Owing money to the state can feel overwhelming, especially when your tax debt grows due to penalties, interest, and ongoing collection actions. For many California residents and business entities, paying off their full tax liability may not be possible now or in the foreseeable future. Fortunately, the Franchise Tax Board (FTB) offers a solution specifically for taxpayers: the California Offer in Compromise.
This compromise program allows qualifying individuals and businesses to settle their state tax liens and outstanding liabilities for less than the total amount owed. If approved, this program provides taxpayers with a fresh start, free from the burden of ongoing wage garnishments, bank levies, or tax liens.
The program isn’t a quick fix or a guaranteed outcome. Submitting a successful compromise application requires a complete, accurate financial picture and proof that paying in full is not feasible, either through a lump-sum payment or other means. The Franchise Tax Board offer is carefully reviewed based on the taxpayer’s ability to pay, considering assets, income, future earnings, monthly payments, and future expenses.
Throughout this guide, we’ll walk you through everything you need to know—from eligibility and financial disclosures to completing your OIC application and avoiding common mistakes. Whether you’re a W-2 employee, a self-employed professional, or a struggling business owner, this article offers step-by-step guidance to help you understand your options and submit a firm offer.
If you’re feeling overwhelmed by California tax debt, now is the time to explore the Offer in Compromise as a strategic option for financial recovery.
The California Offer in Compromise is a tax relief program administered by the Franchise Tax Board (FTB). It allows qualifying individuals and business entities to settle their tax liability for less than the total amount owed. This option is intended for taxpayers who cannot pay their full tax debt now or in the foreseeable future, even if they request an installment agreement. The program offers a potential fresh start by resolving outstanding balances through a single, reduced lump sum payment.
To qualify for the program, taxpayers must demonstrate that their present and future income, available assets, and anticipated future expenses are insufficient to cover the full amount owed. The FTB uses a financial standard known as reasonable collection potential to assess whether the offer submitted reflects the maximum amount that the state can reasonably expect to collect during a specified period. Each compromise application is evaluated individually and must include complete information and detailed supporting documentation, such as bank statements, pay stubs, tax returns, and billing statements. Additional documentation, including rental agreements, medical information, and legal documents such as divorce decrees or bankruptcy filings, may be required.
It is important to note that the California program is separate from any federal Offer in Compromise administered by the IRS. Approval from the IRS does not influence the outcome of your FTB offer, as the state applies its specific criteria. Because of the complexity of the application process and the serious consequences of rejection, many taxpayers choose to work with an experienced tax attorney. A professional can help ensure that your financial records are accurate, your explanations are thorough, and your offer represents a realistic reflection of your taxpayer’s ability to pay based on both current and projected future earnings.
To qualify for the California Offer in Compromise, a taxpayer must meet specific eligibility requirements established by the Franchise Tax Board (FTB). The program is open to individuals and business entities that cannot fully pay their tax liability now or in the foreseeable future. The FTB evaluates each compromise application based on the applicant’s current and projected financial condition, including assets, present and future income, and future expenses.
Applicants must be in full compliance with required tax returns. This means all legally mandated income tax filings must be current. For self-employed taxpayers, the requirement includes submitting accurate financial statements and, often, profit and loss reports. The FTB also requires applicants to agree with the amount of tax owed. Taxpayers actively disputing their liability or involved in open bankruptcy proceedings are not eligible. Incomplete or inconsistent financial disclosure, especially regarding bank accounts, consumer credit reports, or employment history, may result in immediate denial.
In support of an application, the FTB expects taxpayers to submit extensive supporting documentation, including but not limited to pay stubs, bank statements, billing statements, rental agreements, medical information for those citing a medical condition, and any relevant legal documents such as divorce decrees. The appropriate form must also be used when applying. Individual taxpayers must complete Form FTB 4905 PIT, while business entities must use Form FTB 4905 BE. In cases where the taxpayer owes money to multiple state agencies, including the Employment Development Department or the California Department of Tax and Fee Administration, a multi-agency form may be required.
Not all taxpayers who struggle with tax debt will automatically qualify for the California Offer in Compromise. However, specific life situations and financial conditions may help demonstrate that paying your full tax liability is not possible, now or in the foreseeable future. These scenarios can support your case if they show that your present and future income, available assets, and earning capacity are unlikely to cover your debt. When submitting your compromise application, it is essential to document any of these circumstances using valid supporting documentation such as medical records, tax returns, or financial statements.
