Tax Analysts Blog

The Rush Is on to Obtain Forgiveness

Posted on Sep 25, 2013

On Monday, September 23, Louisiana and Connecticut launched tax amnesty programs. State and local tax amnesty programs are a politically palatable way to raise revenue without raising taxes. Although arguably flawed from a tax policy standpoint, amnesties can be beneficial to taxpayers and state officials. In general, tax amnesty programs are administered under statute or are implemented as a matter of administrative grace. There is no one-size-fits-all state tax amnesty, so the types of taxes covered by a specific amnesty, the length of the amnesty, and other conditions of amnesty may vary.

Despite the differences in the types of taxes covered, a common feature among tax amnesty programs is the waiver of penalties and the partial or complete waiver of interest assessments. This feature serves as an incentive for taxpayers and is the main feature taxpayers want to take advantage of. Amnesty can mean thousands of dollars of savings in reduced interest assessments and waived penalties.

As if to further encourage eligible taxpayers (read: those that owe back taxes) to participate in amnesty programs, states and localities often follow an amnesty program with increased penalties and stricter enforcement on taxpayers that were eligible but failed to participate in the program. Connecticut has jumped on this bandwagon. The Department of Revenue Services will increase the late-penalty fee from 10 percent to 25 percent for deficiencies that are not resolved during the current amnesty.

But despite all the encouragement, taxpayers should be cautious about the specific lookback of the amnesty program. Typically, amnesty programs apply to specified taxes and to all tax periods open under the statute of limitations. For taxpayers who have not filed, the statute of limitations is not said to have run, meaning that all tax periods could be open and there could be an unlimited lookback.

States stand to benefit by increased and immediate revenue. To participate, taxpayers are typically required to pay tax liabilities before the end of the amnesty period. Louisiana expects to raise $200 million between now and November 22 (though Louisiana Treasurer John Kennedy disputed that number).

State and local governments also use tax amnesty programs to get nonfiling taxpayers on the tax rolls and reduce the number of underreporters, thus increasing revenue in future years. Given the potential for an increased revenue stream in the future and the immediate revenue gains that have been reported from successful amnesty programs, it is easy to see why state and local governments frequently turn to amnesty programs to close budget gaps.

But all that glitters is not gold. Tax amnesty programs do not come without potential burdens for state and local governments. The simple cost of administering and publicizing a tax amnesty program can be significant. If a sufficient number of taxpayers do not come forward or are not located, the program could end up costing the state or local government rather than providing revenue. Amnesty programs are also best when used sparingly.

Regular use of amnesty programs diminishes any sense of urgency on the part of taxpayers and encourages a wait-and-see approach. The Louisiana amnesty program will be repeated in 2014 and 2015. While those programs will only be for one month and the terms less generous, taxpayers may feel there's no need to participate now since they'll have a second or third chance for amnesty.

Still, tax amnesty programs offer significant upsides for states and taxpayers. Achieving tax compliance is, of course, a good thing and tax amnesty programs help achieve this goal. But states should offer amnesty sparingly, and taxpayers should enter into an amnesty program only if they are fully aware of what amnesty means, what other programs are available, and what they are potentially giving up as a result.

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