2015-Issue 29—Starting this fall, nine states are instituting tax amnesty programs for reporting unpaid taxes. States view this as an opportunity to increase tax collections without the political perils of changing tax laws. While tax amnesties are not new, there are an inordinately high number of amnesty programs in 2015. Do not be fooled by the term “amnesty.” States want the spike in tax collections associated with tax amnesty programs, but they do not want to create a culture that promotes irregular tax compliance or that punishes compliant taxpayers. As a result, every amnesty program has its limitations.
Taking advantage of an amnesty program is helpful when a company has a known tax liability related to a prior period. There are a number of sales tax scenarios that can be settled through amnesty. For example, failure to remit sales taxes collected from customers, failure to collect tax on taxable sales, or reporting unremitted use tax due on taxable purchases are all examples of scenarios where amnesty could apply. While the author of this article is a sales and use tax specialist, amnesty programs typically apply to a variety of tax types.
Amnesty opportunities materialize quickly, and the programs are typically open for a relatively short amount of time. Departments of revenue may not advertise amnesty programs sufficiently because of the short time period between the enactment of the law and the amnesty program window. Similarly, determining whether amnesty is a good alternative takes time as each company has to fully understand the tax types, tax periods, and many other state-specific amnesty program terms. Because amnesty programs typically require the immediate payment of tax, settling a known liability through amnesty may clean up the financial statements, but the cash impact of an amnesty program must also be considered.
As of the date of this article, Arizona, Indiana, Kansas, Louisiana, Maryland, Massachusetts, Missouri, Oklahoma and South Carolina all have amnesty programs scheduled for 2015.
Thinking About Tax Amnesty
There are many articles about the tax amnesty programs mentioned above. Instead of outlining the state-specific rules here, we will focus on the general opportunities and complications associated with tax amnesty programs. The primary benefit of an amnesty program typically includes waiver of 100 percent of penalties due on unfiled taxes and an abatement of all or a portion of the statutory interest due. However, many amnesty programs do not include the most current periods open for audit. Settling a tax underpayment related to the 2013 tax year through an amnesty program may create a benefit, but it may simultaneously notify the state of a 2014 and 2015 liability.
Timing is crucial because most amnesty programs are open for one to three months. Taxpayers have a limited window of time to comply, so they have to move quickly once the covered period begins. Frequently the enacting law simply grants a state’s department of revenue the authority to administer an amnesty program. Furthermore, politicians typically pass the bill granting a tax amnesty program in the year that the program is to occur. As such, timing can be an issue for revenue departments because they may only have a few months to assemble amnesty teams, generate forms, issue materials explaining the amnesty program, and create an amnesty website. Likewise, taxpayers may not have enough time to determine if amnesty is the right course of action, especially when there is a disputed technical tax matter that the taxpayer is not ready to concede.
Tax amnesty programs do not simply create a clean slate. Many amnesty programs require ongoing compliance in future years. Some states may not extend the amnesty program to companies that are under audit or have been notified of a pending audit.
Amnesty programs can create the perfect avenue to remit tax that has already been assessed or that is being litigated, but other programs specifically exclude currently contested matters. Settling an audit assessment through amnesty can be tricky because a company may not be able to partially settle an assessment, so both agreed-upon adjustments and contested adjustments may have to be remitted to the state. Also, companies that have previously participated in an amnesty program may not qualify for a current amnesty. The state may also regard taxes collected but not remitted differently, thereby not abating interest and penalties under the amnesty.
The permanency of an amnesty agreement also varies by state. Some states allow amnesty seekers to request refunds for monies remitted through an amnesty program. In other states taxpayers forfeit all rights to appeal, thus all amnesty payments are final. It is important to note that states can reserve the right to audit amnesty program submissions at a later period, and the failure to participate in an amnesty program can create “claw back” or increased penalties if a company had an opportunity to participate in an amnesty program but neglected to do so. Accordingly, many taxpayers consider whether to make “protective” payments under amnesty programs. Such payments are made when issues are not yet settled under audit, but, in an effort to avoid stiff future penalties for not utilizing available amnesty, sufficient payments are made to cover all potential audit issues. The taxpayer then must attempt to recover overpaid items through refund claims (if the state allows it).
Each state will have a different procedure for participating in the program. Some amnesty programs may involve just reaching out to the state by filing a return, remitting the taxes due, and submitting a statement of intent to file the taxes under the amnesty program. Other states may require a special form or application along with a tax return and payment. Typically the dedicated amnesty program personnel are very responsive and they should be able to explain the nuances of the particular state’s program.
Other Options to Amnesty
Because amnesty programs are typically statutorily defined, the ability to negotiate terms may be a significant limitation. Companies should be mindful that the normal forms of tax liability mitigation still exist. Voluntary disclosure agreements, offers in compromise, and managed audits can all be negotiated if amnesty terms are not the right fit for a given situation. Companies with long-standing tax exposures in states that can audit amnesty submissions may want to consider a voluntary disclosure agreement that limits the look-back period. An offer in compromise might make sense for companies that have taken uncertain tax positions, because a savvy company can settle a technical issue for less than the potential total liability. Managed audits may be a better option when a state does not allow for the partial payment of tax through amnesty.
Alvarez & Marsal Taxand Says:
Make sure you understand all of the procedures required by an amnesty program prior to beginning the process. You typically cannot negotiate more favorable terms under an amnesty program. Pay close attention to the types of taxes included in the amnesty program, as all tax types may not be covered. Make sure that your federal tax returns reflect any changes amnesty may trigger in your state income tax returns.
Amnesty programs are open for a limited period of time. A company has to evaluate whether it has the ability to quantify, document and remit tax in the time allotted for the amnesty program. Be aware that if a company forgoes amnesty, some states have punitive post-amnesty penalties designed to encourage amnesty participation. Also, be aware that once amnesty is used, it may not be possible to make future changes to years covered by amnesty (e.g., taxpayers may be precluded from obtaining refunds for those years).
In this article we addressed how amnesty programs differ and the inherent limitations of state tax amnesty programs. State tax amnesty programs are great mechanisms for remitting known tax liabilities. In summary, every amnesty program will include some favorable terms, and keep in mind that interest abatement is generally uncommon outside of amnesty programs. The key to a successful amnesty submission is knowing what is and is not included in the program.
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Scott Jackson, Senior Director, contributed to this article.
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The information contained herein is of a general nature and based on authorities that are subject to change. Readers are reminded that they should not consider this publication to be a recommendation to undertake any tax position, nor consider the information contained herein to be complete. Before any item or treatment is reported or excluded from reporting on tax returns, financial statements or any other document, for any reason, readers should thoroughly evaluate their specific facts and circumstances, and obtain the advice and assistance of qualified tax advisors. The information reported in this publication may not continue to apply to a reader's situation as a result of changing laws and associated authoritative literature, and readers are reminded to consult with their tax or other professional advisors before determining if any information contained herein remains applicable to their facts and circumstances.
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