Tax Analysts Blog

Hitting the Jackpot

Posted on Nov 20, 2013
It’s being called a jackpot for Connecticut and the most successful tax amnesty in state history. By all accounts, it’s true. During its most recent tax amnesty, which ended on November 15, Connecticut collected more than $175 million in back taxes from more than 10,000 taxpayers. The final dollar amount is still being tallied, but will far exceed the $35 million the state anticipated it would collect through the program.

So how did the state not see this coming? Kevin Sullivan, commissioner of the Department of Revenue Services, suggested to reporters that state officials "underestimated the number of people and businesses that got in trouble during the recession. . . .This was an opportunity for them to come forward.''

And come forward they did. Beginning on September 16, taxpayers that came forward and paid taxes owed in full avoided penalties and 75 percent of the interest on the debt. The program was also broad, imposing fewer limitations than usual for taxpayers to qualify. All state taxes were eligible even if the taxpayer was in litigation with the state or was under audit.

Fun facts from the amnesty include that the largest single payment was $20 million and one payment was for a debt that dated to 1988. Roughly 665 corporations participated and paid back taxes of $91.3 million. An additional $21.4 million was collected from 5,100 individuals who owed personal income tax.

It is good news for the state. The tax amnesty served its purpose. The state collected a sizable amount of back taxes, and some taxpayers got a fresh start. But according to Sullivan, there is still some $250 million in unpaid state taxes. Taxpayers that were eligible for amnesty (which in this instance was most taxpayers) and who chose not to come forward will face stiffer penalties. While the typical penalty on back taxes is 10 percent, taxpayers that decided to forgo the amnesty will be subject to a 25 percent penalty. Criminal prosecution and litigation are also possibilities.

Of course, there are typically valid reasons for an eligible taxpayer to decline to participate in an amnesty. For example, the taxpayer may have numerous years of tax deficiencies and simply be unable to pay all of the tax due during the amnesty period. Those taxpayers may choose to file for amnesty on a year-by-year basis, allowing them to reap the benefits of reduced interest and penalties on at least a portion of the years at issue.

Taxpayers may also affirmatively decline to participate in an amnesty because they do not want to waive their appeal rights. Most amnesty programs, Connecticut’s included, require taxpayers to waive their rights to appeal any issues related to the period for which the taxpayer requested amnesty. While this is done to ensure the state does not have to refund amounts collected during the amnesty period, it can be a problem for a taxpayer that wants to make an additional adjustment to a return that was covered by amnesty. The rule applies even if the adjustment is unrelated to the issue being addressed through amnesty.

Regardless of whether taxpayers chose not to participate or simply were unaware, the Connecticut amnesty is over. But all is not lost. Those taxpayers that did not participate may be able to enter into a voluntary disclosure agreement. Taxpayers must generally pay all taxes and interest due for the period covered by the agreement.

Acceptance into the program is not guaranteed, but it may be a useful option, particularly now. However, given the potential for post-amnesty penalties, if a taxpayer chooses to forgo amnesty and enter into a voluntary disclosure agreement, the penalties should be addressed during the negotiation of the terms of the agreement. As with most tax issues, going in with eyes wide open is the best way to avoid unwelcome surprises.

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