United States: New York Legislation Provides Limitations On Collections, Recognizes Undue Hardships, Considers Impact Of Same-Sex Marriages And Grants Extensions For Hurricane Victims

Last Updated: October 1 2011
Article by Dennis Rimkunas and Carolyn Joy Lee
Most Read Contributor in United States, September 2019

20-Year Statute of Limitations on the Time to Collect State Tax Liabilities

The enactment of 2011 NY A7238, added to the New York tax law as section 174-b, seeks to bring some definitiveness to the 20-year statute of limitations on the time to collect tax liabilities. Previously, the statute of limitations to collect tax liabilities was governed by NY Civil Practice Laws and Rules ("CPLR") § 211(b). This section provides that a money judgment, including a tax warrant, is presumed to be paid and satisfied after the expiration of 20 years from the time when the party recovering it was first entitled to enforce it. The presumption is conclusive, except as against a person who within that 20-year period acknowledges an indebtedness in writing or makes a payment, including an involuntary payment.

Because the statute of limitations effectively would be extended under the CPLR if the taxpayer acknowledged the indebtedness in writing or made a partial payment, even if that payment was a result of wage garnishment or bank levy, New York kept on its books millions of dollars of owed taxes accrued more than 20 years ago that it had no hope of collecting. Besides the significant expense of attempting to collect these taxes with little or no result, the old law created a huge burden for taxpayers, who were subject to old tax liabilities of which they were often unaware. In many cases, the interest alone exceeded the tax liability many times over, further increasing the burden.

The new provision does away with the rebuttable presumption and creates a fixed 20-year statute of limitations for outstanding tax warrants. The newly enacted section 174-b provides that a tax liability will not be enforceable and will be extinguished after 20 years from the first date a warrant could be filed by the New York State Commissioner of Taxation and Finance ("State Tax Commissioner"). "The first date a warrant could be filed" means the day after the last day specified for payment by the notice and demand issued for the tax liability where there is no right to a hearing with respect to such notice and demand. Where there is a right to a hearing with respect to a notice and demand, "the first date a warrant could be filed" means the day after opportunity for a hearing or review has been exhausted.

The statute applies solely to taxes administered by the State Tax Commissioner (and therefore does not apply to liability for local taxes administered by, for example, New York City), and it also applies to penalties and interest associated with state-administered taxes. The State Tax Commissioner and the taxpayer can consent in writing to extend the time period during which tax warrants may be collected.

The new statute became effective on August 17, 2011, but explicitly applies to tax liabilities that could have been warranted before the statute took effect.

Changes to the Offer in Compromise Program

New York's Offer in Compromise Program has been around for a while, but it is not well known because it has not been very effective. Prior to the enactment of the new law in 2011, the State Tax Commissioner was authorized to compromise fixed and final tax liabilities, including penalties and interest, only if: (1) the taxpayer had been discharged in bankruptcy or proved to be insolvent; and (2) the amount payable in compromise equaled or exceeded what the New York State Department of Taxation and Finance ("Tax Department") could recover through legal proceedings. These restrictions required the Tax Department to assume a full exercise of its levy and garnishment powers to establish a minimally acceptable offer, even if specific circumstances rendered enforcement of the debt impractical or unlikely to succeed.

The new law, effective August 17, 2011, and enacted as 2011 A08180, amending sections 171 (fifteenth) and 171 (eighteenth-a) of the New York tax law, seeks to broaden the provisions of the Offer in Compromise Program and grant more discretion to the Tax Department to compromise cases. The revised section 171 (fifteenth) now additionally allows tax debtors to apply for an offer in compromise for a final liability of a tax administered by the State Tax Commissioner if "collection in full would cause the tax debtor undue economic hardship."

The new statute also eliminates the requirement that the amount payable under the program be limited to the amount recoverable through legal proceedings. Rather, the compromised amount should reasonably reflect collection potential or be otherwise justified by the tax debtor. No offer in compromise would be acceptable if it would undermine tax compliance by other taxpayers or be adverse to the interests of the state.

The statute requires the Commissioner to promulgate regulations defining what constitutes "undue economic hardship." Although the regulations have yet to be issued, the Tax Department's web site provides the following guidelines:

Generally, undue economic hardship occurs when a taxpayer is unable to pay reasonable basic living expenses. Basic living expenses are those that provide for the health, welfare, and production of income for the taxpayer or the taxpayer's family. We will look to the Internal Revenue Service Collection Financial Standards to help determine a taxpayer's allowable basic living expenses.

In addition to basic living expenses, we will consider other factors that can impact an individual's financial condition, including:

  • taxpayer's age, employment status, and employment history
  • inability to earn an income because of a long-term illness, medical condition or disability
  • obligations to dependents
  • extraordinary circumstances such as special educational expenses, medical catastrophe or a natural disaster
  • inability to borrow against or liquidate assets due to hardship

The new statute additionally provides that "inability to maintain an affluent or luxurious lifestyle would not constitute undue economic hardship." Although the statute does not define what constitutes "an affluent or luxurious lifestyle," the Tax Department's web site provides the following guidelines:

Undue economic hardship does not include the inability to maintain an affluent or luxurious lifestyle. Other expenses that we generally won't allow as necessary living expenses in determining the existence of an undue economic hardship include:

  • private school tuition
  • college expenses
  • charitable contributions
  • voluntary retirement contributions
  • payments on credit cards
  • payments for cable or similar bills

It remains to be seen whether the revamped Offer in Compromise Program will be more effective than its earlier incarnation. Only time will tell.

The Marriage Equality Act

Effective July 24, 2011, Governor Cuomo legalized same-sex marriage in New York. Accordingly, the new law applies to all taxes administered by the Tax Department.

The Tax Department has yet to fully analyze all the reporting and compliance issues associated with the legalization of same-sex marriage in New York and the fact that same-sex marriage is not recognized for federal tax purposes. Nevertheless, the Tax Department recently issued a technical memorandum stating that same-sex married couples, for personal income tax purposes, must file their New York returns using a married filing status (married filing jointly, married filing separately) and, for New York estate tax purposes, must compute the New York taxable estate as if the deceased was married for federal estate tax purposes. TSB-M-11(8)C, July 29, 2011.

While these changes are of direct relevance only to individuals, employers and others with withholding obligations may find that changes are necessary to reflect this new law.

Hurricane Irene

The New York State Department of Taxation and Finance has extended the filing and payment dates for taxpayers residing or having their principal place of business in the following counties: Albany, Clinton, Delaware, Dutchess, Essex, Greene, Montgomery, Nassau, Orange, Otsego, Rensselaer, Rockland, Saratoga, Schenectady, Schoharie, Suffolk, Sullivan, Ulster, Warren, and Westchester. All deadlines for the performance of certain acts, including filing returns, requesting extensions, and paying certain taxes, occurring during the period beginning August 26, 2011, and concluding October 31, 2011, have been postponed to October 31, 2011. N-11-8, September 2011.

The New Jersey Division of Taxation similarly extended the filing and payment dates to October 31, 2011. New Jersey's tax relief, however, extends to taxpayers who reside or have a business in all 21 counties of New Jersey. NJ-2011-42, as updated on September 7, 2011.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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