Michigan Department of Treasury Offer in Compromise Program

If you owe taxes to the State of Michigan and face severe financial hardship, Michigan's compromise program may provide the relief you need. This program allows eligible taxpayers to settle their outstanding tax debt for less than the full amount owed. It's a legal option provided by the Michigan Department of Treasury to help individuals and businesses resolve state tax liabilities when paying in full is impossible.

Michigan’s offer in compromise is not the same as the federal offer in compromise offered by the Internal Revenue Service. While both serve similar purposes, each program has its eligibility rules, forms, and review process. Understanding these differences is critical for anyone navigating state and federal tax debt simultaneously.

This guide explains the Michigan offer in detail—who qualifies, how to apply, what documentation is needed, and what happens after you submit your application. Whether you're dealing with back taxes, looking to stop collection actions, or seeking a way to avoid bankruptcy, this article offers a clear, step-by-step roadmap. If you've never dealt with the Department of the Treasury or applied for tax relief before, don’t worry—this guide is designed to be beginner-friendly and easy to follow.

Let’s start by understanding what exactly a Michigan offer in compromise is and how it works.

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What Is a Michigan Offer in Compromise?

A Michigan offer in compromise is a formal agreement that allows eligible taxpayers to settle their outstanding tax debt for less than the full amount owed. Administered by the Michigan Department of Treasury, this compromise program helps individuals and businesses who cannot pay their full liability due to financial hardship or have valid reasons to dispute the debt.

This state program is entirely separate from the IRS offer in compromise and follows its own rules, forms, and review process. Submitting a federal offer does not automatically qualify you for Michigan’s program, and each must be applied for independently. Understanding these differences is key for taxpayers with state and federal tax obligations.

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Who Is Eligible for the Michigan OIC Program?

You must meet specific eligibility criteria before qualifying for the Michigan offer in the compromise program. These requirements ensure that only taxpayers with legitimate financial hardship or valid disputes over their tax liability are considered. Failing to meet these standards will result in your OIC application being rejected without further review.

General Eligibility Requirements

To be eligible for consideration, you must satisfy all of the following:

• All required tax returns must be filed
  You must file any outstanding tax returns related to individual income tax, corporate income tax, or other applicable state income taxes. The Michigan Department of Treasury will not consider offers from taxpayers who have not met their filing obligations.
  
• The tax debt must be formally assessed
  Michigan will only consider offers related to debts that have already been assessed. You cannot submit an OIC application for unfiled liabilities or pending audit results.
  
• There should be no ongoing bankruptcy proceedings
  Taxpayers with an open bankruptcy case are not eligible for the compromise program. You must complete or dismiss the bankruptcy before submitting your offer.
  

Who Can Apply

The compromise program is open to a broad range of taxpayers with Michigan-related tax debts:

• Michigan residents
  Individuals who live in Michigan and owe back taxes on their income.
  
• Businesses operating in Michigan
  Entities that owe corporate income tax, sales tax, withholding tax, or other state business-related liabilities fall under this category.
  
• Former residents
  Former residents who previously lived in Michigan and accumulated outstanding tax debt there.
  
• Nonresidents with Michigan-source income
  Individuals who do not live in Michigan owe taxes on income earned within the state.
  

Meeting these eligibility criteria is the first step toward qualifying for tax relief through the Michigan offer-in-compromise program. The following section will explain the acceptable grounds for submitting an offer.

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Grounds for Submitting an Offer in Compromise

To qualify for the Michigan offer in the compromise program, your application must be based on one of three grounds. Each category has distinct requirements, and choosing the right one is critical to the success of your OIC application.

1. Doubt as to Collectability

This is the most common ground for submitting a Michigan offer. It applies when your financial situation clearly shows that you cannot pay the full tax debt, now or in the foreseeable future.

To qualify under this ground, you must demonstrate:

• You must demonstrate a current financial hardship
  Your assets, income, and allowable expenses must indicate that you cannot pay the full tax liability without serious difficulty.
  
• Your future earning potential is limited
  The Michigan Department of Treasury will evaluate your age, employment prospects, health, and economic conditions to determine whether your financial situation is likely to improve.
  
