Offer in Compromise
By law, taxes should be paid in full and on time. When that is not possible, other options may be available. For example, a payment plan in which the amount due (plus any penalty and interest that is charged after the filing deadline) is paid in monthly installments with interest accruing monthly on the unpaid tax and penalty amount.If a payment plan will not work, you may ask the Department of Taxation (Department) to compromise on the amount of the tax, penalty, and interest due. This request to pay less than what is actually owed to settle a taxpayer’s delinquency is known as an offer in compromise.
The following answers some of the most commonly asked questions about offers in compromise.
1 What is an offer in compromise?
An offer in compromise is a request by you to the Department to pay less than the total amount of delinquent tax, penalty, and interest actually owed to the state.
2 When is an offer in compromise appropriate?
An offer in compromise may be appropriate when there is doubt as to the amount of the tax liability, doubt as to the collectability of the tax liability, or exceptional circumstances (effective tax administration).
3 What is doubt as to liability?
Doubt as to liability means that there is some uncertainty about whether the amount that the Department says is owed is in fact the correct amount.
Possible reasons for submitting a doubt as to liability offer in compromise include the following: the examiner made a mistake interpreting the tax law, the examiner failed to consider the evidence presented, or new evidence is available to support a change to the assessment.
Caution: You may not ignore audit notifications sent by the Department and later attempt to make an offer in compromise based on doubt as to liability based on records that were available to you at the time of the audit but chose not to produce. An offer in compromise is not a substitute for appearing at an examination and producing records to support your position.
4 What is doubt as to collectability?
Doubt as to collectability means that the Department does not think that you will ever be able to pay the full amount of the taxes, penalties, and interest owed no matter how long the Department waits. For example, there may be doubt as to collectability when you have an outstanding tax liability and no assets, are in poor health (which is substantiated with a physician’s report), and have no future earning potential.
5 What is exceptional circumstances (effective tax administration)?
Exceptional circumstances (effective tax administration) means that although you have sufficient assets to pay the full amount of tax owed, due to exceptional circumstances, requiring full payment would cause an economic hardship or would be unfair and inequitable. For example, you may have a serious illness such that paying the full amount of tax owed would impair your ability to provide for yourself and your family.
6 Should I attach an offer in compromise to my tax return if I cannot pay the full amount of tax shown on the return?
No. File the tax return and wait until you receive a bill from the Department. That will allow the Department to process your return and determine the actual amount of your tax delinquency.
After you receive the bill, contact the Department at the telephone number listed on the bill. Our collection staff will first try to determine if a payment plan is a valid option. If not, then an offer in compromise may be appropriate.
Note: If you are being represented by a tax professional, you must complete a power of attorney (Form N-848) authorizing the Department to discuss your situation with that person. Form N-848 may be obtained from any district tax office, by calling the Department at 808-587-4242 (toll-free at 1-800-222-3229), or on the Department’s website.
7 How do I submit an offer in compromise?
All applications require documentation which will be reviewed and verified.
Complete and send the following:
- Form CM-1 Offer in Compromise on website at Hawaii Tax Forms (Alphabetical Listing)
- Form CM-2 (Individual) or CM-2B (Corporation) Statement of Financial Condition (Federal Forms are acceptable) on website at Hawaii Tax Forms (Alphabetical Listing)
- Copies of all bank statements & bank checks/check register for last 3 months
If applicable, also provide:
- ___ Copies of statements showing the premium amounts for all insurance (auto, home, health, renters, etc.) – the coverage page of the homeowners & renters insurance policies and the first page of all insurance policies
- ___ Copies of Federal income tax returns for the last 3 tax years
- ___ Copies of any and all contracts and notes receivables
- ___ Copies of any and all judgments, including divorces
- ___ Real property: Complete name and address of encumbrance/lien holder & proof of remaining balance. Copies of any and all deeds to real property in which you have an interest. Realtor’s valuation, and a copy of the current year’s county assessor’s valuation. If renting, provide a copy of your rent/lease agreement.
- ___ Vehicles: Copies of all registration certificate(s) issued by the Department of Licensing, verification of any encumbrances against all vehicles plus the current statements. Provide verification of how the values were determined, this includes cars, boats, trucks, motor homes airplanes, etc.)
- ___ Copies of any and all pre or ante nuptial agreement, with affidavits from each of the parties under penalty of perjury regarding adherence to said agreements
- ___ Copies of any and all trusts of which you may be a beneficiary or which you have an interest
- ___ Copies of paychecks/stubs/statements for the last 6 months
- ___ Proof of all court ordered payments you are making (child/spousal support, fines, etc.)
- ___ Proof of monthly expenses not already covered, i.e. utility bills, transportation, etc.
- ___ Doctor’s papers, if claiming ill health or disabled
- ___ The Source of funds for offer
- ___ Copy of Federal Offer in Compromise and letter of acceptance
For faster processing, send your pdf documents via web message on Hawaii Tax Online (HTO). To set-up an account on HTO, visit Hawaii Tax Online at https://hitax.hawaii.gov, or send all applicable forms and documents to:
Department of Taxation – Collections Branch
P.O. Box 259
Honolulu, HI 96809-0259
8 Can I use federal Form 656, Offer in Compromise, to submit an offer in compromise to the state?
No. Federal Form 656 cannot be substituted for the Department’s Form CM-1. However, copies of documents that you submit to the Internal Revenue Service (IRS), such as your current financial statements, may be submitted to the Department.
9 Will the Department continue its collection activities after an offer in compromise is submitted?
No. Collection activities (for example, additional liens, levies, garnishments, or referrals to outside collection agencies) against you with regards to the specific tax relating to the offer in compromise are suspended while your offer is being investigated and evaluated. Other types of taxes with collections activities not related to the offer in compromise will continue as normal.
Note: Internal offsets of tax credits are not considered collection activities and therefore, are not suspended while your offer is being evaluated.
If the Department finds that your offer in compromise is a tactic to delay collection actions or if the delay jeopardizes the Department’s ability to collect the outstanding tax liabilities, the Department will take action to protect the state’s interests.
10 I am currently on a payment plan. Do I need to continue making my monthly payments after submitting an offer in compromise?
Yes. You must continue making your monthly installment payments per your installment agreement while your offer in compromise is being considered.
11 How much should I offer for the compromise?
The amount that the Department will accept for an offer in compromise will vary depending on the reason for the compromise. If the compromise is offered because there is doubt as to liability, then the amount offered may be the amount that you believe is the correct tax liability owed. If the compromise is offered because there is doubt as to collectability, then the amount offered is usually the amount that you believe is appropriate given your current financial condition and future earning potential.
12 Is any part of the amount offered in the compromise required to be paid when Form CM-1 is submitted?
Yes. All offers in compromise must be accompanied by a minimum payment. For a lump sum offer in compromise, at least 20% of the proposed offer must accompany the offer. For an offer in compromise that will be paid in periodic installments, an amount equal to the first periodic payment must accompany the offer. However, the Department may waive these payment requirements for individuals who meet the low income certification guidelines published by the IRS. If the offer in compromise is rejected, any payment made with the offer in compromise will be kept by the Department and will be applied to your tax debt. Payments are applied first to recover costs incurred by the Department, then to any interest due, then to penalties, and finally, to taxes.
For more information, TAX FACTS 2000-2 Offer in Compromise.
Page Last Updated: May 25, 2022