The FY 2015 Massachusetts Tax Amnesty Program: Opportunities for Noncompliant Taxpayers and the DOR

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1 The FY 2015 Massachusetts Tax Amnesty Program: Opportunities for Noncompliant Taxpayers and the DOR Matthew A. Morris, LL.M., Esq.* I. INTRODUCTION A tax amnesty bill signed into law by Governor Deval Patrick on July 11, 2014, will provide Massachusetts taxpayers with a two-month window for reporting and paying their Massachusetts tax liabilities. 1 The FY 2015 tax amnesty program, which forms part of the Governor s budget for fiscal year 2015, is anticipated to raise $35 million in revenue for the Commonwealth. 2 Matthew A. Morris, LL.M., Esq., recently joined Kerstein, Coren & Lichtenstein, LLP, as a Partner in the Tax and Estate Planning Department. Although the precise terms of the tax amnesty program have yet to be determined by the Commissioner of Revenue, early signs suggest that the FY 2015 program will follow the lead of the FY 2010 program by limiting participation to business taxpayers with specified business trustee tax liabilities such as sales and use tax and income tax withholding. In order to maximize the revenue-generating potential of the FY 2015 program and to open the window for compliance to the broadest range of taxpayers, the Commissioner should consider adopting a broad-based amnesty program similar to the FY 2003 program that was open to both individual and business taxpayers who owed income as well as trustee taxes. * Attorney Matthew A. Morris, LL.M., Esq., is a Partner at Kerstein, Coren & Lichtenstein, LLP, a full-service law firm in Wellesley, Massachusetts. Attorney Morris s practice areas include, but are not limited to, federal and state tax controversy resolution, representation in federal and state voluntary disclosure programs, state sales and use tax controversies, tax planning, and estate planning. Attorney Morris can be reached at (781) or via at mmorris@kcl-law.com. 1 See generally 188 TH MASSACHUSETTS GENERAL COURT, Senate Ways and Means FY 2015 Budget Amendment regarding Tax Amnesty (hereafter FY 2015 Tax Amnesty Bill ), section 122A, adopted by RC #305, available at (last visited July 14, 2014). 2 See MASSACHUSETTS BUDGET AND POLICY CENTER, Analyzing the Legislature s Budget for FY 2015 (July 2, 2014), available at (last visted July 14, 2014). This projection for FY 2015 is based on the success of prior amnesty programs. For example, the tax amnesty program for FY 2010 raised $32.6 million. See MASSACHUSETTS DEPARTMENT OF REVENUE, Amnesty Report September 2010 at 3 ( Overall Results ), available at (last visited July 14, 2014). According to House Majority Leader Brad Jones, $5 million of the total revenue generated from the FY 2015 program is earmarked for the Massachusetts Substance Abuse Services Fund; the remainder will be distributed through the Commonwealth s General Fund. Mass. Approves 2-Month Tax Amnesty Program, boston.com, personal-finance/2014/07/13/massachusetts-approves-month-tax-amnesty-program/tlbetupr8vycung5pgulbp/story.html (last visited July 14, 2014).

2 2 II. PRIOR TAX AMNESTY PROGRAMS The Commonwealth of Massachusetts has offered three tax amnesty programs within the past 12 years. 3 The tax amnesty program for FY 2003 was the broadest of the three, offering an opportunity for both businesses and individuals to come into compliance with their tax obligations. 4 The FY 2003 program was also significantly broader than the amnesty programs in later years by offering taxpayers with both individual and corporate income tax liabilities the opportunity to participate. 5 According to House Majority Leader Brad Jones, the FY 2003 program generated over $100 million in revenue. 6 The FY 2009 and FY 2010 tax amnesty programs were more narrowly-focused and generated less revenue than the FY 2003 program. The FY 2009 tax amnesty program was limited to individual taxpayers by invitation only, which means that only individual taxpayers with unpaid income tax and personal sales and use tax liabilities who received special tax amnesty bills were eligible to participate 7 ; this program generated $32 million in revenue. 8 The FY 2010 tax amnesty program was limited to business taxpayers with existing business trustee tax liabilities such as sales and use tax, meals tax, income withholding, and cigarette excise tax 9 ; this program generated $32.6 million in revenue. 10 III. THE BASIC TERMS OF THE FY 2015 TAX AMNESTY PROGRAM Although the Department of Revenue (DOR) will as it has with previously-announced amnesty programs 11 release guidance that will clarify the exact parameters of the program, the basic structure of the tax amnesty is as follows 12 : a. The DOR will determine two consecutive months of tax amnesty in fiscal year The Commissioner of the DOR will announce the two months of amnesty in which affected taxpayers can apply to the DOR for participation. b. The DOR will announce the eligible tax types. The DOR will announce the eligible tax types when it releases its guidance on the amnesty program, although the bill states that the amnesty program shall include, at the minimum, the following tax types: Sales and use taxes (including materialman sales taxes and sales taxes on telecommunications services, boats, and recreational vehicles); Meals taxes (including local options); Withholding income; Performer withholdings; Pass-through entity withholdings; Lottery annuity withholdings; Room occupancy excises (including local options); Certain convention center financing fees and financing surcharges; Deeds excises; Cigarette, cigar, and smoking tobacco excises; 3 MASSACHUSETTS BUDGET AND POLICY CENTER, supra note 2 at Tax Amnesty Program. 4 See MASSACHUSETTS DEPARTMENT OF REVENUE, TIR 02-14: Amnesty Program, Section III.1 ( Eligible Taxpayers ), available at 5 Id. 6 THE WASHINGTON TIMES, Lawmakers Give Nod to Tax Amnesty Program (Apr. 28, 2014), available at (last visited July 14, 2014); see also WORCESTER BUSINESS JOURNAL ONLINE, House GOP Hopes Timing is Right for its Tax Amnesty Program (Apr. 24, 2014), available at (last visited July 14, 2014) (reporting that the FY 2003 program generated $102.8 million). 7 See MASSACHUSETTS DEPARTMENT OF REVENUE, Press Release, An Estimated 159,000 Taxpayers to Receive Amnesty Tax Offer (Feb. 23, 2009), available at (last visited July 14, 2014). 8 See House GOP Hopes Timing is Right, supra note 6. 9 See TIR 02-14, supra note DOR Amnesty Report FY 2010, supra note 2 at p. 3 ( Overall Results ). 11 See, e.g., TIR 02-14, supra note Each of the following parameters is described in detail in the FY 2015 Tax Amnesty Bill, supra note 1.

