[Following is Part 1 of a 3-part series on Amnesty by Peisner Johnson's Michael Fleming]
Tax Amnesty programs wax and wane in popularity depending on economic conditions. Recently with the depressed economy, Amnesty Programs seem to be all the rage. State and local jurisdictions have been announcing them at a rapid pace with some jurisdictions, like the city of Philadelphia offering one for the first time in 19 years and the state of WA offering the program apparently for the first time ever. The programs usually have short windows of opportunity and require quick action in order to take advantage of the benefits. Many states increase the sense of urgency by threatening increased enforcement actions once the amnesty period ends. A prime example is Pennsylvania, who’s Revenue Secretary, C. Daniel Hassell said, “Before Tax Amnesty ended, we promised to step up enforcement efforts against anyone who did not take advantage … Now we’re delivering on a second promise, to hold corporate officers personally accountable for taxes their businesses owe.” It is statements like this that have caused many taxpayers who were not able to meet amnesty deadlines to worry that the states will soon be knocking at their door. If you are one of these taxpayers your worries may be over. You may be able to do a Voluntary Disclosure Agreement (VDA) and actually be better off then if you completed the amnesty.
There are many similarities between VDAs and Amnesty Programs, however before we begin to compare and contrast the programs, let’s explore why a state (local jurisdiction can be substituted for state from this point forward) would offer programs like these. After all, if the states are looking for ways to increase revenues, why give taxpayers a financial break? At first glance it may not make sense, but after reviewing some of the reasoning you’ll hopefully see why it makes perfect sense. Here are three points.
1. Best use of limited resources. State tax departments, just like company tax departments, are being asked to do more with less. Tax officials, who are being tasked with bringing more revenue into state coffers, have to choose where to devote their time and enforcement efforts. If companies step forward on their own, the time and resources that would have been spent finding those companies can now be targeted elsewhere. Simply put, they now have more time and resources to devote to you.
2. New found cash. When a company voluntarily steps forward the state receives a lump-sum cash infusion consisting of numerous years of back taxes and some interest and/or penalty. This money flowing in through VDAs or rushing in through Amnesty is basically a windfall to the state.
3. New streams of cash going forward. Not only does the state receive a lump sum for the back years when a company becomes compliant and pays the money it owes, but it now has a taxpayer that will likely continue to pay taxes on a going-forward basis.
Hopefully these points have shed some light on why a state would offer programs like these. Now the question is why companies would want to participate in these programs. Well, in order to convince companies to participate, the states offer enticements. Those enticements can include a waiving or reduction of the penalties and or interest as well as possibly limiting the look-back period. These enticements can add up to big money often totaling into the tens or hundreds of thousands and even millions of dollars. Taking advantage of these programs can sometimes make the difference between the life and death of a company. By becoming compliant there is also the possible added benefit of escaping the possibility of civil and or criminal prosecution.
Now that we know these programs are a win for the states as well as the taxpayer, you may be asking; what’s the difference between the two programs and which one is best for me. In order to answer this question let’s quickly look at the general characteristics of both VDAs and Amnesty programs. I say general characteristics because each state has its own twist on each of these programs and to cover the details of each program in each state would be too much to cover in one article. (If you have specific question about individual state programs please contact me.)
The first thing to realize when talking about state tax amnesty programs is that they are generally not true amnesties. I say “true amnesties” because you don’t get out of the tax completely. They require you to at least pay back taxes. Some states offer a limited look-back period but the majority require all outstanding periods to be paid. In short, the look-back period is usually not limited. In addition to back taxes you may be required to pay either some interest and/or penalty. Some states will waive the entire penalty. Others will waive the penalty and a percentage of interest and a few the entire penalty and interest. Whatever the mixture turns out to be in a given state, you will be paying something in virtually all instances. (There is one exception for true amnesties, covering the states of Georgia, Ohio, Utah and Tennessee, where a seller’s uncollected sales tax, penalty and interest are all waived. However this is a complicated situation that can be explained in more detail by contacting us or by reviewing the article written by Andrew Johnson, founding partner of Peisner Johnson & Company, titled “Are You For or Against Amnesty?”
In addition to saving money, an amnesty program is a great vehicle to become compliant and is a step towards the possible avoidance of possible civil or criminal prosecution. Amnesty programs usually cover a wide range of taxes, are generally well publicized and run for specific period of time. The specific period of time is short, ranging from 30 days to 6 months, with the majority trending toward the lower end of the range. Amnesty programs are not offered on a regular basis or with any frequency. They are usually available only to participants who are not currently reporting or those with outstanding liabilities that have not been identified by the taxing agency. Participants are often required to waive their rights to an appeal or a refund of any monies paid under the amnesty. Sometimes, there can be harsh penalties for any taxes that could have been paid under the amnesty but were not. Amnesty is public and usually leaves a company open to greater scrutiny by other states. Amnesty is almost always followed with periods of increased enforcement against those who have not taken advantage of the amnesty.
Amnesty Pros & Cons
1. Vehicle for compliance.
2. Avoidance of possible prosecution.
3. Usually offer a waiver of penalties.
4. Potential waiver of some or all interest.
1. Usually no limitation on look-back period.
2. Short window of opportunity to act.
3. No predetermined frequency of offering.
4. Available only if not already identified by state.
5. Waiver of rights to an appeal or refund.
6. Possible harsh penalties for not taking full advantage.
7. Increased visibility by other jurisdictions.
[Part 2 in this series will look in-depth at Voluntary Disclosure Agreements]