New York State recently made two changes in its tax collection procedures that benefit taxpayers. First, it enacted a statute which provides that the State must collect a tax liability within 20 years after a tax warrant could have been filed, regardless of when it is actually filed. Second, it added an additional ground for an offer in compromise. Both provisions became effective August 17, 2011. The first change provides definite rules for determining when a tax liability expires. The second provision should make it easier to compromise tax liabilities which cannot be paid in full.

Changes in the 20-Year Collection Statute

The first statutory change¹ supplies rules to provide a more definite time for the termination of New York State tax liabilities, replacing the uncertainty that existed under the prior law. Both before and after the change, tax liabilities last 20 years. Before the change, however, this 20-year period could be extended if the taxpayer acknowledged the tax debt in writing, or made a payment, including an involuntary payment.

The new statute makes two fundamental changes to the 20-year rule, both concerning the filing of a tax warrant. A tax warrant has the effect of a judgment and gives rise to a tax lien. The first change is that a tax warrant must be filed within six years after the tax is assessed. If it is not filed within that time, the tax liability is extinguished. The second change is that the time for the New York State Department of Taxation and Finance (“Department”) to collect the tax is now limited to 20 years from the first date that the warrant could have been filed, regardless of whether the warrant is actually filed. The first date a warrant could be filed is the day after the last day specified for payment by a notice and demand for payment of the tax, if there is no right to a hearing. If there is a right to a hearing on the notice and demand, the first date that a warrant could be filed is the day that the opportunity for a hearing or review has been exhausted.

The new law also provides that if a tax warrant could have been filed before August 17, 2011 (the effective date of this change), the liability is not enforceable and is to be extinguished after 20 years from the date the warrant could have been filed. It permits the 20-year statute to be extended by written agreement of the Department and the taxpayer, where the agreement is entered into before the expiration of the previous period. The law permits the Department to file tax warrants which include the date on which the warrant expires and the tax liability is extinguished. The statute also provides that it is not to be construed to prevent the Department from accepting a voluntary payment of tax after the time to collect the tax has expired and the tax liability is extinguished.

Before the change in the law, the duration of the 20-year period was uncertain because it could be extended if the taxpayer either acknowledged the debt in writing, or made a payment, whether or not that payment was involuntary. If the department seized property or levied on a bank account and collected anything, no matter how small, this would start the 20-year period running again. This amendment benefits both the taxpayer and the Department. Taxpayers will now know how long their tax liabilities remains open. The legislative history notes that the provision will benefit the Department by eliminating the need for it to dedicate time and labor to the collection of aged and difficult to collect accounts, while permitting it to shift its resources to more productive uses. The Department will no longer have to track acknowledgements, which the legislative history notes “can be very difficult.”

Expanded Grounds for Offers in Compromise of Tax Liabilities

The second change is in New York’s offers in compromise of tax liabilities.² An offer in compromise permits the taxpayer to pay less than the full amount of a tax liability (including interest and penalty) in certain circumstances. Before the amendment, compromise of a tax liability was possible only if the tax debtor had been discharged in bankruptcy or was proven to be insolvent. In addition to these grounds, taxpayers can now have their tax liabilities compromised where they can show that the collection any liability in full will cause “undue economic hardship.” The revised statute deletes the requirement that the compromised amount can not be less than the amount recoverable through legal proceedings.

The amendment requires that the compromised amount must reasonably reflect the collection potential or otherwise be justified based on the evidence presented. Further, the Department many not accept a compromise that “would undermine compliance with the taxes” or that “would be adverse to the best interests of the state.” The Department is to issue regulations defining “undue economic hardship.” The statute offers no guidance on what is meant by “undue economic hardship” other than to note that “the inability to maintain an affluent or luxurious lifestyle shall not constitute undue economic hardship.”

The Department has already issued some guidance.³ It suggests that the new provision is limited to individual taxpayers, a restriction not found in the statute, and advises that further information will be made available on the Department’s website. As of the date of this Alert, the Department’s website states that “Generally, undue economic hardship occurs when a taxpayer is unable to pay reasonable basic living expenses.” The Department will look to the Internal Revenue Service Collection Financial Standards to determine basic living expenses. Factors to be considered in evaluating an offer in compromise include age, employment status and history; inability to earn income because of long-term illness, medical condition or disability; obligations to dependents; extraordinary circumstances such as special educational expenses, medical catastrophe or a natural disaster; and the inability to borrow against or liquidate assets due to hardship. The website states that it will not consider “necessary living expenses” to include private school tuition, college expenses, charitable contributions, voluntary retirement contributions, payments on credit cards, or payments for “cable or similar bills.”

It remains to be seen how the scope of this new “undue economic hardship” provision will operate in practice. But liberalizing New York’s offer in compromise program is certainly welcome. As the legislative history recognizes, before this change the program was so restrictive that very few tax debts could be compromised, “contributing to an increasing number of taxpayers facing overwhelmingly large, aging, and uncollectible tax debts” which with “the rapid accumulation of penalties and interest” makes it “impossible for some taxpayers to keep up, over time, with their growing liabilities, no matter how hard they try.” This was not good for either taxpayers or the Department. Taxpayers could not put the problem behind them, and the Department was unable to collect anything, where with compromise it could collect something.

New York’s two new tax collection provisions will provide greater certainty as to the life of a tax debt and make it is easier to compromise tax liabilities which cannot be fully paid. 

¹New York State Tax Law § 174-b. 

²New York State Tax Law § 171(Fifteenth) and (Eighteenth-a) 
³TSB-M-11(9)C, TSB-M-11(9)I, etc.