Understanding the New Jersey Offer in Compromise: A Path to Tax Relief

Owing state taxes can feel overwhelming, especially when the bill is more than you can afford to pay. For many New Jersey taxpayers, falling behind on tax obligations creates stress, uncertainty, and the risk of collection actions like wage garnishment or tax liens. Whether you’re dealing with back taxes, interest, or penalties, resolving tax debt may seem out of reach.

Fortunately, New Jersey offers a tax relief option known as the Closing Agreement—its version of an offer in compromise. This compromise program allows qualifying individuals and businesses to settle tax debt for less than the full amount owed. If you're facing significant financial hardship, understanding this program could be the first step toward regaining control of your finances and avoiding more serious consequences.

In this guide, you’ll learn what the New Jersey offer in compromise is, how it differs from the IRS process, and whether you qualify based on your specific financial situation. We’ll also show you how to apply, what documents you need, and how to avoid common mistakes that could delay or derail your application. If you owe money to the state and want a realistic path to settle your tax debt, this guide will help you take informed, confident action.

What Is a New Jersey Offer in Compromise (Closing Agreement)?

When you owe more in New Jersey taxes than you can reasonably pay, the Division of Taxation may allow you to settle your tax debt through a legal agreement known as a Closing Agreement. This is New Jersey’s version of an offer in compromise. This settlement option lets qualified taxpayers resolve tax debt for less than the total amount owed when complete collection is unlikely or would cause significant financial hardship.

Unlike the IRS offer in compromise, which is used at the federal level, New Jersey’s program is governed by state-specific tax law under N.J.S.A. 54:53-1 through 54:53-9 and related administrative codes. Not everyone can participate in the program. It is intended for individuals and businesses to demonstrate that paying the full tax liability would be unreasonable or impossible based on their financial situations.

Key facts about the New Jersey offer in compromise (Closing Agreement):

Settlement for less than you owe: The program allows eligible taxpayers to settle their unpaid balances, including penalties and interest, for less than the full amount due.
Legal authority: The offer is based on New Jersey tax law provisions that permit settlements in cases involving doubt as to liability or doubt as to collectability.
Not automatic: Approval is not guaranteed. Taxpayers must present complete financial information and supporting documentation that proves their inability to pay or that the underlying tax bill is incorrect.
Separate from the IRS: New Jersey’s compromise program is entirely separate from the IRS offer in compromise. You must submit a separate application to the Internal Revenue Service if you also owe federal tax debt.
Applies to most state taxes: The program may apply to a range of New Jersey taxes, including individual and business taxes, as long as the taxpayer has met all filing requirements and is not in an open bankruptcy proceeding.

This option can relieve taxpayers burdened by back taxes, penalties, and collection activities, but it requires detailed disclosures and a thorough review process. If you meet the eligibility criteria and demonstrate extraordinary circumstances, the Closing Agreement may be your best opportunity to settle your tax debt and regain financial stability.

Step-by-Step Guide to Applying for a New Jersey Closing Agreement

Applying for a New Jersey offer in compromise is a detailed process that requires preparation, accuracy, and complete financial disclosure. Follow the steps below to ensure your application meets all state requirements.

Step 1: Gather Required Documents

Before beginning the application, collect all necessary documents that support your financial claims and eligibility:

Provide your most recent two years of federal income tax returns. These are required even if you are only applying for state tax relief.
If you own or operate a business, include your New Jersey corporate or business tax returns for the last two years.
Submit complete bank statements for all checking, savings, and investment accounts to demonstrate your available funds and spending patterns.
Include recent pay stubs, benefit award letters, or other income verification for yourself and your spouse, if applicable.
Gather real estate tax assessments or professional property appraisals to document your current real estate equity.
You can obtain vehicle ownership documents and recent valuations from online appraisal tools or loan statements.
Submit copies of insurance policies that contain cash value, such as whole life insurance policies or annuities.
Include detailed records of your monthly living expenses, such as rent, mortgage, utilities, groceries, and transportation.
Provide documentation of debts and financial obligations, including credit card statements, personal loans, student loans, or court judgments.

Thorough documentation is essential for the Division of Taxation to evaluate whether your offer represents the most they could expect to collect.

Step 2: Complete Form 906 – Closing Agreement Request

Form 906 is the official request to settle your New Jersey tax liability. When completing the form:

Accurately list your name, current address, and Social Security number or Federal Employer Identification Number.
Identify your offer's specific taxes and periods, such as unpaid balances from prior income tax years.
Write a detailed explanation of why you believe the state should accept a reduced payment. This may include medical hardship, loss of income, or errors in your original tax assessment.
Clearly state the dollar amount you are offering to pay and whether you propose a lump sum or an installment arrangement.
Disclose the source of funds for your offer, such as savings, borrowed funds, or assistance from family members.

A clear, honest, and well-organized submission improves your chances of being selected for the next stage of the process.

