There are times when taxpayers are unable to meet their tax obligations to their home state. Just as the federal government has ways for individuals and businesses to deal with tax debt, states do as well. There are four main ways used by most states, including California, to handle back taxes.
The first way is a payment plan. Two main drawbacks of a payment plan are that interest may continue to accrue and a tax lien may be issued by the state for the duration of the payment plan. This could case a taxpayer to be unable to acquire credit while the tax lien is in place.
The second way is a Voluntary Disclosure Agreement. Taxpayers come forward on their own to let the taxing authority know that they owe taxes for prior years. The timing of the disclosure is critical — it must be done before an audit notice is sent to the taxpayer.
The third way is through an Offer in Compromise. Taxpayers can end up paying less tax than they actually owe through negotiations with the state. In order to even be considered for an Offer in Compromise, the taxpayer has to meet one or more of certain conditions.
Lastly, some states provide amnesty programs to taxpayers. The programs usually have a component of forgiveness whether it is for penalties, interest or principal. These programs are normally the most taxpayer friendly.
One thing that all plans tend to have in common is that the state of California is going to want detailed financial documents and may want them often. Also, even if a taxpayer qualifies for one of the aforementioned options, there is no guarantee that the state will agree to let the taxpayer pay off tax debt through one of these options. However, with advice and assistance, it may be possible to convince the state that it would be in its best interest to work with the taxpayer.
Source: Huffington Post, State Taxes: What To Do When You Do Not Have the Money, David Seiden, Aug. 28, 2013