• The Department of the Treasury will also consider your reasonable collection potential (RCP)
  Your offer must reflect the maximum amount the treasury can reasonably expect to collect based on your disposable income and assets, such as real and personal property.
  

2. Doubt as to Liability

This applies when you believe that you do not owe part or all of the assessed taxes.

To qualify under this ground, you must:

• Provide evidence that the original assessment was incorrect: This could include documentation showing errors in income reporting, residency status, or other relevant tax details.
  
• Show that you have exhausted your administrative appeal rights: Your time to dispute the debt through the treasury’s informal conference process or other appeal routes must have expired.
  
• Meet the legal standard of proof:The department must ascertain that a litigated issue will likely result in your victory in the contested case.
  

3. Based on Federal Acceptance

This ground is available to taxpayers who have already had a similar offer accepted by the Internal Revenue Service.

To qualify under federal acceptance:

• The IRS must formally accept your federal offer, not merely submit or pend it.
  
• The accepted offer must cover the same tax periods and types of taxes owed to Michigan.
  
• This option is limited to specific tax types, including individual income tax, corporate income tax, and withholding tax.
  

Choosing the correct ground and submitting supporting documentation increases your chances of approval under Michigan’s compromise program. Next, we’ll walk through the complete application process.

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Step-by-Step Application Process

Submitting a Michigan offer in compromise requires careful preparation, detailed documentation, and strict adherence to the Michigan Department of Treasury’s procedures. Below is a complete guide to help you understand what forms to file, how to calculate your offer, and how to present your financial situation effectively.

Step 1 – Choose Your Offer Type and Get the Correct Forms

Your first step is to select the correct offer category based on your situation—whether you have doubts about collectability, liability, or federal acceptance.

You must also use the most current versions of the following forms, available at michigan.gov/taxes:

• Form 5181CI – Doubt as to collectability
  
• Form 5181CB—Alternative collectability form for specific situations
  
• Form 5181L – Doubt as to liability
  
• Form 5181F—Based on federal acceptance
  

Using outdated forms or choosing the wrong category will result in your OIC application being rejected.

Step 2 – Conduct a Detailed Financial Analysis

Your offer must be based on what the treasury could reasonably collect from your assets and income for collectability offers.

You will need to:

• List all assets, including bank accounts, real and personal property, vehicles, retirement accounts, and business assets.
  
• Determine quick-sale values. Michigan typically uses 80% of the fair market value for most assets.
  
• Calculate monthly income from wages, pensions, business income, or other sources.
  
• Document monthly expenses such as rent, utilities, insurance, medical bills, and court-ordered payments.
  

This analysis helps determine your reasonable collection potential—the baseline for how much your offer should be.

Step 3 – Gather Supporting Documentation

The Michigan Department of Treasury requires comprehensive documentation to evaluate your financial situation.

Required documents may include:

• Recent tax returns
  
• Bank statements (last 3–6 months)
  
• Pay stubs, 1099s, or profit/loss statements
  
• Property deeds and mortgage statements
  
• Vehicle registrations and loan balances
  
• Documentation of monthly expenses (e.g., lease agreements, utility bills, insurance policies)
  

Missing or incomplete documentation may delay or disqualify your offer.

Step 4 – Submit an Initial Payment

Your application must include a nonrefundable initial payment. Even if your offer is rejected, this payment will be applied to your outstanding tax debt.

• Amount required: The greater of $100 or 20% of your total offer
  
• Payment methods: Check, money order, or online payment via the Michigan Department of Treasury website
  

Offers submitted without this payment are automatically ineligible.

Step 5 – Complete and Sign Form 5181

Carefully complete the selected version of Form 5181. The form includes:

1. Taxpayer identification and contact details
   
2. Tax periods and amounts owed
   
3. Offer amount and proposed payment terms
   
4. Reason for the offer (collectibility, liability, or federal acceptance)
   
5. Supporting documentation checklist
   
6. Signatures—signed under penalty of perjury
   

Ensure all information is accurate and that all responsible parties sign the form.

