Drug Tax (Part II): Offers in Compromise to Resolve Unauthorized Substance Tax AssessmentsJuly 13, 2022, 08:00 AM
This blog has previously addressed frequently asked questions associated with unauthorized substance tax assessments in North Carolina. Unauthorized substance taxes are levied by the State in response to drug trafficking crimes prosecuted in either state or federal court. These “drug taxes” are assessed according to the type and weight of controlled substances seized and can often amount to tens or even hundreds of thousands of dollars in taxes, interest, penalties, and fees.
As previously discussed, there is an important 45-day deadline in which to contest the notice of tax assessment. Working with an experienced attorney to take the necessary steps to file a challenge within that time period is crucial. A timely challenge provides the best opportunity to negotiate a reduction or outright dismissal of the unauthorized substance tax assessment.
Once the 45-day deadline passes, the opportunity to contest the assessment is over and the tax becomes final. At that point, the NC Department of Revenue has the right to file attachments and even garnish wages to collect. Understandably, criminal defendants facing drug trafficking charges often either miss or ignore the drug tax notice because they are more concerned with their criminal case and avoiding or minimizing prison time. Left unaddressed, however, the unauthorized substance tax will continue to balloon with interest, and paycheck garnishments will serve as a painful, ongoing remainder of this oversight.
Fortunately, under N.C.G.S. § 105-237.1, a taxpayer can make an “offer in compromise” seeking reduction and settlement of an unauthorized substance tax that has become final. Although discretionary, the NC Department of Revenue may negotiate and settle a drug tax if it determines that it is in the best interest of the State using a number of statutory criteria including, but not limited to:
- Whether there is reasonable doubt as to the taxpayer’s liability under the law and facts;
- Whether the taxpayer is insolvent and the State would probably not be able to collect the taxed amount;
- Collection of anything more than the amount offered in compromise is improbable; or
- Collection of anything greater than the amount offered in compromise would be an unjust result.
Based on the subjective criteria above, NC DOR has wide discretion about whether to accept an offer in compromise. For that reason, a successful offer in compromise should address in detail the specific facts of the case and summarize why the unique financial situation of the taxpayer warrants a reduction and settlement of the tax. Possible scenarios may include incarceration status of the taxpayer, insolvency or limited financial resources, unemployment or underemployment, or settlement with the IRS for similar federal tax liabilities.
Preparation of an offer in compromise can be time intensive and requires the submission of specific forms and financial records to the NC Department of Revenue including tax returns, pay stubs, bank and credit card statements, and itemized monthly expenses. However, a carefully prepared offer in a compromise package supporting a statutory basis for a reduction of the drug tax can result in a significant reduction of the taxed amount and settlement of the case. Because each case is different, careful discussion with an experienced attorney is recommended to determine eligibility status and strategy options.