California state’s tax agencies operate their own Offer in Compromise (OIC) programs, separate from the IRS. While they share the same general concept – settling a tax debt for less than owed – these state programs have different criteria and processes that reflect California state law and policy. A key difference is that California OICs are only for final, agreed-upon liabilities and are primarily based on collectibility (inability to pay). If there is any dispute about the liability, or the case is in an appeal posture, California agencies instead use settlement programs (analogous to litigation settlements) rather than OICs.
Franchise Tax Board (FTB) – Income/Franchise Tax OIC
The FTB handles California’s personal and corporate income taxes. Its Offer in Compromise program is authorized by state law (Cal. Rev. & Tax. Code § 19443, et seq.) and is aimed at taxpayers who do not have the income, assets, or means to pay their California tax liability now or in the foreseeable future. In essence, it’s a collectibility-based program very similar in spirit to the IRS’s doubt as to collectibility OIC.
The FTB considers an OIC only after a liability is final and undisputed. Its guiding standard is whether the lump-sum amount offered represents the most we can expect to collect within a reasonable period. Like the IRS, the specialist measures equity in assets, current and future income, and necessary living expenses, but California state also weighs age, health, and the likelihood of changed circumstances when deciding if compromise is in “the best interest of the state.”
Eligibility Essentials:
- All California returns must be filed, and other payment options (e.g., installment plan) explored.
- No open protests, appeals, or bankruptcies may exist.
- The taxpayer must certify agreement with the assessed balance.
Application:
File FTB Form 4905 PIT or 4905 BE—or the multi-agency Form DE 999CA—with full financial disclosure (income, expenses, asset backup). FTB charges no application fee and requires no up-front deposit, but the offered amount must be payable in one lump sum at acceptance; installment-pay OICs are not allowed.
Review:
A specialist verifies assets (credit reports, lien searches) and recalculates reasonable collection potential. FTB may demand liquidation of available equity and, where future earnings could rise, require a five-year collateral agreement that captures a percentage of excess income. If an offer meets or exceeds the expected collectibility—and acceptance will not undermine voluntary compliance—the FTB will approve and issue a written agreement; payment is then due immediately, and state tax liens are released.
Key Pitfalls:
- Submitting an offer while returns are missing or liabilities are still in dispute—FTB will not process it.
- Lowballing the lump-sum amount, FTB often counters once, but a grossly inadequate offer risks outright denial (no formal appeal exists).
- Concealing assets or income—grounds for summary rejection and potential enforcement action.
- Assuming an IRS OIC guarantees state acceptance, FTB applies its own standards and collection horizon.
Interest and penalties continue to accrue throughout the review, and collection action is usually suspended unless delay would jeopardize the state’s position.
CDTFA Offers-in-Compromise for Sales, Use, and Special Taxes
California’s Department of Tax and Fee Administration will compromise a final, undisputed sales- or special-tax liability only when the amount offered represents the maximum the state can expect to collect within a reasonable time and acceptance is “in the best interest of the State” (Cal. Rev. & Tax. Code § 7093.6). The program historically targeted closed businesses and the responsible individuals who no longer own or operate a similar enterprise, but a 2009–2028 statutory expansion lets CDTFA consider offers from (1) still-operating businesses that failed to collect reimbursement (for example, uncollected sales tax on taxable sales), (2) successors who inherited a predecessor’s debt, and (3) consumers with large use-tax liabilities. By contrast, if trust-fund tax was actually collected and withheld from customers, compromise is rare; where a 50 percent fraud penalty was assessed, CDTFA policy requires any offer to pay at least the tax and fraud penalty in full, and a felony sales-tax-evasion conviction bars relief altogether.
Eligibility Snapshot
- A final liability on a closed or qualifying open account, no pending protests or appeals, and no bankruptcy.
- Taxpayer is not—and, for closed-business cases, will not be—engaged in the same or a similar business that incurred the debt.
- Inability to pay the full balance from current assets and income.
