State Tax Amnesty Programs; it seems like every month one state or another announces a tax amnesty program. This perception isn’t far from reality as approximately thirteen states announced and completed tax amnesty programs in 2009. The amnesty trend continued in 2010 with at least fourteen more states (Florida, Kansas, Kentucky, Illinois, Indiana, Maine, Massachusetts, Minnesota, Nevada, New Mexico, New York, North Carolina, Pennsylvania, Tennessee), one city (Philadelphia) and the District of Columbia announcing some form of a state tax amnesty program. And while some of the 2010 state tax amnesty programs have come and gone, others are in progress right now, and still others are set to begin in the near future.
But what exactly is a state tax amnesty? And how do these programs help taxpayers resolve state tax delinquencies (unreported or underreported taxes)? What are the advantages and disadvantages of participating in a state tax amnesty, and are they all created equal?
A state tax amnesty is a limited-time program approved by a state’s legislature and administered by a state’s Department of Revenue, which provides taxpayers an opportunity to can come forward voluntarily and satisfy their delinquent tax obligations in exchange for certain benefits, such as an abatement of penalties and of all or a portion of interest. When tax liabilities remain unpaid for years, the amount of penalty and interest that has accrued can be substantial, and over time, could possibly exceed the tax liability to which they relate. Therefore, penalty and interest abatements help taxpayers retain cash they might otherwise have had to pay. Filing delinquent taxes during an amnesty also allows taxpayers to come forward with minimal scrutiny as “eligible” taxpayers generally need only follow the amnesty “process”, which generally means simply filing all required forms and returns and paying all taxes by the amnesty’s deadline. (However, filings made during an amnesty period could still be chosen for audit at a later date.) Of course, filing under amnesty also alleviates the potential negative consequences (notices, assessments, penalties, interest, liens on property, civil or even criminal investigation) that could result if a taxpayer’s delinquencies are discovered by the state first.
Despite the benefits of participating in a state’s amnesty program, there are potential negatives that taxpayers need to consider. For instance, a taxpayer coming forward during an amnesty period may be required to file and pay delinquent taxes for as far back as the taxpayer’s liability extends. You’ve likely heard the term “statute of limitations”, which, for tax law purposes, refers to the maximum amount of time after the filing of a return or the payment of a tax that the federal or a state government can assess or collect an additional tax, or a taxpayer can file an amended return or a claim for refund. When a taxpayer has never filed in a state, the statute of limitations never begins to “run”. Therefore, in order to be fully compliant a taxpayer may be required to file (and pay the associated tax) for as many years as the taxpayer is delinquent.
Additionally, taxpayers filing under amnesty shouldn’t expect that they can negotiate for better terms, as this typically is not allowed in an amnesty situation. (However, a state’s Voluntary Disclosure Program, which I’ll discuss in a future post, does offer negotiation potential to delinquent taxpayers.) Another possible drawback applies to taxpayers who have outstanding tax assessments (notices). A requirement of participation faced by these particular taxpayers could be that they pay the full amount of the tax owed to the state even if they do not agree with the assessment. Having to pay the full amount of a disputed assessment could present an even larger negative as an amnesty program may require that taxpayers expressly waive their right to claim a refund or protest an amount paid under amnesty. Taxpayers who are already in the process of protesting an assessment, either through the state’s administrative process or in state court, might also be required to formally withdraw their protest, or dismiss any administrative or judicial proceedings.
Some recent amnesty programs have also included a negative incentive in the form of an “amnesty penalty” which is imposed on taxpayers with outstanding assessments who choose not to participate in the current amnesty program. Thus, a taxpayer who disagrees with a tax assessment, chooses to protest it and is unsuccessful may find himself owning the original assessment, interest, re-instated penalties, and the additional amnesty penalty. Because amnesties are only offered periodically and run for a limited, specified time, taxpayers may find that they do not have sufficient time to fully evaluate the pros and cons of participation, or to generate the funds needed to fully cover the tax due.
Although the state legislature approves an amnesty, the specifics of the program, such as, the eligibility requirements for participation and the specific procedures that must be followed, are generally left to the Department of Revenue to decide and administer. But since all state amnesty programs are not created equal, the specifics of an amnesty program can vary widely from state to state. For instance, a state may offer a general amnesty program, which means that it covers many types of taxes (personal income, corporate income, sales and use, etc), or a state may offer a specific amnesty program, one which is targeted at a specific type of tax or category of taxpayers. Most amnesty programs prohibit taxpayers under criminal investigation for tax law violations from participating, but may be open to taxpayers under civil investigation. Some amnesty programs may prohibit taxpayers who have been chosen for audit from participating, but others may include special provisions that allow these taxpayers to participate. As noted above, some amnesty programs require taxpayers to waive their appeal or refund rights, while others allow taxpayers to retain these significant rights.
