Tax amnesty programs at both the federal and state level have met with varying degrees of success, as tax agencies have intro-duced programs designed to meet the dual goals of generating revenue and bringing more taxpayers onto the tax rolls. More than half the states have had some form of amnesty or voluntary compliance program in the past decade.
It's always better for a taxpayer to come forward voluntarily when they are in violation of a tax rule or regulation. In addition to the greater flexibility the Internal Revenue Service gives to examiners when dealing with voluntary disclosures, the IRS and the states have had a number of formal programs encouraging taxpayers to come forward in exchange for greatly reduced penalties, and a reduction in the amount of interest owed.
While the programs do produce immediate revenue, some oppose the idea of amnesty because it seems to reward bad behavior. "It's better to have people in the system than out," said Saul Brenner, tax partner at Berdon LLP. "But there are people doing their civic duty, paying taxes all these years, and now you're giving a pardon to those who failed to do this - so what's the point of being compliant? It's rewarding bad behavior, which is one reason why a general amnesty hasn't occurred at the federal level."
"States like amnesty programs for the simple reason that it brings in money and helps them with the cash crunch du jour," said Robert Kerr, senior director of government relations at the National Association of Enrolled Agents. "But from the tax administrative standpoint, amnesty is a bad idea because it undermines a belief in the justness of the system. It's even worse when there are recurring amnesties. It works better when they say, 'This is the only one, and we're not kidding. We're not doing another one for X years."
It operates like a store sale, agreed Roger Harris, president of Padgett Business Services. "If you know a store has a sale every week, you wait for the sale. If people know there will sooner or later be a 'tax sale,' they'll wait until there is one to pay their taxes in full."
"Amnesty programs are really a business deal for both sides," said Wayne Berkowitz, head of the state and local tax group at Berdon. "The taxpayer can come clean and move on with his life. The state gets immediate revenue, and it gets taxpayers on its rolls that it didn't have and may not have found."
"Another great benefit of voluntary disclosure is that there is often a limited look-back," he added. "If the taxpayer should have been filing for the past 20 years, not only will he get the penalties abated, but they won't go back after a certain point, typically three or six years."
But the caveat on most amnesty programs is you have to come forward before they find you, Berkowitz noted. "You have to get to them first," he said. "If there are any notices out there, they won't let you play."
State tax issues, especially those involving nexus, are generally more complex than at the federal level, Berkowitz observed. "With the states, there's always the question as to whether or not there's nexus. It's not so clear-cut," he said. "A buyer of a business that hasn't filed may come in and do due diligence, and want to straighten things out even where it's not clear that there was a filing requirement. The seller may not have been a bad citizen, but just didn't realize that going into a state a certain number of times constituted nexus and triggered a filing requirement."
Berkowitz sees the use tax area generating amnesty programs in the future. "Where people make Internet purchases, in many states the vendor is not obligated to pay sales tax, but there's a requirement that the purchaser pay use tax. Most people individually don't comply with this," he said. "States are looking to get more revenue from this area."
States are moving from special amnesty programs to permanent voluntary disclosure, according to Berkowitz. For example, New York's program covers all taxes, including income, corporate and sales. Any taxpayer who meets the eligibility criteria can participate, even if their nonpayment was the result of fraudulent or criminal conduct.
Programs at the federal level include the Voluntary Worker Classification Settlement Program and the Offshore Voluntary Compliance initiatives. The worker classification program allows employers to come in out of the cold and settle with the IRS for very limited penalties, indicated Berkowitz: "Typically, an employer will give an individual contractor a Form 1099 when their service ends, and the contractor files for unemployment insurance. That's where it all starts. They don't realize that they're not covered by unemployment insurance."
To be eligible, an applicant must consistently have treated the workers in the past as non-employees; have filed all required Forms 1099 for the workers for the previous three years; not currently be under audit by the IRS; and not currently be under audit by the Department of Labor or a state agency concerning the classification of those workers.
Berkowitz cautioned employers who want to take advantage of the IRS program to check the corresponding state requirements, since a state may have a similar program or no program at all. Otherwise, "They may be opening a Pandora's box," he said.
Since 2009, the IRS has created three separate tax amnesty programs to encourage U.S. taxpayers to report and pay taxes on assets held overseas. While the first two have expired, the third has no expiration date but can be cancelled at any time. The program requires the U.S. taxpayer to pay any overdue tax, penalties and interest on unreported income, and pay an additional penalty based on the amount of unreported funds held in the foreign account.
"The cost of the FBAR [Foreign Bank Account Reporting] has increased successively with each of the three programs, so that those who waited until the current 2012 amnesty program to report their offshore income and assets pay a penalty of up to 27.5 percent of those assets, as compared to the 20 percent FBAR penalty due under the 2009 amnesty program," said Michael Foster, a partner in Venable LLP's Tax Group in Los Angeles.
As a result of the recent U.S. Supreme Court decision in Kawashima v. Holder, the program is now vitally important for green card holders and other resident aliens, according to Foster. In Kawashima, the Supreme Court held that conviction of a criminal tax offense, other than tax evasion, constitutes a deportable offense.
"The risk of nondisclosure is no longer just financial, but now includes deportation from the U.S.," he said.
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