3 3 Club alcoholic beverages excises; and Gasoline and special fuels excises (including local options). c. The DOR will waive all penalties for failure-tofile, failure-to-pay, and failure to make proper estimated tax payments. The Commissioner of DOR shall waive these penalties without the need for any showing by the taxpayer of reasonable cause or the absence of willful neglect. d. All required payments must be made by June 30, 2015 (within the government s fiscal year 2015). The purpose of this provision is to ensure that any projected revenues from the amnesty program which impact other parts of the budget for FY 2015 will actually be paid within the fiscal year and not deferred beyond the scope of the FY 2015 budget. This means that affected taxpayers will either need to propose lump-sum payments of their liabilities or propose short-term payment agreements in which their liabilities will be paid in full no later than June 30, Any payments not made on or before June 30, 2015, will not be eligible for tax amnesty, which means that failure-to-file and failure-to-pay penalties may be imposed on the unpaid portion of the liability. e. Taxpayers currently under criminal investigation, or taxpayers who have delivered or disclosed any false or fraudulent application, document, return or other statement are ineligible to participate. This caveat gives the DOR the right to deny eligibility to those taxpayers who are currently the subject of a criminal investigation or who willfully submitted a fraudulent application, return, or statement to the DOR (against whom a criminal investigation has not yet been initiated or will never be initiated). f. Taxpayers who submit false or fraudulent information to the DOR in connection with the amnesty application will be subject to additional penalties. A taxpayer who delivers or discloses any false or fraudulent application, document, return or other statement to the DOR in connection with the amnesty application will be subject to the greater of (1) the tax penalties imposed under chapter 62C of the Massachusetts General Laws or (2) a penalty not to exceed $10,000, which will be added to and become part of the tax due. g. Taxpayers who are contesting a tax liability and who want to participate in the amnesty program must agree to pay the tax and interest thereon in full before proceeding with their administrative appeal rights. In other words, a taxpayer who is appealing a tax liability through a Form CA-6 or petition to the Appellate Tax Board cannot simultaneously obtain the benefits of penalty abatement under the amnesty program and the stay of collections under chapter 62C, section 32(e) of the Massachusetts General Laws. If a taxpayer wants the benefits of penalty abatement under the amnesty program, he or she must agree to pay the tax and interest assessment immediately on issuance of a revised Notice of Assessment before proceeding with the appeals process. h. The Commissioner must prepare and file a report detailing the scope and success of the program. The Commissioner is to provide this report to the Massachusetts General Court no later than September 1, i. The amnesty will not include penalties which the commissioner would not have the sole authority to waive. For example, the Commissioner does not have the authority to waive penalties on fuels taxes imposed under the International Fuel Tax Agreement (IFTA) or under local options. j. Participating taxpayers will not be eligible for another tax amnesty program for a 10-year period. Taxpayers who come forward under the FY 2015 program are ineligible to participate in any future DOR amnesty program for a 10-year period. IV. OPPORTUNITIES AND DANGERS FOR NONCOMPLIANT TAXPAYERS Taxpayers with undisclosed or disclosed but unpaid business tax liabilities of any type set forth in Section III.b, above, should consider retaining qualified tax counsel to represent them in the FY 2015 tax amnesty program. The FY 2015 tax amnesty program offers an opportunity for taxpayers with unpaid tax liabilities (at this point, limited to business trustee taxes) to come