But what better way to illustrate how state tax amnesty programs work than by providing a summary of three state tax amnesty programs in effect right now! But in the interest of keeping this post to a manageable length, I’ve limited each state’s discussion to the program’s highlights, important aspects and Department of Revenue links.
FLORIDA: The sunshine state’s general amnesty program began on July 1st, and will end on September 30, 2010 and applies to all virtually all state and local option taxes administered by the Florida Department of Revenue, including the corporate and emergency excise tax, and sales & use tax. (See Florida’s Tax Amnesty Fact Sheet for a full listing of amnesty eligible taxes) Eligible individuals and businesses with outstanding tax assessments or unreported taxes that were due prior to July 1, 2010 may participate in the amnesty, which provides for a full penalty waiver and an interest waiver of up to 50% if all taxes are paid by the close of the amnesty. Taxpayers under criminal (but not civil) investigation for tax law violations and taxpayers whose tax delinquency is already covered by a settlement or installment payment agreement are not eligible to participate. A few final notes on Florida’s amnesty; even though Florida does not impose a personal income tax, Florida’s amnesty is targeted at individuals, in particular for the use tax that individuals may owe for purchases made over the internet. Another important highlight is Florida’s installment plan provision (something rarely available in amnesty programs), which allows taxpayers who are unable to pay their full amnesty balance by September 30th up to 7 months to pay their full balance. Florida has created several excellent documents to fully explain the amnesty, including a Tax Information Publication, a Fact Sheet, a Frequently Asked Questions (FAQ)and a Press Release.
NEW MEXICO: Before launching into summary of New Mexico’s “Tax Relief” program, I must say I was enchanted by the Land of Enchantment’s amnesty homepage. This page opens with a picture of a bottle of “New Mexico Tax Relief” capsules, which claim to be “For the relief of: High Blood Pressure, Heartburn, Sleeplessness, etc.” According to the amnesty website, Only New Mexico Tax Relief can give you freedom from the countless symptoms caused by unreported or under-reported state taxes”. New Mexico’s amnesty began on June 7th, ends on September 30, 2010 and applies to most state taxes and fees administered by the New Mexico Taxation and Revenue Department, including the personal income, gross receipts, and corporate income tax. (See New Mexico’s FAQ document for a full listing of amnesty eligible taxes) The program applies to tax liabilities that were either reported or would have been due on returns with original due dates before January 1, 2010. Individuals and businesses with unfiled tax returns, or who have underreported their taxes and have not received an audit engagement letter are eligible to participate. Taxpayers under criminal investigation for tax-related acts and, in general, taxpayers who are in bankruptcy proceedings are not eligible to participate. Also, unlike Florida’s program, taxpayers with outstanding tax assessments are not eligible to pay their assessments under amnesty, and therefore, are not entitled to the penalty and interest waiver allowed under the program. New Mexico’s amnesty program is unusual in that taxpayers must first apply and be accepted into the program to fully participate and enjoy the amnesty benefits. Thus, September 30this actually the deadline for filing an amnesty application and agreement, not the deadline for filing returns and making tax payments. Taxpayers whose applications are approved are given a date by which they must provide all information, records and documents. An actual assessment is not created until all requested information is received. In order to receive the penalty and full interest waiver, taxpayers must pay this assessment within 180 calendar days from the date of the assessment. More details about the program can be found at the New Mexico Tax Reliefwebsite.
NEVADA: Nevada’s amnesty program began on July 1st and will end on September 30, 2010. Nevada’s amnesty applies to several categories of Nevada taxes tax, including the modified business tax, sales & use tax, liquor tax, cigarette tax and the centrally assessed property tax, just to name a few. (See Nevada’s Instruction and Fact Sheet for a full listing of amnesty eligible taxes) As an incentive to report and pay tax eligible tax liabilities that were due prior to July 1, 2010 and which have been assessed, or that are the state has no knowledge of, Nevada’s amnesty allows taxpayer a penalty and full interest waiver as long as the taxpayer pays their entire outstanding tax liability by the amnesty deadline of September 30th. Individuals and businesses with unreported or underreported taxes, including taxpayers with unpaid audit assessments, are eligible to participate in the amnesty. Taxpayers that have entered into a compromise or settlement agreement with the Nevada Department of Taxation or Tax Commission are not eligible. More information on the program can be found at the Nevada Department of Revenue website. Also see Nevada’s Press Release and Amnesty Instruction and Fact Sheet.
Sylvia’s Summation
But what exactly is a state tax amnesty? And how do these programs help taxpayers resolve state tax delinquencies (unreported or underreported taxes)? What are the advantages and disadvantages of participating in a state tax amnesty, and are they all created equal?
