Ohio Tax Collection Rules Create Challenges for Resolving Tax CLaims

by Mario J. Fazio, Esq.

The State of Ohio has a complex tax collection system for unpaid taxes owed by individuals and businesses. The State generally relies on notices to start its collection process, but then can ramp up its efforts by filing tax liens or bank account garnishments. A tax liability is created when the Ohio Department of Taxation makes an assessment of tax. Assessments can arise either from tax reported on a tax return or through a tax audit that results in the determination of additional tax. Tax assessments are made for all types of taxes including, for example, income taxes, sales tax, employee withholding taxes and commercial activity tax.

Once tax is assessed, the State typically sends out notices requesting payment. These notices often include penalties and interest. If the tax claim is not paid, the Ohio Department of Taxation may certify the unpaid tax to the Ohio Attorney General’s Office, which is then authorized to file a tax lien in the county in which the taxpayer resides. A tax lien automatically becomes a lien on all real estate owned by the taxpayer in the county.

The Ohio Attorney General has seven years from the date of the assessment to file a law suit to collect the tax, such as filing a garnishment of a bank account, IRA or brokerage account, or conducting an examination of the taxpayer’s financial information by deposition. However, if the Ohio Attorney General fails to file a law suit to collect the tax within the seven year period, the Ohio Attorney General is time-barred from instituting any garnishment, foreclosure or other law suit to collect the unpaid tax. But, the State is not required to release any tax lien even though the seven year statute of limitations has expired. This is because the tax lien has a separate statute of limitations that only requires the State to refile the tax lien every 15 years to avoid the dormancy of the tax lien. A tax lien may remain effective for up to 40 years.

From time to time, we have noticed that the Ohio Attorney General will send out collection notices for purportedly unpaid taxes, interest and penalties that are many years old, and in some cases, twenty or more years old. In these situations, our clients frequently have vague memories of the business or other circumstances that may have given rise to the tax liability and are unlikely to have records to determine the origin of the tax liability or whether the State’s claim is correct. In these cases, it is critical that the statute of limitations be considered in determining what collection authority the State has. The Ohio Attorney General in many cases refers tax claims to outside collection law firms who are referred to as “Special Counsel” for the State. Special Counsel has limited authority to negotiate on behalf of the State to settle tax claims. In most cases, Special Counsel will consider installment agreements. The State may not inform a taxpayer that a statute of limitations has expired at the time it is making a demand for payment unless the statute is raised by the taxpayer. Moreover,  even though the seven-year collection statute may have expired, the State is unlikely to release a tax lien since it is not obligated to do so. Clients are often troubled by a tax lien since the lien may appear on a credit report and impair the client’s credit rating. In order to release a tax lien, the Ohio Attorney General will require that the taxpayer first make full financial disclosure of all assets, liabilities and income through a formal process referred to as an “Offer in Compromise.” Based on the taxpayer’s financial condition, the State will consider whether the unpaid taxes should be full paid or settled for less than the full amount. The Offer in Compromise process is not easy and requires a substantial amount of time and effort, but in the right circumstances may present an opportunity to resolve a tax claim where there is an inability to pay the full amount.