A significant medical condition can severely impact a person’s ability to earn income or manage everyday living expenses. For example, someone undergoing long-term cancer treatment or recovering from major surgery may be unable to work full time or at all. In such cases, the Franchise Tax Board may consider the medical hardship when evaluating the taxpayer’s ability to pay. Applicants should provide medical information such as a doctor’s letter, recent treatment records, and any disability statements to support their claim.
If a taxpayer recently lost their job or experienced a substantial reduction in income, they may qualify for relief based on economic hardship. For instance, a self-employed taxpayer whose business failed due to market conditions or a W-2 employee laid off during an industry downturn could demonstrate financial hardship. In these cases, the state will look at current pay stubs (if applicable), bank statements, consumer credit reports, and employment records to determine whether the taxpayer’s future income and monthly payments make full repayment unrealistic.
Sometimes, taxpayers simply do not own enough valuable property or savings to cover their tax and fee administration debt fully. This situation is common among individuals whose bank accounts and assets—including vehicles, real estate, or retirement funds—hold minimal or even negative equity.
Suppose the taxpayer’s available assets cannot be sold or leveraged to raise sufficient funds to pay the tax liability. In that case, the Franchise Tax Board may determine that the person has limited reasonable collection potential. In these cases, the FTB may accept a lower lump sum payment that reflects the actual value they can reasonably expect to recover, rather than pursuing the full amount owed through traditional collection actions.
Older taxpayers living on a fixed income, such as Social Security or a modest pension, often lack the significant potential for increased earnings. Suppose their basic living expenses consume most of their monthly income, and they have little to no remaining savings. In that case, the Franchise Tax Board may accept an offer that reflects their permanent financial limitations. This type of claim usually involves submitting billing statements, rental agreements, and documentation of retirement benefits or other steady but limited income sources.
Applying for the California Offer in Compromise requires careful planning, accurate paperwork, and complete financial transparency. The Franchise Tax Board evaluates every compromise application in detail, so it is critical to follow each step precisely and include all supporting documents. Submitting an incomplete or poorly prepared package may result in delays or immediate denial. Below is a complete breakdown of the application process from start to finish.
Before completing any forms, collect documents that reflect your financial situation, assets, income, and expenses. You must demonstrate that paying your full tax liability is not possible in the foreseeable future.
Required documents may include:
The FTB provides separate application forms depending on your taxpayer classification:
Each form requires detailed financial statements, a breakdown of assets and liabilities, and information about your current and future expenses. If applicable, be prepared to explain why an installment agreement would not be viable.
The amount you propose in your Offer in Compromise must be based on your reasonable collection potential—the maximum amount the Franchise Tax Board (FTB) believes it can collect from you within a reasonable period. One of the most common reasons for application denial is submitting a low offer without proper justification. Accurate financial data and a clear explanation of its calculation must support your offer.
When determining your offer amount, you should consider the following factors:
The FTB will notify you in writing if they accept your offer. Usually, you have to submit the full lump sum payment within a specified timeframe. Suppose your earning potential is expected to improve over time. In that case, the FTB may also require a collateral agreement, which allows the state to collect a portion of your future earnings should your financial situation change significantly.
You can submit your application by mail or online:
Mail submission: Send your completed application and documents to:
Franchise Tax Board
Offer in Compromise Group MS A453
PO Box 2966
Rancho Cordova, CA 95741-2966
Do not send any payment with your application. The FTB will provide payment instructions if your offer is accepted.
After submission, you will receive an acknowledgment letter within four weeks. A specialist from the Franchise Tax Board will review your file and may request additional supporting documentation. If you fail to respond or provide complete records, your application process may be terminated. Most collection actions are paused during this time, although interest and penalties may continue to accrue.
Submitting an Offer in Compromise to the Franchise Tax Board can be a highly effective way to resolve your tax debt, but only if your application is complete, accurate, and well-documented. These mistakes can result in delays, denial, or continued collection actions. Below are some of the most frequent and preventable mistakes made during the application process.
Many applicants fail to provide an honest picture of their financial situation. Omitting key information about bank accounts, assets, or present and future income can lead to immediate rejection. The FTB will verify your details using consumer credit reports, public records, and third-party data. Any discrepancies between your supporting documentation and reported numbers will be flagged.
Submitting an unreasonably low offer compared to your reasonable collection potential signals bad faith. Your offer must reflect what the state can expect to collect based on your income, monthly payments, available assets, and any future earnings. If your compromise application does not justify the proposed amount, the FTB is likely to reject it outright.
Submitting During a Tax Dispute or Bankruptcy
You cannot submit a valid OIC while actively disputing your tax liability or if you are in open bankruptcy proceedings. Doing so will automatically disqualify your application. Be sure to resolve all pending issues before applying.