A state tax amnesty is a limited-time program approved by a state’s legislature and administered by a state’s Department of Revenue, which provides taxpayers an opportunity to can come forward voluntarily and satisfy their delinquent tax obligations in exchange for certain benefits, such as an abatement of penalties and of all or a portion of interest. When tax liabilities remain unpaid for years, the amount of penalty and interest that has accrued can be substantial, and over time, could possibly exceed the tax liability to which they relate. Therefore, penalty and interest abatements help taxpayers retain cash they might otherwise have had to pay. Filing delinquent taxes during an amnesty also allows taxpayers to come forward with minimal scrutiny as “eligible” taxpayers generally need only follow the amnesty “process”, which generally means simply filing all required forms and returns and paying all taxes by the amnesty’s deadline. (However, filings made during an amnesty period could still be chosen for audit at a later date.) Of course, filing under amnesty also alleviates the potential negative consequences (notices, assessments, penalties, interest, liens on property, civil or even criminal investigation) that could result if a taxpayer’s delinquencies are discovered by the state first.
Despite the benefits of participating in a state’s amnesty program, there are potential negatives that taxpayers need to consider. For instance, a taxpayer coming forward during an amnesty period may be required to file and pay delinquent taxes for as far back as the taxpayer’s liability extends. You’ve likely heard the term “statute of limitations”, which, for tax law purposes, refers to the maximum amount of time after the filing of a return or the payment of a tax that the federal or a state government can assess or collect an additional tax, or a taxpayer can file an amended return or a claim for refund. When a taxpayer has never filed in a state, the statute of limitations never begins to “run”. Therefore, in order to be fully compliant a taxpayer may be required to file (and pay the associated tax) for as many years as the taxpayer is delinquent.
Additionally, taxpayers filing under amnesty shouldn’t expect that they can negotiate for better terms, as this typically is not allowed in an amnesty situation. (However, a state’s Voluntary Disclosure Program, which I’ll discuss in a future post, does offer negotiation potential to delinquent taxpayers.) Another possible drawback applies to taxpayers who have outstanding tax assessments (notices). A requirement of participation faced by these particular taxpayers could be that they pay the full amount of the tax owed to the state even if they do not agree with the assessment. Having to pay the full amount of a disputed assessment could present an even larger negative as an amnesty program may require that taxpayers expressly waive their right to claim a refund or protest an amount paid under amnesty. Taxpayers who are already in the process of protesting an assessment, either through the state’s administrative process or in state court, might also be required to formally withdraw their protest, or dismiss any administrative or judicial proceedings.
Some recent amnesty programs have also included a negative incentive in the form of an “amnesty penalty” which is imposed on taxpayers with outstanding assessments who choose not to participate in the current amnesty program. Thus, a taxpayer who disagrees with a tax assessment, chooses to protest it and is unsuccessful may find himself owning the original assessment, interest, re-instated penalties, and the additional amnesty penalty. Because amnesties are only offered periodically and run for a limited, specified time, taxpayers may find that they do not have sufficient time to fully evaluate the pros and cons of participation, or to generate the funds needed to fully cover the tax due.
Although the state legislature approves an amnesty, the specifics of the program, such as, the eligibility requirements for participation and the specific procedures that must be followed, are generally left to the Department of Revenue to decide and administer. But since all state amnesty programs are not created equal, the specifics of an amnesty program can vary widely from state to state. For instance, a state may offer a general amnesty program, which means that it covers many types of taxes (personal income, corporate income, sales and use, etc), or a state may offer a specific amnesty program, one which is targeted at a specific type of tax or category of taxpayers. Most amnesty programs prohibit taxpayers under criminal investigation for tax law violations from participating, but may be open to taxpayers under civil investigation. Some amnesty programs may prohibit taxpayers who have been chosen for audit from participating, but others may include special provisions that allow these taxpayers to participate. As noted above, some amnesty programs require taxpayers to waive their appeal or refund rights, while others allow taxpayers to retain these significant rights.
But what better way to illustrate how state tax amnesty programs work than by providing a summary of three state tax amnesty programs in effect right now! But in the interest of keeping this post to a manageable length, I’ve limited each state’s discussion to the program’s highlights, important aspects and Department of Revenue links.
FLORIDA: The sunshine state’s general amnesty program began on July 1st, and will end on September 30, 2010 and applies to all virtually all state and local option taxes administered by the Florida Department of Revenue, including the corporate and emergency excise tax, and sales & use tax. (See Florida’s Tax Amnesty Fact Sheet for a full listing of amnesty eligible taxes) Eligible individuals and businesses with outstanding tax assessments or unreported taxes that were due prior to July 1, 2010 may participate in the amnesty, which provides for a full penalty waiver and an interest waiver of up to 50% if all taxes are paid by the close of the amnesty. Taxpayers under criminal (but not civil) investigation for tax law violations and taxpayers whose tax delinquency is already covered by a settlement or installment payment agreement are not eligible to participate. A few final notes on Florida’s amnesty; even though Florida does not impose a personal income tax, Florida’s amnesty is targeted at individuals, in particular for the use tax that individuals may owe for purchases made over the internet. Another important highlight is Florida’s installment plan provision (something rarely available in amnesty programs), which allows taxpayers who are unable to pay their full amnesty balance by September 30th up to 7 months to pay their full balance. Florida has created several excellent documents to fully explain the amnesty, including a Tax Information Publication, a Fact Sheet, a Frequently Asked Questions (FAQ)and a Press Release.