Step 6 – Select a Payment Option

You may propose one of the following payment arrangements:

• Lump sum payment: Pay the full offer amount at once, minus your initial payment
  
• Short-term installment plan: Pay in 5 or fewer equal monthly payments
  
• Long-term installment plan: Pay in equal monthly payments over 6 to 24 months
  

The treasury may request a lump sum if it believes it's the most practical option.

Step 7 – Submit the Completed Application Package

Mail your completed OIC application to:

Michigan Department of Treasury
Offer in Compromise
P.O. Box 30190
Lansing, MI 48909

Your package must include:

• Completed and signed Form 5181
  
• All required supporting documentation.
  
• Initial payment (or proof of online payment)
  

Incomplete applications will be returned without review.

Once submitted, your OIC application will be evaluated for eligibility and reviewed for financial accuracy. The following section explains what happens after submission, including how long the process typically takes.

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How the Michigan Department of Treasury Reviews and Processes Your Offer

After submitting your completed OIC application to the Michigan Department of Treasury, your offer enters a structured evaluation process. Understanding each step can help you track progress and respond appropriately if additional action is needed.

Initial Eligibility Review

The first stage is a basic eligibility screening to ensure your submission meets all required criteria. At this point, the treasury will confirm that:

• You submitted the correct version of Form 5181
  Applications must use the latest approved forms designated for the type of offer you're submitting—collectability, liability, or federal acceptance.
  
• All required supporting documentation is included
  This includes bank statements, income verification, expense records, and other materials supporting your financial situation or legal claims.
  
• Your initial payment has been received and correctly calculated
  The payment must be at least $100 or 20% of your proposed offer amount and submitted via check, money order, or verified online payment.
  
• You meet the eligibility conditions as a taxpayer
  All necessary tax returns must be filed, and you must not have an open bankruptcy proceeding at the time of submission.
  

If your application passes this review, you’ll receive a written Acknowledgment of Offer in Compromise, confirming that the Michigan Department of Treasury has accepted your submission for complete evaluation.

Suspension of Collection Actions

The state will suspend active collection efforts once your offer is acknowledged as eligible for review. This means that

• Wage garnishments will be paused
  The treasury or its private collection agencies will halt any ongoing garnishment orders against your income while the review is pending.
  
• No new tax liens will be issued during this period
  Although existing tax liens may remain on your record, the state generally refrains from filing new liens once a valid offer is reviewed.
  
• Bank account levies will be temporarily suspended
  The treasury will not issue new levy orders to seize funds from your bank accounts tied to the liabilities included in your offer.
  
• Private collection agencies will cease active collection on the covered debt
  If your case has been referred to an outside collection agency, that agency will be notified to pause all collection actions on the tax periods included in your offer.
  

Review Timeline and Assignment

Once your offer has cleared initial review, it is assigned to a caseworker in the Office of Advocacy Services. While complex cases may require more time, the department aims to review most offers within 90 to 180 days. During this time:

• A reviewer will evaluate your entire application file
  They may request additional documentation or clarification if certain aspects of your financial profile or legal claims are incomplete or unclear.
  
• You will be notified of any missing items.
  Promptly responding to requests can help avoid delays and demonstrate good-faith participation.
  

Financial and Legal Evaluation

For offers that raise doubts about collectability, the reviewer assigned to your case will conduct a detailed financial analysis, which includes

• The reviewer will verify and value the assets
  The treasury will confirm the quick-sale value of all listed real and personal property and determine whether assets were disclosed correctly.
  
• The treasury will also assess your disposable income
  Your monthly income and reasonable expenses will be reviewed to calculate what you can pay.
  
• Future income potential analysis
  Your age, health, education level, and job history will be used to assess whether your financial hardship is temporary or long-term.
  

For offers based on doubt as to liability, the department will focus on the legal merits of your case:

• Your documentation must clearly show that the tax assessment was incorrect
  This may include W-2s, residency records, or prior correspondence with the department.
  
• The reviewer will assess whether your evidence would succeed in a contested case
  The burden of proof is on the taxpayer to show that the liability should be reduced or eliminated.
  

For offers based on federal acceptance, Michigan will verify the IRS approval and compare the covered tax periods and amounts. Your state offer may be reviewed under a streamlined process if all criteria align.

After this analysis, the treasury will issue a final decision—acceptance, rejection, or a counteroffer—which we will explain in the next section.

