GT Alert

California’s Newest Tax Amnesty Program is a Good Opportunity for Taxpayers to Become Compliant, but Deadlines are Looming

February 2005

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Governor Schwarzenegger signed into law California’s newest version of Tax Amnesty on August 16, 2004. This comes on the heels of California’s 2004 Amnesty for tax shelter transactions, which enabled taxpayers to avoid all of the substantially increased penalties if they disclosed their tax avoidance transactions, waived their rights to appeal, and paid all tax and interest due between January 1, 2004 and April 15, 2004. The new Tax Amnesty legislation provides California taxpayers with the opportunity to pay delinquent income, franchise, sales and use taxes and interest on a penalty-free basis, but only for tax years beginning before 2002. The period for taxpayers who are eligible to participate in this program began on February 1, 2005 and will end on March 31, 2005. The new legislation is intended to encourage compliance with the tax laws and the program was implemented to generate badly needed revenue for California. This has a broader impact than the 2004 Amnesty because the new Tax Amnesty is not merely limited to taxpayers involved in tax shelter arrangements.

All eligible taxpayers with actual or potential tax amounts due to the California Franchise Tax Board (FTB) or the State Board of Equalization (BOE), for tax periods beginning before January 1, 2003, should consider this program. Taxpayers who wish to participate in the Tax Amnesty program should file an Amnesty application, file the appropriate delinquent tax returns (if any), and pay all the delinquent taxes and interest by the May 31, 2005 deadline. In exchange for such compliance, the FTB and the BOE will relieve the taxpayer of any penalties or potential criminal sanctions. The trade-off for taxpayer “voluntary” compliance should be enough incentive to encourage many to participate in California’s newest Tax Amnesty program.

Eligible taxpayers generally include persons who have tax liabilities that resulted from non-filing of returns, underreported income on filed returns, claimed excessive deductions, or any unpaid tax liabilities from previously determined (or proposed) amounts. However, the Tax Amnesty program will not apply to any tax liabilities that arose out of tax shelter items, which could have been reported pursuant to the FTB’s Voluntary Compliance Initiative and which took place between January 1, 2004 and April 15, 20041. Moreover, California taxpayers who failed to participate in the IRS’s Offshore Voluntary Compliance Initiative (which is described in Rev. Proc. 2003-11), are not eligible to participate in the Tax Amnesty program. Lastly, taxpayers who are currently under criminal investigation or who have had a civil tax court proceeding filed against them are not eligible to participate.

California individual or corporate taxpayers who have already paid fees or penalties for the tax years covered by the Tax Amnesty program (prior to January 1, 2003), cannot apply for refunds or credits of the amounts previously paid. Moreover, once a taxpayer agrees to participate in the Tax Amnesty program, he will forfeit any appeal rights he may have previously had for all amounts paid pursuant to the Amnesty program.

To further encourage California taxpayers to participate, the Tax Amnesty program has provided for installment agreements, under some circumstances, for those taxpayers who cannot pay the full tax and interest delinquency within the prescribed 60-day period (March 31, 2005 to May 31, 2005). If any installment agreement is granted by the state-taxing agency, the taxpayer will have until June 30, 2006 to make all payments of the tax and interest owed.

Though interest will continue to accrue on the outstanding liability during the installment payment period, the opportunity to pay off the deficiencies over a longer period should persuade more taxpayers to participate in the Tax Amnesty program. However, it’s not surprising that taxpayers who default on such installment agreements will immediately become liable for all tax, interest, and penalties (which had previously been waived by virtue of the taxpayer’s participation in the program).

Both the BOE and the FTB will be given added power to assert penalties against those taxpayers who failed to participate in the Tax Amnesty program, but who were eligible to do so. In other words, there are extreme consequences for not participating in the Tax Amnesty program, such as increased interest-based and other penalties, potential criminal prosecution and other possible sanctions. For example, the BOE has the right to impose penalties at double the normal rate against taxpayers who are eligible for the Amnesty program, but who chose not to participate. The FTB will be armed with an increased accuracy-related penalty of 40% for taxpayers who fail to take advantage of the Tax Amnesty program. The new penalty, applies to tax deficiencies for tax years beginning before January 1, 2003.

Taxpayers who participate in the Tax Amnesty program should use this opportunity to be completely honest about their tax filing and payment obligations. Taxpayers who feel compelled to correct their past filing and paying errors should have every intention of revealing their true income and tax deficiencies. If a taxpayer who participates in the Amnesty program does not reveal all amounts of underreported (or unreported) income, the FTB will be able to impose fees, penalties, and criminal action, if necessary, for the taxpayer’s failure to disclose all amounts of income. Likewise, participation in the Tax Amnesty program does not merely correct the taxpayer’s past filing mishaps; it also requires that the taxpayer stay compliant for the 2005 and 2006 tax years. If the taxpayer fails to stay in compliance in 2005 and 2006, the penalties and fees, which were previously waived pursuant to the Amnesty program, will immediately be due, along with all accrued interest.

Though time is short to take advantage of the California Tax Amnesty program, affected California taxpayers should use this opportunity to clear up past filing and paying obligations with the California taxing agencies. Though some taxpayers will be hard-pressed to comply within the 60-day participation period (February 1, 2005 to March 31, 2005), the Tax Amnesty program is California’s best offer to release taxpayers from penalties and possible criminal prosecution in exchange for voluntary participation in the program.

If you have any clients who meet the above-descriptions and who are eligible to participate in this program, we strongly suggest you consider the benefits of California’s Tax Amnesty initiative.

This Alert was written by G. Michelle Ferreira, Of Counsel, in the Silicon Valley office. Please contact Ms. Ferreira at (650) 328-8500 or your Greenberg Traurig liaison if you have any questions regarding the subject matter of this Alert.

Footnotes

1 * A GT Alert discussing the 2004 Tax Amnesty program is available here.

© 2005 Greenberg Traurig

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