States Offer Tax Amnesty as a Fresh Start for Delinquent Taxpayers

By: Chris Tracy, Principal, State and Local Tax

Chris Tracy

Principal, State & Local Tax

States Offer Tax Amnesty as a Fresh Start for Delinquent Taxpayers

Periodically states will offer delinquent taxpayers the opportunity to settle past due liabilities through formal Amnesty Programs. Taxpayers typically are required to file an application to participate in the Program and must file returns and pay all delinquent taxes within a specified period of time. In exchange for participating in these Programs, states will generally waive all penalties associated with the delinquent filings and interest may be partially or fully abated.

Connecticut and Texas currently have active Amnesty Programs in place and Alabama’s Program is set to start on July 1st.

Who is eligible to participate?

It depends on the state. Most states will allow any taxpayer with a delinquent filing to participate in the Amnesty Program. However, some states will not allow taxpayers that are currently under audit or who have participated in prior Amnesty Programs offered by the state to participate. Each state that offers an Amnesty Program will issue guidance, which can be found on their website, outlining who is eligible to participate.

Do Amnesty Programs Cover All Tax Types?

Most taxes, including corporate income and sales & use taxes, are covered. However, there are generally some exclusions from each Program, which are state-specific, and typically include fuel excise taxes, unclaimed property, and various gross receipts taxes.

Are Amnesty Programs the Best Approach for Settling Delinquent Liabilities?

As with most advice, it depends on each taxpayer’s facts and circumstances. Amnesty Programs are certainly a good avenue for states to boost tax revenues without making significant investments in enforcement efforts. However, participating in an Amnesty Program may not be the most cost-effective way for a taxpayer to get into compliance with a state. The biggest drawback to Amnesty Programs is they generally do not limit the state’s look-back period or the look-back period is longer than the state’s traditional statute-of-limitations. Most states are legally barred from assessing taxpayers for past due liabilities beyond their typical statute-of-limitations period; generally three or four years depending on the state. However, for taxpayers that never filed a tax return, the look-back period is open all the way back to the date that the taxpayer first established a filing requirement. For example, if a taxpayer first established a filing requirement ten years ago but never filed a return, the state can issue an assessment going back all ten years. Under most Amnesty Programs the look-back period isn’t limited. While penalty and interest forgiveness is nice, the burden of having to report and pay an extra six or more years worth of tax could be financially devastating.

Another drawback is Amnesty Programs typically only cover delinquent taxes through a specific date, usually the end of the most recently completed calendar year. Delinquent taxes attributable to periods after the specified date are still due but the favorable penalty and interest reductions offered under the Amnesty Program do not apply.

One alternative to participating in an Amnesty Program would be to enter into a Voluntary Disclosure Agreement (“VDA”). Under a VDA, the look-back period is typically the same as the state’s traditional statute-of-limitations period. Penalties are usually waived but interest is generally assessed at the full rate.

Due to the differences between Amnesty Programs and VDAs, anyone with a delinquent tax liability should carefully compare the costs associated with each approach in order to determine the best and most cost-effective solution. Clearview is available to help should you have any questions about which approach makes the most sense for your current situation; fill out a contact form on our site or email me at ctracy@cviewllc.com.

More From Chris

More in State & Local Tax Services

Related Case Studies