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.
π 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
π California FTB Offer in Compromise vs IRS Offer: What’s the Difference?
π§ 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.
π οΈ Factors the FTB Considers When Evaluating Ability to Pay
β 1. Cash and Cash Equivalents
- Bank accounts
- Investment accounts (stocks, bonds)
- Cryptocurrency holdings
- Life insurance cash value
π‘ Tip: The FTB expects you to offer nearly all available cash unless exempt for necessary living expenses.
β 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.
π How to Remove an FTB Tax Lien in California
β 3. Vehicles and Personal Property
- Cars, trucks, RVs, motorcycles
- Boats
- Jewelry, collectibles
Again, expect the FTB to estimate liquidation value — not sentimental value.
β 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.
β 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.
π Example: FTB Ability to Pay Calculation
| Category | Amount |
|---|---|
| Cash in Bank | $2,000 |
| Home Equity | $75,000 |
| Vehicles | $5,000 |
| Net Monthly Income After Expenses | $800 |
| Collection Period | 60 months |
Offer Minimum:
$2,000 (cash) + $75,000 (equity) + ($800 × 60) =
$124,000
π Unless you can show hardship or exempt assets, the FTB will expect an offer close to $124K — even if your original debt was $90K.
β οΈ Mistakes That Cause OIC Denials
β 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.
β 2. Claiming Excessive Expenses
If you claim $4,000/month in groceries for a family of three, expect an immediate denial.
β 3. Failing to File or Pay Current Taxes
You must be fully current on all required filings before applying.
β 4. Offering Too Little Without Backup
Lowball offers without strong financial backup (paystubs, bank statements, hardship letters) get rejected quickly.
π‘οΈ How to Improve Your Offer in Compromise
β 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
β Use Realistic Expense Standards
Don’t inflate — but don’t leave deductions on the table either.
π California Back Tax Penalties and Interest Explained
β Explain Special Circumstances
If you have medical issues, caregiving responsibilities, or permanent income loss, document it thoroughly.
π 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
π Call
657-218-5700
π
www.orangecounty.cpa
Frequently Asked Questions
How does the FTB determine my ability to pay?
The FTB looks at your income, expenses, assets, and overall financial condition. They calculate your ability to pay based on the equity in your property, disposable income, and future earning potential.
What expenses does the FTB allow in their financial analysis?
The FTB considers necessary living expenses such as housing, food, utilities, transportation, and healthcare. They may disallow luxury or excessive expenses when evaluating an Offer in Compromise.
Does the FTB use a standard for allowable expenses?
Yes. The FTB often references IRS Collection Financial Standards but can apply more restrictive thresholds, especially if your expenses exceed what is typical for your income and location.
Can I qualify for an OIC if I own a home or have assets?
Possibly. You may still qualify if your assets are illiquid, encumbered, or you can show that forced liquidation would cause undue hardship. However, significant equity can reduce your chances of settlement.
Should I work with a CPA when submitting an FTB OIC?
Absolutely. A CPA can prepare a clean financial statement, identify allowed deductions, and structure your offer to align with FTB expectations—improving your chances of success and avoiding rejection.
ο»Ώπ£ About the Author
Marc Boulanger, CPA is the founder of Boulanger CPA and Consulting PC, a boutique tax resolution firm based in Orange County, California and trusted by high-income individuals and business owners across Southern California.
He is the author of Defend What’s Yours: A California Taxpayer’s Guide to Beating the IRS and FTB at Their Own Game, available now on Amazon. The book offers a step-by-step plan for resolving IRS and FTB tax debt without losing your business, your home, or your peace of mind.
With over a decade of experience resolving high-stakes IRS and State tax matters, Marc brings strategic insight to complex cases involving wage garnishments, bank levies, unfiled returns, and six-figure tax debts. He is known for helping clients reduce or eliminate tax liabilities through expertly negotiated settlements and compliance plans.
Marc is a Certified Public Accountant licensed in California and Oklahoma and holds the designation of Certified Tax Representation Consultant. He is a member of the American Society of Tax Problem Solvers (ASTPS) — the national organization founded by the educators and practitioners who have trained thousands of CPAs, EAs, and tax attorneys in IRS representation strategy.
Every case is handled with discretion, proven methodology, and direct CPA-led representation — not call center scripts.
π Learn more at www.orangecounty.cpa or call (657) 218-5700.
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