Step 3: Fill Out the Financial Statement of Debtor

The Financial Statement of Debtor is a critical part of your application. It allows the Division to evaluate your income, expenses, and ability to pay.

Section I: Provide information about your employment status, your spouse’s employment (if applicable), and any dependents you support.
Section II: Document monthly income and break down your regular living expenses, including housing, healthcare, transportation, and other necessary costs.
Section III: Lists all of your assets—such as bank accounts, property, retirement accounts, and vehicles—and your liabilities, including monthly loan and credit payments.
Section IV: Disclose additional financial details, including the value of insurance policies, balances in investment accounts, and any outstanding tax obligations.
Section V: Lists other relevant financial disclosures, such as ongoing legal proceedings, expected inheritances, or upcoming financial changes that could affect your ability to pay.

The information you provide must be complete and truthful. Any inconsistencies or omissions could delay your application or result in immediate rejection.

Step 4: Submit Your Application

Once your forms are complete and your documents are in order, submit your application by mail.

Mail your complete application package to:
New Jersey Division of Taxation
Closing Agreements
PO Box 245
Trenton, NJ 08695-0245
Please include all required forms: the completed Form 906, the full Financial Statement of Debtor, supporting documentation, and a payment or deposit, if applicable.
Send your package using certified mail with a return receipt to confirm delivery and maintain a record for your files.
Keep a complete copy of your entire submission, including attachments and cover letters, in case the Division requests clarification or supporting documentation during review.

Attention to detail at this stage can prevent unnecessary delays.

Step 5: Await Review and Respond if Needed

After submitting your application, the New Jersey Division of Taxation will begin the review process.

The Division will review your documents for completeness and confirm that all required information is included.
Your financial information will be verified to ensure your offer is based on accurate and current data.
If your proposed settlement appears reasonable and supported, the Division may accept the offer, make a counteroffer, or request more documentation.
If additional information is requested, you must respond promptly and thoroughly to avoid denying your application.
If your offer is accepted, you will receive written confirmation outlining payment terms and any continuing obligations.
If your offer is rejected, you will be notified of your appeal rights and options for other forms of tax relief, such as a payment plan or installment agreement.
Patience is key, as processing times can vary depending on the complexity of your case and the division’s current workload.

Common Mistakes That Can Lead to Offer Rejection

Submitting an offer in compromise to the New Jersey Division of Taxation requires detailed documentation and full compliance. Many applications are rejected due to errors that could have been avoided with proper planning. This section outlines the most common mistakes that can lead to denial and strategies for preventing them.

Submitting incomplete or inaccurate financial information will almost always result in rejection. If you leave out bank accounts, undervalue your assets, or underreport your income, the Division may view this as a misrepresentation of your financial situation.
Proposing an offer amount far below your actual ability to pay weakens your case. The Division expects your offer to reflect your reasonable collection potential, based on your income, assets, and necessary living expenses.
Failing to include the required supporting documentation makes it impossible for the state to verify your claims. Every figure on your application—whether related to income, expenses, or debt—requires backing by bank statements, tax returns, or other credible evidence.
Applying while you are in an open bankruptcy proceeding automatically disqualifies you from the program. New Jersey does not consider compromise applications until a bankruptcy case has been formally discharged or dismissed.
Claiming expenses that exceed the IRS National Standards without proper justification can trigger a denial. If you list unusually high housing, transportation, or medical care costs, you must submit supporting documentation explaining why your expenses exceed the norm.
Submitting your application before filing all required tax returns is a common and avoidable mistake. The Division will not consider your offer unless you are current on all tax filings, including prior-year returns.

Correcting these mistakes before submission will improve your chances of approval and reduce the likelihood of delays in the review process.

What Happens After Your Offer Is Accepted or Rejected?

After submitting your application for a New Jersey offer in compromise, the Division of Taxation will conduct a detailed review. Their decision will determine whether you can resolve your tax debt through a reduced settlement or must pursue an alternative resolution.

If Your Offer Is Accepted

You will receive a formal acceptance letter confirming your offer has been approved. This letter will include instructions on how to make your payment and outline the terms of the agreement.
You must follow the payment terms exactly as outlined. Failure to pay the agreed amount on time or missing future filing obligations may result in a default, which could reinstate your full tax liability and trigger collection actions.
The agreement becomes binding once your payment is processed and all conditions are met. However, you must comply with your ongoing tax obligations to keep the deal in effect.

If Your Offer Is Rejected

The Division will notify you in writing if your offer is rejected. The notice may include a brief explanation or a request for additional documentation before making a final decision.
You may appeal to the New Jersey Tax Court if you disagree with the rejection. Appeals must be based on legal or procedural grounds and filed within the time allowed under state tax law.
If you do not appeal, consider reapplying with a revised offer or exploring other tax resolution options, such as a payment plan or installment agreement.
Rejection does not prevent you from applying again. However, your new application must address the reasons for denial and include updated financial information.

Understanding these outcomes lets you plan your next steps and control your tax situation.