NEW MEXICO: Before launching into summary of New Mexico’s “Tax Relief” program, I must say I was enchanted by the Land of Enchantment’s amnesty homepage. This page opens with a picture of a bottle of “New Mexico Tax Relief” capsules, which claim to be “For the relief of: High Blood Pressure, Heartburn, Sleeplessness, etc.” According to the amnesty website, Only New Mexico Tax Relief can give you freedom from the countless symptoms caused by unreported or under-reported state taxes”. New Mexico’s amnesty began on June 7th, ends on September 30, 2010 and applies to most state taxes and fees administered by the New Mexico Taxation and Revenue Department, including the personal income, gross receipts, and corporate income tax. (See New Mexico’s FAQ document for a full listing of amnesty eligible taxes) The program applies to tax liabilities that were either reported or would have been due on returns with original due dates before January 1, 2010. Individuals and businesses with unfiled tax returns, or who have underreported their taxes and have not received an audit engagement letter are eligible to participate. Taxpayers under criminal investigation for tax-related acts and, in general, taxpayers who are in bankruptcy proceedings are not eligible to participate. Also, unlike Florida’s program, taxpayers with outstanding tax assessments are not eligible to pay their assessments under amnesty, and therefore, are not entitled to the penalty and interest waiver allowed under the program. New Mexico’s amnesty program is unusual in that taxpayers must first apply and be accepted into the program to fully participate and enjoy the amnesty benefits. Thus, September 30this actually the deadline for filing an amnesty application and agreement, not the deadline for filing returns and making tax payments. Taxpayers whose applications are approved are given a date by which they must provide all information, records and documents. An actual assessment is not created until all requested information is received. In order to receive the penalty and full interest waiver, taxpayers must pay this assessment within 180 calendar days from the date of the assessment. More details about the program can be found at the New Mexico Tax Reliefwebsite.
NEVADA: Nevada’s amnesty program began on July 1st and will end on September 30, 2010. Nevada’s amnesty applies to several categories of Nevada taxes tax, including the modified business tax, sales & use tax, liquor tax, cigarette tax and the centrally assessed property tax, just to name a few. (See Nevada’s Instruction and Fact Sheet for a full listing of amnesty eligible taxes) As an incentive to report and pay tax eligible tax liabilities that were due prior to July 1, 2010 and which have been assessed, or that are the state has no knowledge of, Nevada’s amnesty allows taxpayer a penalty and full interest waiver as long as the taxpayer pays their entire outstanding tax liability by the amnesty deadline of September 30th. Individuals and businesses with unreported or underreported taxes, including taxpayers with unpaid audit assessments, are eligible to participate in the amnesty. Taxpayers that have entered into a compromise or settlement agreement with the Nevada Department of Taxation or Tax Commission are not eligible. More information on the program can be found at the Nevada Department of Revenue website. Also see Nevada’s Press Release and Amnesty Instruction and Fact Sheet.
Sylvia’s Summation
The amnesty train is charging full steam ahead and doesn’t appear to be stopping anytime soon. This isn’t surprising as states are in desperate need of a revenue shot in the arm, and amnesty programs have provided that much needed remedy to their fiscal ailments in recent years. Amnesty programs, such as New Jersey’s 2009 program, which brought in a whopping $725 million (the most ever collected through an amnesty program), have made other states hungry for similar outcomes. So despite the criticisms of these programs, including that amnesty programs reward “deadbeat” taxpayers with penalty and interest waivers or that they encourage non-compliance as taxpayers with outstanding liabilities might decide to just wait for the next amnesty to come along, these programs will continue, at least for a while. In addition to current programs in Florida (7/1/ – 9/30/10), Nevada (7/1 – 9/30/10) New Mexico (6/7 – 9/30/10), and the District of Columbia (8/2 – 9/30/10), programs will begin soon in Kansas (9/1 – 10/15/10), Maine (9/1 – 11/30/10) and Illinois (10/1 – 11/8/2010). Stayed tuned – I’ll do my best to keep readers up-to-date on new amnesty offerings.
The above post is an excerpt from “State Tax Amnesty: An Opportunity for Taxpayers to Pay Delinquent Taxes, What Taxpayers Need to Know” authored by Sylvia F. Dion for the August 21, 2010 post of her “Business Tax Advisor” blog for AllBusiness.com.
