Companies with known underpaid taxes can accrue a significant amount of delinquent interest and penalties if the unpaid tax amount is substantial and has been increasing over a long period of time. Therefore, when a company becomes aware that a taxing jurisdiction is offering a Tax amnesty program, they should strongly consider whether taking advantage of the program is right for their company. This article focuses on the general opportunities and complications associated with tax amnesty programs. As of the date of this article, Alabama, Connecticut, and Texas have amnesty programs scheduled for 2018. Given that the Texas Amnesty Program begins May 1, 2018, we will also provide some helpful information about the program later in this article.
Amnesty programs are considered beneficial to taxpayers because they typically offer 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 2016 tax year through an amnesty program may create a benefit, but it may simultaneously notify the state of a 2017 liability.
Timing is crucial because most amnesty programs are only open from one to three months. Taxpayers have a limited window of time to comply, requiring taxpayers to move quickly once amnesty is announced and 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 the 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.
Forewarned is Forearmed
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.
If allowed for, amnesty programs can create a perfect venue to remit tax that has already been assessed or that is being litigated, as generally other programs specifically exclude currently contested matters. Settling an audit assessment by taking advantage of an amnesty program 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, sometimes the state dictates that companies who 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 occasionally states reserve the right to audit amnesty program submissions at a later period, and the failure to participate in an amnesty program might create “clawback” 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 reaching out to the state through the filing of 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.
Texas Tax Amnesty Program
As mentioned above, the Texas amnesty program begins May 1, 2018, and runs through June 29, 2018. The program applies to taxes and fees due before January 1, 2018, and participants of the program will receive a waiver of all penalties and interest. All state and local taxes and fees administered by the Texas Comptroller are eligible for the program except for taxes remitted under the International Fuel Tax Agreement (IFTA), local motor vehicle tax, Public Utility Commission (PUC) gross receipts assessments, and Unclaimed Property fees. A company is eligible for participation if they did not file a required return originally due before January 1, 2018, or underreported taxes or fees for any reason for periods due before January 1, 2018. A company is also expected to pay all taxes due, in full, when the amnesty returns are filed; installment plans are not available.
As expected, the state has provided limitations to exclude specific periods or companies from participating in the program. If a company has signed a settlement agreement or a voluntary disclosure agreement, they are excluded from participating in the program for the same period covered under either agreement. If a company has been identified for audit or are currently under audit, then these periods for the related tax type are not eligible for amnesty. Only liabilities that have not been previously reported to the Comptroller’s office are eligible for the program. Accounts which have been certified to the Office of the Attorney General, accounts presently in litigation, or accounts which have been reduced to judgment are also not eligible for the program.
To participate in the program a company with underreported taxes will amend a paper return to reflect corrected figures with “Amnesty” written across the top of the return and on the check or money order. If submitting a tax application and original returns, the company will prepare original paper returns with “Amnesty” written across the top of the return, check or money order, and the tax application. Electronic submission of documents and payment is not allowed. The deadline to submit amnesty documents is June 29, 2018.
Other Options to Amnesty
Because amnesty programs are typically statutorily mandated, negotiating terms is a significant limitation of most amnesty programs. 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 in states with amnesty programs that do not include the most current periods because a savvy company can settle both past and current periods through one agreement.
Alvarez & Marsal Taxand Says
In summary, make sure you understand all procedures required by an amnesty program prior to beginning the process. It is typically difficult (but not impossible) to 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. Also, it is very important to 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 must evaluate whether it has the ability to quantify, document, and remit tax in the time allotted for the amnesty program. 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). 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.
In this article, we addressed areas of focus when considering participation in a state tax amnesty program, along with other options to consider when deciding if amnesty is right for your company. 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 timely deciding whether a company should participate and knowing what is and is not included in the program.