A Taxing Initiative: New York State Suspends Driver's Licenses for Delinquent Tax Debt
By: Gary P. Bluestein and Gregory D. Verdibello
The New York State Department of Taxation and Finance (“DTF”) is becoming increasingly aggressive in its methods to collect tax debt from taxpayers. On August 5, 2013, Governor Andrew M. Cuomo announced a new initiative to encourage individuals who owe significant back taxes to pay their bills. Under the new program, a New York State driver’s license can be suspended when a taxpayer’s past-due tax liability exceeds $10,000. The crackdown is the result of legislation introduced as part of the Executive Budget and signed into law earlier this year. The new initiative is estimated to increase State collections by $26 million this fiscal year and as much as $6 million annually thereafter. DTF is sending the first round of 16,000 suspension notices to delinquent taxpayers, who have 60 days from the mailing date to arrange payment with DTF. If the taxpayer fails to do so, the Department of Motor Vehicles will send a second letter providing an additional 15 days to respond. If the delinquent taxpayer again fails to arrange payment, the license is suspended until the debt is paid or a payment plan is established.
There are several ways for taxpayers to resolve their outstanding liabilities with DTF. First and foremost, if a taxpayer has unfiled returns, then the taxpayer should consult with a tax professional about applying for the DTF Voluntary Disclosure and Compliance (“VDC”) Program. The VDC Program was created in order to encourage eligible taxpayers who owe back taxes, for whatever reason, to voluntarily disclose their eligible tax liabilities that are not currently known by DTF. Taxpayers who participate in the program will be required to sign a compliance agreement with DTF in which they promise to correct their past behavior, comply with the tax laws in the future, and pay their past due liabilities. In exchange, eligible taxpayers who comply with the agreement’s requirements will be granted protection from criminal prosecution and the avoidance of civil penalties. This program may also limit the number of years for which the returns have to be filed, significantly reducing a taxpayer’s financial exposure.
A number of collection resolutions are also available once a taxpayer is in filing compliance with DTF. First, DTF has an Offer in Compromise program available for taxpayers (businesses and individuals) who are insolvent or bankrupt. For individuals only, an Offer in Compromise is also available if paying the tax in full would cause the individual to suffer “undue hardship.” When examining an Offer in Compromise and the offer amount, DTF will examine how much it can collect from the taxpayer’s assets through legal proceedings, such as levies, seizures, and income executions in a “reasonable period of time.” If the taxpayer owes trust tax liabilities (e.g., sales tax, withholding tax), then DTF will generally not accept an offer for less than the amount of tax owed, exclusive of penalties and interest.
Second, contrary to popular belief, personal income taxes may be dischargeable in bankruptcy. Often the key is waiting for certain time periods to expire in order for the taxes to be dischargeable in a Chapter 7, 11, or 13 bankruptcy. Bankruptcy is an excellent tool in resolving not only tax liabilities, but other debts such as credit cards and judgments. Thus, bankruptcy can be more of a “global” solution in certain cases. It should be noted that trust fund taxes, such as sales tax and withholding tax are excepted from discharge. However, bankruptcy can still be beneficial, since a debtor can utilize a Chapter 11 or 13 to pay the trust tax over time through the bankruptcy plan and often the penalties associated with the tax liability are dischargeable.
Finally, a taxpayer could be eligible for an Installment Payment Arrangement (“IPA”) with DTF, depending on the taxpayer’s prior history of compliance, current financial condition, and adherence to all DTF requirements. DTF will require a taxpayer to complete Form DTF-5 if the liability is over a certain threshold. Establishing a payment arrangement will lift the license suspension.