by Gail Perry

Tax amnesty programs are taking center stage as state governments seek new ways to boost revenue and relieve budgetary pressure.

In the 20 years prior to 2002, the United States saw an average of only 2.6 state tax amnesty programs each year, with the majority of those programs occurring in the recession years of the mid-1980s. In 2002, there were 11 amnesty programs, and there were another 10 in 2003.

Several state legislatures are considering programs for 2004.

Amnesty programs are generally regarded as a direct response to economic conditions and provide states with an opportunity to increase cash flow.

“All states are looking for a way to improve their collections,” said Carl Towe, president of Towe & Associates, state and local tax specialists in West Milton, Ohio. “The am­nesty programs are another way to accelerate the revenue collection process.”

While an obvious benefit of tax amnesty programs is a rapid influx of cash, there are some less obvious advantages.

For example, by encouraging taxpayers to come forward on their own, states save on both the administrative costs that are associated with tracking down those who owe and collecting the back taxes. Another important advantage is that many taxpayers who have fallen out of the routine of paying taxes regularly are encouraged to return to the system.

According to Bill Lundeen, partner and director of state and local tax services for large regional firm Clifton Gunderson, the success of amnesty programs is determined by “the number of new taxpayers who become members of the taxpaying community for that state.”

While the actual dollar amount collected can also be a factor in judging the success of a program, it’s much more difficult to quantify success in this way, and, while it makes interesting reading, comparing states based on dollar amount collected provides little in the way of useful information.

Some states offer amnesty on all outstanding taxes, while others limit the types of taxes that are eligible for amnesty, so estate taxes or sales taxes may be included in one state’s program but not in another. Furthermore, there’s no way to accurately measure the amount of taxes that eventually would have been collected anyway, perhaps with full interest and penalties, so to claim these as taxes paid solely as a result of the amnesty may be inaccurate.

The typical comprehensive program covers all taxes, including individual and corporate income taxes, sales and use taxes, wage withholding taxes, estate taxes, fuel taxes, cigarette taxes and so on.

The program does not apply to taxes that are currently owed — only taxes that were due prior to a specified date are eligible for amnesty. In some situations, taxpayers currently participating in a payment plan with the state can waive some penalties and interest if they pay off their entire plan during the amnesty program.

The program typically does not apply to taxes for which the taxpayer has received a bill from the state revenue department. Instead, the amnesty program applies to taxpayers who did not file a tax return, filed a tax return but did not report all income, claimed invalid deductions or credits, or made any other misrepresentations on their tax return. Taxpayers who filed fraudulent tax returns may not be eligible to participate.

The program runs for a specified period of time — usually two to three months but sometimes for as little as half a month or as long as six months — and only taxpayers who come forward during the amnesty period are permitted to participate.

Participants in the amnesty program typically enjoy a reduced rate of interest or a complete waiver of interest, a waiver of penalties, and a release from criminal prosecution.

Amnesty and politics

Few politicians place tax amnesty on their campaign agenda. But several governors have specifically made an am­nesty a part of their plan to improve their states’ budgets.

Arizona’s governor, Janet Napolitano, claimed victory for her state’s 2003 amnesty, which provided taxpayers with an opportunity to come clean and provided the state with $22 million more than they had hoped to collect in the program.

Typical amnesty programs net under $100 million, though New York’s 2002 amnesty program, the most lucrative ever, brought in $520 million.

But what accompanies successful programs is the flip side — the fear that offering amnesty to delinquent taxpayers may anger honest taxpayers who make regular and complete payments of their taxes. It’s conceivable that a tax amnesty can actually lessen compliance in the years after the program ends, when taxpayers who are on the edge about coming forward with tax payments may choose to hold off, hoping for another amnesty. States that have offered frequent amnesty programs may be at greater risk for such a response.

In a study conducted by Georgia State University’s Andrew Young School of Public Studies, analysts expressed concern that amnesty programs may serve to make tax evasion seem like a less serious crime.

Often, tax amnesty programs are followed by stricter enforcement of tax laws, more vigorous audits and steeper penalties for those taxpayers who fail to come forward during the am­nesty period. Some analysts say that this is a requirement of a successful program. Lundeen pointed to the recent Illinois tax amnesty program, which collected $135 million, as an excellent example of such a structure.

Whereas most amnesty programs offer a waiver of penalties but only at best a reduction in interest, “Illinois offered an unusually attractive amnesty program coupled with an unusually harsh back-end set of penalties,” Lundeen explained.

New Jersey’s hugely successful program of 1996 also offered a complete waiver of interest and penalties on back taxes. The program netted $350 million, five times its original estimate. Harsher penalties for future tax offenders followed the New Jersey amnesty program, with the state implementing a 5 percent increase in penalties after the program ended.

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