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Reasons Offers Are Rejected (and How to Avoid Them)

Not every compromise offer from Michigan receives approval. Many are rejected because of avoidable mistakes, incomplete information, or unrealistic proposals. Understanding why offers are denied can help you submit a stronger, more credible OIC application.

Common Reasons for Rejection

• Incomplete application package
  If you fail to include the required forms, supporting documentation, or initial payment, your submission will be deemed ineligible without review. The Michigan Department of Treasury requires every field to be completed and signed under penalty of perjury.
  
• Unrealistic offer amount
  Offers significantly lower than your reasonable collection potential (RCP) will be rejected unless exceptional circumstances are well-documented. We will assess your income, assets, and future earning potential to determine what you can realistically pay.
  
• Failure to meet eligibility requirements
  If you have unfiled tax returns, an open bankruptcy case, or are attempting to compromise unassessed tax debt, your application will be rejected outright. Compliance is a non-negotiable requirement.
  
• Omission of key financial information
  Attempting to hide assets or underreport income can result in automatic denial. The department has access to financial databases and cross-checks information provided in your OIC application.
  
• Bad faith submission
  Suppose your offer is being used solely to delay collection actions without a genuine intent to resolve the debt. The treasury may reject your request and reinstate full enforcement in that case.
  

How to Avoid These Pitfalls

To improve your chances of success:

• Use the correct and most recent version of the required form.
  
• Provide all requested documentation clearly labeled and organized.
  
• Submit an initial payment that meets the minimum requirements.
  
• Make a realistic offer based on your financial analysis.
  
• Ensure that all tax returns are filed and up to date.
  
• Be truthful and transparent about your financial situation.
  

A well-prepared, honest application is more likely to be accepted—or at least considered seriously—by the Michigan Department of Treasury. In the next section, we’ll explore your options if your offer is rejected.

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What to Do If Your Offer Is Rejected

If the Michigan Department of Treasury rejects your compromise offer, it doesn't necessarily signify the end of the process. Taxpayers receiving a rejection letter still have options to pursue further relief or adjust their strategy based on the denial.

Independent Administrative Review (IAR)

If you disagree with the rejection, you can request an Independent Administrative Review—a formal appeal conducted by someone not involved in the original decision.

To initiate the IAR process:

• Submit Form 5186 within 30 days of the date listed on your rejection letter.
  This deadline is strict and cannot be extended.
  
• Provide supporting materials. You should include any new financial information, updated documentation, or clarification of items that may have been misunderstood during the initial review.
  
• Explain changed circumstances. If your financial situation has worsened—such as job loss, a medical emergency, or other hardship—include detailed evidence to support your revised request.
  
• Raise legal or factual arguments in doubtful liability documentation or interpretations that clarify why the original tax assessment was incorrect.
  

Once your IAR request is received, a different reviewer within the treasury will re-evaluate your application. Their final decision cannot be appealed to a court or tribunal.

Other Options After Rejection

If your offer remains denied after the appeal, you may still:

• Submit a new offer
  You must complete a brand-new application with updated documentation. Previously rejected offers cannot be amended or reactivated.
  
• Enter into a payment plan
  If full payment is impossible, but you can make monthly payments, request an installment agreement to avoid further collection actions.
  
• The request is currently not collectible (CNC)
  You may qualify for temporary relief if you’re facing extreme financial hardship. This status suspends collections until your financial situation improves.
  

Rejections are typical, especially if key documents or reasonable payment estimates are missing. However, responding quickly and strategically can help you regain control over your outstanding tax debt.

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Key Differences Between Michigan and IRS OIC Programs

While the Michigan Department of Treasury and the Internal Revenue Service offer compromise programs to help taxpayers reduce tax liability, the two systems operate independently. Understanding how these programs differ can help you avoid confusion and strengthen your approach to resolving state and federal tax debt.

Separate and Independent Programs

• The programs do not automatically accept each other
  If the IRS accepts your federal offer in compromise, it does not guarantee that Michigan will accept your state-level offer. Each agency conducts its review using separate financial standards and procedures.
  