Application
File CDTFA-490 (individuals) or CDTFA-490-C (entities) with a complete financial statement, or use Form DE 999CA if you are submitting a single package to the FTB, EDD, and CDTFA. Unlike the IRS, do not send money with the offer; CDTFA will request the lump-sum payment only after preliminarily approving the compromise. There is no application fee, but documentation—bank statements, asset valuations, income proof—must be airtight.
Evaluation
A specialist verifies asset titles, credit reports, and income sources, then calculates the reasonable collection potential. Age, health, future earning capacity, and cost-effectiveness of enforced collection all factor into whether the offer truly maximizes recovery. For taxpayers with genuine upside potential, CDTFA may demand a collateral agreement that shares in unexpected income for up to five years. The agency also weighs public-policy concerns: accepting an offer cannot appear to reward willful non-compliance, and compromises exceeding statutory thresholds are publicly reported.
Outcome and Pitfalls
If CDTFA accepts, the taxpayer remits the lump sum (often concurrently with signing a stipulation for judgment to secure payment) and liens are released; collection remains stayed during review unless delay would jeopardize recovery. Denials carry no administrative appeal, so an incomplete or lowball offer wastes months and hands CDTFA a detailed map of your finances. Common deal-breakers include ongoing involvement in a similar business, undervalued assets, or liabilities composed primarily of sales tax actually collected from customers. Post-compromise compliance is essential—any new delinquencies can torpedo future relief and invite renewed enforcement.
EDD Offers-in-Compromise for Payroll-Tax Debts
California’s Employment Development Department (EDD) can compromise final, undisputed payroll-tax liabilities under CUIC §§ 1870-1875, but its program is narrower and more formula-driven than those of the FTB or CDTFA. In practice, an EDD OIC is aimed almost exclusively at defunct businesses and the individuals personally assessed under CUIC § 1735 who have no realistic way to pay the debt.
Who Can Qualify?
- Closed businesses or responsible persons who are no longer associated with an operating business that incurred the debt.
- For an active business, only someone without any current ownership or control may apply.
- The applicant must lack sufficient income to reduce the principal: EDD deems you unable to pay if, after covering interest, you cannot apply more than 6.7 % of the tax each year to principal.
- All assets that could fully satisfy the liability must already be exhausted; otherwise, their equity becomes the floor of any offer.
- The offer must exceed what EDD projects it could collect through enforced collection over the next four years—a statutory look-forward unique to EDD.
- No fraud, criminal payroll-tax violations, open CUIAB petitions, or bankruptcies are compromise-eligible.
How to Apply
Submit Form DE 999A (EDD-only) or DE 999CA (multi-agency) with complete financial disclosures; there is no application fee. The OIC Unit may request bank records, pay stubs, property data, and will verify your statements with asset searches. If EDD tentatively approves, the Director (or delegate) signs a written agreement; payment may be allowed in installments of up to five years, but tax liens remain until the settlement amount is paid in full. Should you default, the compromise is void, and the original debt (minus payments) springs back.
No Appeal
A denial is final by statute (CUIC § 1873); neither the CUIAB nor the courts may review it. Applicants can, however, submit a new offer if their financial condition worsens or if they can meet the four-year collectibility test with a higher figure. (If liability is still being disputed, the separate EDD Settlement Bureau under CUIC § 1236—not the OIC program—handles compromises based on litigation risk.)
Common Pitfalls
- Applying while still connected to the business.
- Offering less than EDD’s four-year enforced-collection projection.
- Omitting assets or understating income—EDD cross-checks public records and will summarily reject inaccurate applications.
- Ignoring the trust-fund nature of withholding taxes, where fraud penalties attach, EDD generally insists on at least the tax plus the 50 % fraud penalty; felony convictions bar any compromise.
Because EDD decisions are unappealable and the agency’s financial tests are rigid, a carefully documented, statute-compliant package is essential: one misstep can close the door on relief.