Final Checklist Before Submitting Your Application

Before mailing your application to the New Jersey Division of Taxation, ensure everything is complete and accurate. Use this checklist to confirm that your package meets all program requirements and is ready for submission.

Required Forms and Core Documents

Please complete Form 906—Closing Agreement Request in full, including your personal information, tax periods, and proposed settlement offer.
Verify that you have included the full Financial Statement of Debtor with all five sections correctly filled out. Incomplete statements will result in delays or rejection.
Attach copies of your most recent two years of federal income tax returns. These are required even if your application involves only New Jersey tax debt.
If you own a business or file corporate returns, include your New Jersey business tax filings for the same two-year period.

Supporting Financial Documentation

Include recent bank statements for all checking, savings, and investment accounts. These statements should reflect your current financial condition.
Provide income verification such as recent pay stubs, Social Security income notices, unemployment benefits, or pension distributions.
Submit property valuations or real estate tax assessments to document equity in your home or other properties.
Attach documentation related to your vehicles, such as registration papers, title documents, and estimated current value from a reputable source.
Provide account statements for all retirement and investment holdings, including IRAs, 401(k)s, brokerage accounts, and annuities.
Include copies of insurance policies that show any cash value available to you, such as whole life or universal life insurance.
Add statements for credit card balances, personal loans, student loans, or any other debts, including details on monthly payments.
Document your monthly expenses. This includes rent or mortgage, utilities, groceries, transportation, and medical costs, with proof such as receipts or billing statements.

Submission and Verification Steps

Write a clear and concise explanation of your financial hardship or reason for disputing the tax liability. This should be included with your Form 906.
Clearly state your proposed settlement amount and payment terms, and identify the source of funds you plan to use to pay the offer.
Review all forms to ensure they are signed and dated where required.
Make a complete copy of your application package for your records. This will be beneficial if you receive a follow-up or need to appeal.
Please send your application via certified mail with the return receipt you requested. This will provide proof of delivery and allow you to track your submission.

Completing these steps with care ensures that your application is complete, credible, and ready for serious consideration by the Division of Taxation.

Frequently Asked Questions (FAQs)

What is a New Jersey offer in compromise, and how does it work?

A New Jersey offer in compromise is a state-administered compromise program that allows eligible taxpayers to settle their tax debt for less than the full amount owed. It is designed for individuals or businesses facing significant financial hardship. If you cannot fully pay your tax bill and meet the eligibility criteria, this program can help you resolve your tax liability and regain control of your finances.

Can I qualify for a New Jersey offer in compromise if I owe both state and IRS tax debt?

Yes, you can apply for a New Jersey and an IRS offer in compromise, but they are handled separately. Each agency—state and Internal Revenue Service—has its own eligibility rules and application process. If you owe money to both, you must submit separate forms and supporting documentation for each. Ensure your financial information is consistent across both applications to improve your chances of success.

What happens if I don’t include all required tax returns in my application?

If you fail to submit all required tax returns, your application will be denied automatically. The New Jersey Division of Taxation requires full filing compliance before reviewing any request to settle tax debt. Missing returns indicate you haven’t fulfilled your tax obligations, disqualifying you from the compromise program. Make sure to file all outstanding tax returns before applying, and provide proof with your submission.

Does applying for an offer in compromise stop IRS collection actions like wage garnishment?

No, applying for a New Jersey offer in compromise does not affect IRS collection activities. If you're facing wage garnishment or other collection actions related to IRS tax debt, you must apply for the federal offer in compromise (OIC) separately. Only a correctly submitted federal application can pause the IRS collection process. A tax professional or tax attorney can help you manage both applications simultaneously.

Can I apply for an offer in compromise if I’m in an open bankruptcy proceeding?

No, taxpayers in an open bankruptcy proceeding are not eligible for a New Jersey offer in compromise. Bankruptcy prevents the Division from pursuing collection and reviewing offers. You must wait until your bankruptcy case is closed before applying to settle your tax debt. If you’re unsure of your status or timeline, contact your bankruptcy attorney or a tax relief company for guidance on the next steps.

How do I determine the amount to offer in a New Jersey compromise program?

Based on your monthly income, expenses, and assets, your offer should reflect the most the state could reasonably expect to collect from you. This amount is referred to as your reasonable collection potential. Offering too little without justification may lead to rejection. Review your financial information, subtract allowable expenses, and determine what you can afford. Always support your proposed offer with thorough supporting documentation and a realistic payment plan.

Are penalties and interest included in a New Jersey offer in compromise?

Yes, a New Jersey offer in compromise can cover the entire tax liability, including the original tax debt, penalties, and interest. Once accepted, your settlement resolves all related unpaid balances for the specified tax periods. It is essential to confirm that your offer amount takes the total amount owed into account. Consult a tax professional if you’re unsure how to calculate your full tax liability.

New Jersey Offer in Compromise Guide: Your Complete Guide to State Tax Debt Settlement