• Each agency utilizes distinct application forms and submission processes
  The IRS requires Form 656 for its offer in compromise, while Michigan uses form 5181 (and related variants). Each program also has its mailing address, submission requirements, and processing timelines.
  
• State and federal tax liabilities are reviewed separately
  Even if you owe taxes to both governments for the same period, your federal and state OIC applications must be filed, reviewed, and approved separately.
  

Financial Standards and Documentation

• Michigan may calculate income and assets differently
  The Michigan Department of Treasury may apply different formulas or thresholds to assess your disposable income, real and personal property equity, and future earning potential.
  
• Different treatment of state tax refunds and penalties
  Michigan may retain any state tax refund due to you during the review process and apply it to your outstanding tax debt. This may differ from how the IRS handles refunds during federal OIC evaluations.
  

Payment Options and Processing Times

• Michigan may offer more flexible payment terms
  While both agencies allow installment payments, Michigan offers long-term payment plans of up to 24 months for accepted offers.
  
• Processing timelines may vary
  Michigan generally reviews OIC applications within 90–180 days, whereas the IRS may take 6–12 months or longer, depending on the case's complexity.
  

Applying to Both Programs

You can apply to the IRS and Michigan programs simultaneously or in sequence. Some taxpayers choose to secure IRS approval first and then use it to support a Michigan offer under the federal acceptance category. But one authority's acceptance doesn't bind the other, and each must be treated as a separate request.

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Tips for a Strong Michigan Offer in Compromise Application

To improve your chances of approval, ensure that Form 5181 is fully completed, accurate, and signed by all required parties. Carefully organize your documentation, labeling each section. For example, provide bank statements and income records so the Michigan Department of Treasury can easily review your financial profile.

Your offer amount should be realistic and based on a conservative financial analysis of your income, assets, and allowable expenses. If exceptional circumstances—such as child support, medical bills, or a natural disaster—affect your ability to pay, include clear explanations and supporting evidence.

Consider adding a brief cover letter that explains your financial hardship and why your offer reflects the maximum you can reasonably pay. Suppose your case involves complex financial details or high tax debt. In that case, working with a qualified tax professional who can ensure accuracy and strengthen your OIC application is beneficial.

A well-prepared, honest, and organized submission shows good faith and increases your likelihood of reaching a favorable resolution on your outstanding tax debt.

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Frequently Asked Questions (FAQs)

Can I stop collections while my Michigan offer in compromise is under review?

Yes, once the Michigan Department of Treasury acknowledges that your offer is eligible for review, it will generally suspend collection actions on the tax debt included in your application. This means wage garnishments, levies, and other enforcement measures are temporarily paused. However, penalties and interest may still accrue, and this suspension only applies to the specific liabilities listed in your OIC application, not unrelated debts.

Can businesses qualify for a Michigan offer in compromise?

Yes, businesses operating in Michigan that owe corporate income tax, sales tax, withholding tax, or other state business liabilities can apply for a Michigan offer in compromise. The business must meet all eligibility requirements, including filing tax returns and assessing debt. Business owners must provide detailed financial documentation, and all authorized representatives must sign the offer under penalty of perjury to be considered valid.

What if I disagree with the treasury’s decision to reject my offer?

If your offer is rejected, you may request an Independent Administrative Review by submitting Form 5186 within thirty days of the rejection notice. This allows you to submit new financial information, clarify misunderstood details, or correct documentation errors. A different reviewer without a role in the original decision will evaluate your case. Their decision is final and cannot be appealed further through Michigan’s court system.

Can I apply for both the IRS and Michigan compromise programs?

Yes, you may apply for both federal and Michigan offers in compromise, but each program operates independently. Acceptance by the IRS does not guarantee acceptance by the Michigan Department of Treasury. However, if your IRS offer is accepted, you may use that approval to support a related Michigan offer under the federal acceptance category. You must still submit a separate application and meet all state-specific requirements.

Will submitting an offer affect my credit score?

Submitting a Michigan offer in compromise does not directly impact your credit score. However, if a tax lien was filed before your offer was submitted, it may remain on your credit report until properly released. An accepted offer does not automatically remove the lien, but completing the payment terms and requesting a lien release can help restore your credit over time. Always follow up with the treasury to confirm the lien resolution.