Missing paperwork—such as pay stubs, bank statements, tax returns, or legal documents like divorce decrees—can delay your application or cause it to be unprocessed. Ensure your submission includes all required supporting documents in the application instructions.
After submitting your application, the Franchise Tax Board may contact you for clarification or additional materials. Failing to respond promptly may result in denial. Ongoing communication is key to ensuring your application remains under review.
The FTB may reject your OIC if you haven't tried an installment agreement or shown that it's not possible. A complete explanation of why an installment agreement will not work must be included in your application.
After submitting your Offer in Compromise to the Franchise Tax Board, you will typically receive an acknowledgment letter within two to four weeks. This letter confirms that your compromise application is under review and may include requests for missing supporting documentation. A specialist will then be assigned to your case and begin a comprehensive evaluation of your financial situation, including your assets, income, bank accounts, monthly payments, future expenses, and any relevant legal documents or medical conditions that could impact your ability to pay.
Most collection actions—such as wage garnishments or bank levies—are temporarily suspended during review. However, this pause is not guaranteed, and interest and penalties will continue to accrue until your case is resolved. If your case requires additional verification, the FTB may request updated records, such as recent pay stubs, bank statements, or financial statements. It is critical to respond promptly to all requests; failure to do so could result in delays or automatic denial of your application.
In some situations, the Franchise Tax Board may determine that your offer is close to acceptable but requires adjustment. You may be asked to revise your proposal or agree to a collateral agreement, which allows the state to collect a portion of your future income if your financial condition improves. If your offer is approved, the FTB will issue written confirmation and instructions for submitting your lump sum payment. If the offer is denied, the decision letter will outline the reasons and may include alternatives such as filing a new application, requesting reconsideration, or entering into an installment agreement.
The California Offer in Compromise is not the only option to resolve a tax liability with the Franchise Tax Board. Many taxpayers who are not eligible for an OIC—or whose compromise application is denied—may still qualify for other forms of tax debt relief. Below are several alternative programs that may assist you based on your financial situation and ability to make payments.
An installment agreement allows taxpayers to pay off their tax debt through monthly installments over time. This option is available to those who can afford regular monthly payments but not a full lump sum payment. The FTB may approve the plan if your financial statements show you can consistently meet the payment amount without defaulting.
Taxpayers experiencing extreme financial hardship may qualify for Currently Not Collectible (CNC) status. If the FTB determines that collecting your tax and fee administration debt would prevent you from meeting basic living expenses, they may temporarily suspend collection actions. You must still file required tax returns, and interest will continue to accrue, but no immediate payments are required.
Sometimes, taxpayers can request relief from specific penalties if they show reasonable cause. This may include a medical condition, a natural disaster, or another unexpected event interfering with tax compliance. Supporting your request with clear legal documents, medical information, or a detailed hardship statement is essential.
If you cannot resolve your case through regular FTB channels or feel that your rights as a taxpayer are being violated, you may contact the Taxpayer Advocate Services. They can assist with navigating complex issues, particularly when you're facing aggressive collection actions or have experienced changed circumstances that affect your ability to pay.
You should offer the maximum amount the Franchise Tax Board can expect to collect based on your reasonable collection potential. This includes your assets, present and future income, and ability to cover future expenses. Low offers without justification are often denied. Supporting your calculation with complete financial statements strengthens your proposal.
No. The Franchise Tax Board and the IRS operate separate compromise programs. Approval from the IRS does not influence the FTB’s decision. Each agency evaluates your financial situation, tax liability, and supporting evidence based on its guidelines and collection standards.
The review process typically takes four to six months after submitting your compromise application. Delays may occur if additional supporting documentation is needed. Most collection actions are paused during this time, but interest and penalties on the unpaid tax debt continue to accrue.
Yes, you may make voluntary monthly payments while your offer is pending, but those payments do not count toward the lump sum payment required if your offer is approved. Submitting payments may demonstrate good faith, but will not reduce your final offer amount.
If your offer is denied, the FTB will send a letter explaining why. You can request reconsideration, submit a new offer based on changed circumstances, or explore alternatives such as an installment agreement or penalty abatement.
Submitting a California Offer in Compromise does not directly impact your credit score. However, the underlying state tax liens that triggered the application may already appear on your consumer credit report. The FTB usually releases any active tax lien if your offer receives approval and payment.
A collateral agreement is a legal arrangement in which the FTB may collect a portion of your future earnings if your financial condition improves. A collateral agreement requires long-term compliance and is generally used when the taxpayer has the potential for increased profits in the foreseeable future.
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