State Tax Amnesty And Voluntary Disclosure Programs

Originally published by The Legal Intelligencer

Our tax system is based on voluntary compliance. That is, the principle that taxpayers voluntarily comply with the tax laws and report their income and other tax items honestly. Some taxpayers, including individuals and businesses, neglect to file their tax returns and pay taxes due, at times because of unawareness, complexity in the tax law or inability to pay. Additionally, some returns are filed in error, resulting in the imposition of additional tax, interest and penalties. Tax amnesty and voluntary disclosure programs are designed with these taxpayers in mind.

Both tax amnesty and voluntary disclosure programs encourage taxpayers to voluntarily file and pay back-taxes. In return, the taxing authority will not criminally prosecute and will reduce, or perhaps entirely waive, associated penalties, which often are steep. In order to qualify for the waiver of penalties under the typical amnesty program, the taxpayer must pay the entire amount of taxes, plus some or all of the interest that may be due by the program's deadline or expiration date. Additionally, taxpayers may be required to sign a settlement agreement in which the taxpayer agrees to file all future tax returns and pay all future tax liabilities timely.

While a tax amnesty program typically provides comprehensive relief, albeit within a very short window of opportunity, and a fresh start, taxpayers considering an amnesty or voluntary disclosure program should consult with a qualified tax professional prior to participation, as the risks or occurrences of disqualification from amnesty programs are great for even the slightest omission of fact or procedure. If disqualification occurs, rest assured enforcement is not too far behind.

The goal of the taxing authority is to collect as much outstanding tax liability as possible within a very short time frame, often within two or three months subsequent to the announcement of the program. In most cases, taxing authorities will waive penalties, in full, if outstanding tax returns and related liabilities are paid during the amnesty period. If no action is taken during the amnesty period, the taxing authority will often impose larger than normal penalties. Tax amnesty programs differ from voluntary disclosure programs in that amnesty programs are typically of short duration while voluntary disclosure programs often provide a greater window of opportunity for entrance. The basis for waiver of interest and penalty also may differ between the two programs. California, for example, has no current tax amnesty program in place, but maintains both an ongoing voluntary disclosure program as well as a filing compliance agreement program for non-residents.

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