Tax Amnesty Update

Massachusetts - The Commissioner of Revenue has authorized a two-month amnesty period (March 1, 2009 to April 30, 2009) limited to individuals with existing tax liabilities. Eligible taxpayers will be issued a “Tax Amnesty Notice” by the Department. All penalties will be waived upon payment of the outstanding balance.

Alabama - The Department of Revenue is administering “Operation Clean Slate” for eligible taxpayers from February 1, 2009 through May 15, 2009 for virtually all taxes (i.e., income (corporate or personal), business privilege, state-administered sales and use, excise, etc.) administered by the Department. All penalties will be waived upon payment of the outstanding balance.

Arizona - The director of the Department of Revenue is authorized to administer a tax amnesty program from May 1, 2009 through June 1, 2009 for eligible taxpayers, for any tax administered by the Department. All penalties associated with the outstanding liability will be waived, and interest will be assessed at a reduced rate.

New Jersey - The state legislature has passed a bill authorizing the Division of Taxation to administer a tax amnesty program from May 4, 2009 through June 15, 2009 for taxpayers with liabilities for returns due on or after January 1, 2002. Eligible taxpayers who participate in the amnesty program will pay only the amount of tax they owe and one-half of the balance of interest that is due as of May 1, 2009, without any penalties or fees.

Connecticut - The Department of Revenue Services is administering an amnesty program from May 1, 2009 through June 25, 2009 for those taxpayers owing tax for any taxable period ending on or before November 30, 2008, either because the taxpayer failed to file returns, or previously filed a return, but underreported the amount of tax due. Amnesty will not be offered to taxpayers with existing assessments. As long as the tax due is paid in full on or before June 25, 2009, all penalties associated with the outstanding liability will be waived, and interest will be assessed at a reduced rate.

Maryland - The state senate passed a bill authorizing an amnesty period from September 1, 2009 to October 31, 2009 for taxpayers that failed to file returns or pay income (corporate or personal), sales and use, withholding, or admissions and amusement tax. The Comptroller’s office will waive all interest and civil penalties related to the tax due.

Virginia - The Tax Commissioner is authorized to administer a tax amnesty program of 60 to 75 days sometime during FY2010 (starting July 1, 2009) for taxpayers who currently have an outstanding assessment or have not filed returns for any tax administered by the Department of Taxation. All penalties and 50% of the interest will be waived upon payment of the outstanding balance.

Streamlined Sales Tax - A number of full (Washington) and associate (Ohio, Tennessee, Utah) Streamlined Sales Tax (SST) member states are currently offering amnesty to taxpayers electing to register to collect sales tax through the SST program. While the amnesty is fully effective (i.e., no look-back period), it does not cover potential use tax liabilities, nor does it provide protection from inquiries from other SST member states, not currently offering amnesty. Additionally, taxpayers are required to register and collect tax in all member states, whether or not they have nexus in those states.

Other - Louisiana’s governor is proposing legislation for a two-month tax amnesty program sometime during the 2009-10 fiscal year. The proposed program includes a full waiver of penalties, as well as a 50% reduction in the interest on the unpaid taxes.
The city of Phoenix, Arizona is a non-program city that self-administers the collection of the city’s sales tax. The city is running a two-month amnesty program from April 15, 2009 through June 15, 2009. Businesses with delinquent city sales due on or before April 1, 2009 are eligible for waiver of penalties and a reduction of interest charges on the tax due. If Phoenix’s program is successful, watch for amnesty programs to be offered by other cities and counties in those states that allow localities to administer their own sales tax as well.

There are a number of issues related to amnesty programs taxpayers should consider as well. First and foremost, states typically do not respond graciously to taxpayers who did not resolve their tax issues when amnesty was being offered. Most state taxing authorities follow amnesty periods with stricter enforcement, including increased interest rates and substantial penalties for taxpayers who were eligible but did not take advantage of amnesty. Some states also temporarily shut down their voluntary disclosure programs during or after amnesty periods to prevent taxpayers from using anonymity or differing term and look-back periods to their advantage.

Furthermore, it is very important to understand the terms of the amnesty program before committing. States often require that taxpayers waive their appeal rights in connection with the tax being paid. This might not sound too important; however, if there is an issue being protested or under judicial review that impacts the amount of tax you just remitted, there may not be an opportunity to seek a refund. Also, the amnesty look-back period may not include recent periods; and you may have filing obligations for periods not covered by the amnesty.

Finally, be mindful of due dates and filing deadlines, as most of the amnesty programs require the tax to be paid by a specific date in order to benefit from the waiver of penalties and/or the reduction of interest.

There is no question about the benefits to the states that administer these programs. The immediate revenue boost alone can be tremendous (see a state-by-state summary of tax amnesty program collections from 1982 to 2007 at http://www.taxadmin.org/fta/rate/amnesty1.html). Given the number of states facing mounting deficits, this additional revenue may be the solution to preventing cuts to critical state-funded programs such as education and healthcare, and offset the need for raising taxes. Furthermore, large numbers of previously unregistered taxpayers typically take advantage of these amnesty programs, to settle past liabilities and limit their potential exposure. This also creates a large a number of new taxpayers in the state, who will continue to pay taxes for future years as well.