California Settlement Programs vs. OIC
It’s essential to differentiate California’s OIC programs from its settlement programs. An OIC, as discussed, is used when the liability is final and not in dispute, focusing on the inability to pay. A settlement (in the FTB, CDTFA, or EDD context) is used when the liability is in dispute (under appeal or litigation) and typically involves compromising the amount due based on the hazards of litigation and the costs of continuing to fight. This is analogous to the IRS compromising before a judgment (though the IRS often handles that through its Appeals or in Tax Court litigation settlements rather than through the OIC unit).
For example, the FTB Settlement Bureau can settle tax disputes that are in protest or court, and the law grants FTB authority to compromise such disputes with supervisory approval (these often consider the likelihood FTB might lose the issue, much like IRS Appeals does). Similarly, CDTFA’s Settlement Program (for sales/use tax) allows a case under appeal to be settled for less, subject to approval by the CDTFA Director or board and possibly oversight committees. EDD’s Settlement Program (CUIC § 1236), as described in EDD’s Info Sheet, allows employers to submit settlement offers on disputed assessments that are under petition with the CUIAB. EDD explicitly notes the settlement is a “compromise… consistent with a reasonable evaluation of the costs and risks associated with litigation”. They will consider risk of loss, cost of litigation, and also fairness, financial hardship, and business survival, though they caution that hardship or equity alone cannot be the sole reason for settlement; there must be a litigation uncertainty or excessive cost driving the compromise. All EDD settlements over $500 forgiven require a public record and certain approvals (including ALJ and possibly board/AG approvals).
What this means for taxpayers: If you have a California tax liability that you believe is incorrect, you should pursue the protest/appeal route and possibly a settlement, rather than an OIC. OIC is not a vehicle to contest a tax. Conversely, if your liability is correct but you cannot pay it, then OIC is the appropriate tool (after the liability has been finalized). It’s also possible to use both sequentially: for instance, a taxpayer might settle a disputed liability down to a final amount, then still be unable to pay that amount and subsequently pursue an OIC on the remaining balance. Each agency has internal coordination to ensure these processes are kept separate and appropriately handled.
Contact the Tax Law Offices of David W. Klasing to See if California State OIC is Your Best Option
When a California tax debt has been finalized and you’ve exhausted appeals, an Offer in Compromise (OIC) with FTB, CDTFA, or EDD may be your best—and sometimes only—hope to avoid crippling financial consequences. But these programs are complex, agency-specific, and unforgiving: missteps can spell rejection and lost opportunities.
At the Tax Law Offices of David W. Klasing, our team of dual-licensed Tax Attorneys & CPAs offers unmatched expertise tailored to each California agency:
- FTB OICs require thorough documentation and must represent the maximum collectible amount. We prepare lump-sum offers based on equity, income, age, health, changing circumstances, and the “best interest of the state” criteria—navigating collateral agreements when future earnings warrant.
- CDTFA compromises (sales/use/special taxes) are available only for final, undisputed debts, often tied to closed businesses or non-trust fund obligations. Our dual-licensed tax attorneys and CPAs verify dissociation from the business, value assets accurately, and include collateral stipulations where appropriate.
- EDD Offers in Compromise are tightly formulaic—limited to incapacitated individuals or defunct businesses. We assess income and assets to ensure offers exceed the four-year enforced-collection threshold and comply with CUIC 6.7% rule, drafting submissions that earn director-level approval.
Across all programs, our firm ensures full filing compliance, uses dual-licensed privilege to protect your analysis, and coordinates multi-agency offers using forms like DE 999CA. Our professionals craft ironclad financial disclosures, source of fund explanations, and contingency-driven strategies to maximize acceptance odds. If California state is breathing down your neck with payroll, sales, or income tax liabilities that you’re unable to pay, don’t lose hope—or time. Call the Tax Law Offices of David W. Klasing today at (800) 681-1295 or schedule a reduced-rate initial consultation HERE to explore whether a California state Offer-in-Compromise can rescue your finances.
