Michigan Back Taxes? The State Has An Offer in Compromise Too
If you’re tangled up in Michigan back taxes, you know the drill—endless letters, threats of levies, liens, garnishments.
But here’s the good news: if your assets and income potential aren’t enough to cover what you owe, Michigan’s Offer in Compromise (OIC) might just be your ticket to a manageable tax debt solution.
What Exactly is a Michigan Offer in Compromise?
A Michigan OIC lets you propose to settle your unpaid taxes for less than the total debt.
That said, some types of taxes are off-limits for compromise, like certain property taxes and unemployment insurance.
However, if you can show financial hardship, you may qualify to pay off what you can afford—rather than what you owe.
Do You Qualify for a Michigan OIC?
First, you must be in compliance and you must have a Michigan state tax debt that has been assessed.
Here’s the criteria:
You’re a business or individual taxpayer with no open bankruptcy cases,
You’re up-to-date on all your tax returns,
All opportunities for appeal on the assessment are closed, and
You haven’t gotten a final decision from the Michigan Tax Tribunal or any court about the debt.
That’s the easy part.
Here are the remaining elements. Each of these involve requirements of their own.
Already Approved by the IRS: If you’ve got an IRS-approved OIC for the same tax period, Michigan might go along with it.
Doubt as to Collectability: This is when you can show that, based on your current income and assets, you’ve offered as much as Michigan could ever realistically expect to collect. You’ll also need to show that your financial situation isn’t going to improve significantly anytime soon. Remember though, Michigan will only consider necessary living expenses.
Doubt as to Liability: If you’ve got evidence that challenges the tax debt’s validity, Michigan may give it a look. Essentially, you’d need to prove you could win if this went to court.
How to Apply for a Michigan OIC
Send in a $100 payment or 20% of your offer (whichever is greater) with your application.
This initial payment will be applied to your debt. Make sure to include all relevant forms and supporting documentation to help Michigan Treasury understand your financial hardship.
Here’s a quick form breakdown:
If IRS has Approved an OIC: Submit Forms 5181 and 5182 (Schedule 1) along with proof of IRS approval.
If Claiming Doubt as to Collectability:
Individuals: Submit Forms 5181 and 5183 (Schedule 2A).
Businesses: Submit Forms 5181, 5184, and Schedule 2B.
If Claiming Doubt as to Liability: Submit Form 5181 and Schedule 3.
Send everything to:
Michigan Department of Treasury
Offer in Compromise
P.O. Box 30190
Lansing, MI 48909
Payment Options for an OIC
Michigan offers ways to pay if they accept your OIC:
Lump-Sum Payment: Settle it all at once.
Short-Term Monthly Payments: Wrap up your payments in five or fewer months after approval.
Longer Monthly Payments: Settle over six months or more, ideally within two years.
How Much Should You Offer?
Michigan will base their decision on what they call your Reasonable Collection Potential (RCP). To figure out a reasonable offer, calculate your current assets and monthly income, and deduct essential living expenses.
Here’s a quick example:
Available Assets: $7,100
Monthly Income: $2,500
Necessary Monthly Expenses: $2,100
Here’s how that adds up:
Net Monthly Income: $2,500 - $2,100 = $400
Assets: $7,100
Annual Income Contribution: $400 x 12 = $4,800
Offer Calculation:
Assets: $7,100
Income Contribution: $4,800
Suggested Offer: $11,900 (with 20% down, $2,380 and the remaining balance: $9,520 paid in 12 monthly installments of $397).
This is just a guide, so make sure to consult with a Michigan tax attorney to ensure your offer is calculated properly.
What Happens Next?
If Michigan denies your offer, you have the option to request an Administrative Review using Form 5186. For those approved based on IRS acceptance, Michigan will send instructions for payment.
For rejections, they’ll explain why.
If you applied under “Doubt as to Collectability” and got approved, Michigan Treasury will provide you with payment terms.
For rejections, they might suggest alternative ways to settle or even offer a counterproposal. If they reject a “Doubt as to Liability” claim, you’ll get a letter with the reasons.
Final Pointers
Confirmation: Michigan Treasury will let you know when they’ve received your application.
Paused Collections: Collection actions halt if your OIC is considered eligible; otherwise, they continue.
Interest and Penalties: These keep adding up while Michigan reviews your OIC.
Lien Release: Any liens remain until the full OIC payment is completed.
Risk of Revocation: Don’t withhold any relevant income or asset info—any misleading statements or failure to follow OIC terms could get your deal canceled.
