How the FTB Evaluates Your Ability to Pay (for an Offer in Compromise)

Introduction: Why Ability to Pay Is Everything

If you’re applying for a California Franchise Tax Board (FTB) Offer in Compromise (OIC), one factor matters more than anything else: your ability to pay.

Unlike some IRS programs that allow settlements based on equity, the FTB focuses primarily on what they think they can reasonably collect from you now and in the future.

Understanding how the FTB calculates this is critical if you want your Offer approved — and for Orange County residents where incomes and home values are higher, it’s even more important to build a strong, defensible application.

This guide breaks down exactly how the FTB evaluates taxpayers, what they consider, and how to optimize your case for success.

📌 What Is an Offer in Compromise (OIC)?

A California FTB Offer in Compromise allows qualifying taxpayers to settle their tax debt for less than the full amount owed, if they can prove:

• They cannot pay the full balance now or in the foreseeable future
• The offer represents the most the FTB can expect to collect
• They are in current compliance with filing and payment obligations

👉 California FTB Offer in Compromise vs IRS Offer: What’s the Difference?

🧠 What Does “Ability to Pay” Mean?

At its core, the FTB wants to know:

• What assets you have
• What income you make
• What expenses are necessary
• What equity or liquidity is accessible
• Whether future income could satisfy the debt

Their question:

"If we wait and enforce collections, can we get more than what you’re offering?"

If the answer is yes, your Offer will be rejected.

If the answer is no, and your documentation supports it, your Offer has a chance.

🛠️ Factors the FTB Considers When Evaluating Ability to Pay

✅ 1. Cash and Cash Equivalents

• Bank accounts
• Investment accounts (stocks, bonds)
• Cryptocurrency holdings
• Life insurance cash value

💡 Tip: The FTB expects you to offer nearly all available cash unless exempt for necessary living expenses.

✅ 2. Real Estate Equity

• Home equity (even primary residences)
• Rental property equity
• Vacation homes

FTB uses fair market value minus reasonable costs of sale and mortgages to calculate available equity.

👉 How to Remove an FTB Tax Lien in California

✅ 3. Vehicles and Personal Property

• Cars, trucks, RVs, motorcycles
• Boats
• Jewelry, collectibles

Again, expect the FTB to estimate liquidation value — not sentimental value.

✅ 4. Current and Future Income

• Paystubs (for W-2 employees)
• Profit & Loss statements (for self-employed)
• Rental income, royalties, dividends

They project future earnings for a reasonable collection period — usually 5 years.

If you make $100K/year, they’ll expect to collect some portion of that over time unless you can show severe hardship.

✅ 5. Necessary Living Expenses

The FTB applies reasonable expense standards based on:

• Housing
• Utilities
• Transportation
• Food, clothing, and miscellaneous
• Health care expenses

They cap allowable expenses based on guidelines — especially in higher-cost areas like Orange County.

📖 Example: FTB Ability to Pay Calculation

Offer Minimum:

$2,000 (cash) + $75,000 (equity) + ($800 × 60) = $124,000

👉 Unless you can show hardship or exempt assets, the FTB will expect an offer close to $124K — even if your original debt was $90K.

⚠️ Mistakes That Cause OIC Denials

❌ 1. Understating Assets or Income

If the FTB catches missing bank accounts, assets, or income, your Offer will be immediately rejected — and you may trigger a fraud review.

❌ 2. Claiming Excessive Expenses

If you claim $4,000/month in groceries for a family of three, expect an immediate denial.

❌ 3. Failing to File or Pay Current Taxes

You must be fully current on all required filings before applying.

❌ 4. Offering Too Little Without Backup

Lowball offers without strong financial backup (paystubs, bank statements, hardship letters) get rejected quickly.

🛡️ How to Improve Your Offer in Compromise

✅ Work With a CPA

An experienced tax resolution CPA can:

• Build a compliant financial disclosure
• Properly value assets and income
• Present hardship explanations the FTB recognizes
• Avoid red-flag mistakes

✅ Use Realistic Expense Standards

Don’t inflate — but don’t leave deductions on the table either.

👉 California Back Tax Penalties and Interest Explained

✅ Explain Special Circumstances

If you have medical issues, caregiving responsibilities, or permanent income loss, document it thoroughly.

📍 How Boulanger CPA Helps Orange County Taxpayers

We help individuals and business owners in Santa Ana, Irvine, Anaheim, Tustin, and beyond:

• Analyze ability to pay
• Prepare compliant OIC applications
• Negotiate directly with the FTB
• Build supporting documentation
• Protect clients from premature enforcement

📞 Call 657-218-5700
🌐 www.orangecounty.cpa

Frequently Asked Questions