
Documentation Requirements
Both programs require extensive financial documentation:
- Three years of tax returns
- Bank statements (12 months)
- Asset valuations
- Proof of income and expenses
- Credit reports.
Pro tip: Incomplete applications get rejected immediately. Having an experienced tax attorney prepare your application dramatically improves your chances.
Timeline Differences
New York State:
- Often faster processing (6 to 12 months)
- More direct communication
- Easier to get status updates.
IRS:
- Longer processing times (12 to 24 months)
- More bureaucratic process
- Automatic acceptance if no decision within 24 months.
Pro Tip: Incomplete applications are not processed. The NYS Tax Department will notify you if anything is missing and set a deadline to submit the missing documents, or your application will not be processed. The IRS will return your application and fee if incomplete or ineligible.
How Bankruptcy Impacts Your Choices
Courts processed 517,308 bankruptcy filings in 2024 for both individuals and businesses, as documented by US Bankruptcy Courts statistics. Many of these filers also had tax debt.
Important: While in an open bankruptcy proceeding, a taxpayer is not eligible for an offer in compromise agreement, according to the IRS.
Bankruptcy Versus Offer in Compromise
Sometimes bankruptcy makes more sense than an OIC:
Consider bankruptcy when:
- You have multiple types of debt beyond taxes
- Your tax debt is old enough to be dischargeable
- You need immediate collection protection, or
- An OIC wouldn’t provide sufficient relief.
Consider OIC when:
- Tax debt is your primary problem
- Your taxes aren’t dischargeable in bankruptcy
- You want to avoid bankruptcy’s credit impact, or
- You can afford the proposed payment amount.
Offer in Compromise: Common Mistakes That Lead to Rejection
After handling hundreds of tax cases, Attorney John D’Amato has seen these mistakes repeatedly:
Underestimating Assets or Income
Even small omissions can destroy your credibility. Both agencies will verify your financial information thoroughly.
Overestimating Necessary Expenses
NYS excludes specific living expenses when determining payment capacity. Private school tuition and college costs cannot be included, according to tax resolution experts.
Poor Timing
Applying during an audit or when you’re behind on current taxes guarantees rejection.
Unrealistic Offer Amounts
Lowball offers insult the agencies and hurt your negotiating position.
Why Professional Help Matters in OICs
The IRS reminds taxpayers to beware of promoters that say their services are necessary to resolve IRS tax debts but charge excessive fees and often produce no results.
But legitimate tax attorneys provide real value:
- Proper application preparation
- Realistic offer calculations
- Negotiation experience
- Protection from common mistakes
- Appeals representation if needed.
The difference between a properly prepared application and a DIY attempt often determines success or failure.
Success Stories from John D’Amato’s Practice
John D’Amato has helped numerous New York taxpayers successfully navigate both state and federal OIC programs. Here’s what clients say:
“John and his team were amazing. They are very thorough and efficient when they handled my case. John himself is an extremely nice guy and easy to talk to. When I had a question they responded quickly.” – Brian S.
“John was extremely realistic and sincere. I never had an experience with an attorney before that was so positive. John was thorough and upfront. I knew I could trust him from the start.” – Vasaliki
“John was very good at giving the how and why about what Chapter to file. . . . Very good “wording” . . . John and legal assistant Margaret made [us] feel like part of the family. . . . No more stress . . . that meant a lot to the both of us.”
These results reflect John D’Amato’s deep understanding of both New York State and federal tax systems, combined with over two decades of experience helping taxpayers resolve complex debt situations.
Contact John D’Amato for Expert Tax Debt Resolution
John D’Amato, PLLC stands as one of New York’s top-rated bankruptcy and tax resolution law firms. With nearly 30 years of experience helping taxpayers resolve complex IRS and New York State tax problems, Attorney John D’Amato has successfully negotiated thousands of dollars in debt reductions for clients throughout Western New York.
Why choose John D’Amato for your tax debt issues:
- Proven track record: Successfully handled Offer in Compromise cases for both state and federal taxes
- Comprehensive approach: Experienced in both bankruptcy and tax resolution, providing you with all available options
- Local expertise: Deep understanding of New York State tax laws and local economic conditions
- Client-focused service: As clients consistently note, John provides thorough, honest guidance and responds promptly to questions
- Affordable solutions: Competitive fees with payment plans available to help you get the representation you need.
Don’t let tax debt control your life. Whether you’re facing IRS collections, New York State tax problems, or considering bankruptcy as a tax resolution alternative, John D’Amato can help you understand your options and fight for the best possible outcome.
Contact (716) 703-9099 now for your free consultation.
During your consultation, we’ll review your specific tax situation, explain the differences between New York State and IRS programs, and develop a strategy tailored to your unique circumstances. We handle cases throughout Western New York, including Buffalo, Rochester, and nearby counties in Western New York.
Don’t wait, as tax problems only get worse with time. Call John D’Amato, PLLC at (716) 703-9099 and take the first step toward financial freedom today.