If you saw our blog post last week, you know that there is a lot of amnesty program activity taking place right now. Although there are benefits to these types of programs, we have some objections to the way they work, including:
- A client fact pattern often needs to fit exactly into the state’s amnesty time window to be effective.
- The types of taxes considered under the amnesty can be limited and may not encompass our client’s entire picture.
- The rules for an amnesty program tend to be fairly rigid, not offering much leniency for either overpayments or underpayments.
Check out last week’s post for more detail. In the meantime, read on for an instance of how difficult amnesty programs can be.
An Example of Amnesty Programs in Action
Here’s an example of amnesty programs’ benefits and potential pitfalls from one of our clients, exemplifying how each state’s treatment of a similar issue is different, making multi-state taxes even trickier.
Right now we’re working with a client that is coming forward voluntarily to a number of states for prior years’ exposure. We are engaging in voluntary disclosure on their behalf in multiple states. This means that they’re coming forward to a state anonymously (and working through us as their designee) to bring the company into compliance over a 3-4 month window. Under most states’ voluntary disclosure programs, generally the look-back period is shortened to 3 or 4 years, and penalties are waived for coming forward and getting into compliance, but the company still generally pays the interest.
In this specific example, we are dealing with Arizona and Indiana, two states that recently announced amnesties.
In Arizona, the state is providing our client with two options:
1. Take the limited look-back of voluntary disclosure of four years (where they’d only waive the penalties),
OR
2. Enroll under the amnesty program, and go back to all open years, but waive the penalties and the interest.
In our case, number one is likely the better option.
In Indiana, they’re offering a voluntary disclosure program with a 4-year look-back period that generally waives penalties (but not interest). However, the current amnesty program includes relief from penalties AND interest for taxes before January 1, 2012. So, in this case, Indiana is allowing the company to take advantage of the amnesty program for one year (2011), thereby allowing for waiver of penalties and interest, and then regular voluntary disclosure program rules for years 2012 forward, where penalties will be waived. Indiana allows us the maximum benefit of both programs as we bring the client into compliance.
As you can see, each state’s amnesty program offers different guidelines and rules, and can be utilized in slightly different ways. Again, we recommend that clients consider their entire fact patterns for state taxes before rushing in to take advantage of an amnesty program. If a company hasn’t really considered the full picture before, that also means engaging in a multi-state nexus review and taxability study. (And that’s the topic of a future blog!). Contact us today to find out if an amnesty program is right for your business!
Miles Consulting Group, Inc. is a professional service firm in San Jose, California specializing in multi-state tax solutions. Our firm addresses state and local tax issues for our clients, including general state tax consulting, nexus reviews, tax credit and tax incentive maximization, income tax and sales/use tax planning and other special projects, including the new California Partial Manufacturer’s Exemption for Sales Tax. To learn more, contact us today at www.MilesConsultingGroup.com.