4 4 into compliance with their filing and payment obligations without having to pay any penalties for failure to file, failure to pay, or failure to make proper estimated tax payments. In order to minimize the cost of legal and professional fees associated with the disclosure, many taxpayers will choose to represent themselves in the tax amnesty program instead of hiring a qualified tax attorney or accountant to guide them through the process. This approach may reduce costs in the short-term, but may result in higher overall costs in the long-term for at least two reasons: a. Some businesses lack appropriate internal bookkeeping or accounting controls. For most companies that owe delinquent taxes such as sales and use taxes, generating true, correct, and complete tax returns requires more than plugging data into software programs. These companies often will need a representative from outside the organization who has the knowledge and experience to trace a business s liabilities over a span of prior tax years in consideration of both changes in law and changes in circumstances. A qualified outside attorney or CPA can help these businesses to ensure that the delinquent returns are not only true, correct, and complete, but also take advantage of every available tax benefit under the law applicable to that particular tax type. b. Eligible taxpayers may want to retain a tax attorney to review their exposures to criminal liability or civil penalties before applying for amnesty. As discussed in Section III.f, above, a taxpayer who submits a false statement in connection with the amnesty application will be subject to, in addition to the underlying tax and interest, the greater of (a) the full range of penalties under section 62C of the Massachusetts General Laws including but not limited to penalties for failure to file (section 34), failure to pay (section 32), negligence or substantial understatement (section 35A), civil fraud (section 28), and criminal tax evasion (section 73) or (b) a penalty of up to $10,000. Taxpayers who think that they might be exposing themselves to these penalties by applying for amnesty should consider retaining a qualified tax attorney to represent them in the disclosure process. V. OPPORTUNITIES FOR THE DEPARTMENT OF REVENUE The only tax types that must be included in the FY 2015 amnesty program are the business trustee taxes enumerated in Section III.b, above. However, the Commissioner would be entitled under the language of the FY 2015 budget bill to expand the scope of eligible taxpayers to include individuals and the scope of eligible tax types to include corporate and individual income tax in addition to trustee taxes. 14 By expanding the scope of eligible taxpayers to include individuals and the scope of eligible tax types to include income tax (both corporate and individual), the DOR may be able to maximize revenue and the number of newly-compliant taxpayers. Based on the revenue generated by the FY 2003 amnesty program (which was open to businesses and individuals) in comparison to the revenue generated by the FY 2010 program (which was limited to businesses), the DOR could more than triple its revenue by including individuals as well as businesses in the scope of eligible taxpayers. 15 The DOR could also broaden the scope of taxpayers eligible to come into compliance by a significant multiple of the 35,000 business taxpayers who were invited to participate in the FY 2010 program. 16 Furthermore, there is at least some evidence to suggest that offering repeated tax amnesties will undercut short-term revenue and magnify revenue losses associated with long-term compliance incentives. By structuring the FY 2015 amnesty program as broadly as possible, the DOR could avoid the need for another 14 See FY 2015 Tax Amnesty Bill, supra note 1, at section 122A(a) ( The scope of the program, including the particular tax types and periods covered, including any limited look-back period for unfiled returns, shall be determined by the commissioner.... ). 15 Compare the $102.8 million generated by the FY 2003 amnesty program with the $32.6 million generated by the FY 2010 program. See supra, notes 6 (FY 2003 program) and 10 (FY 2010 program). 16 Compare the approximately 35,000 business taxpayers invited to participate under the FY 2010 program to the 159,000 individual taxpayers invited to participate in the FY 2009 program. See supra, notes 7 (FY 2009 program) and 10 (FY 2010 program). 17 See Hari Sharan Luitel and Russell S. Sobel, Abstract, The Revenue Impact of Repeated Tax Amnesties, ST. CLOUD STATE (Oct. 2005), available at stcloudstate.edu/economics/documents/taxamnesty.pdf (last visited July 14, 2014) ( We find that these additional tax amnesties generate less short-run revenue than predecessors and tend to magnify revenue losses associated with disincentives for long-run tax compliance. ).

5 5 individual income amnesty program within the next few years. The more comprehensive the current program, the less likely taxpayers will adopt a wait and see attitude regarding their tax compliance problems. VI. CONCLUSION The FY 2015 tax amnesty program offers Massachusetts taxpayers the chance to resolve their outstanding liabilities with the DOR without failure-to-file and failure-to-pay penalties and without the time and expense associated with appealing those penalties. The current drawbacks of the FY 2015 program, at least as far as taxpayers are concerned, are (a) that the early signs suggest that the scope of the program may be limited to business taxpayers who owe trustee taxes and (b) the taxes and interest must be paid in full by June 30, 2015 (or earlier in certain cases). The Commissioner of the DOR should not miss an opportunity to maximize revenue production and compliance through a broad-based amnesty program offered to both individuals with outstanding income taxes and businesses with unreported income and trustee taxes. Although administering a broad-based amnesty program would be more expensive than administering a limited amnesty program, both the DOR and taxpayers caught in the compliance gap should benefit from a more inclusive approach. The alternative would mean a series of short-term amnesty programs that are limited in scope and that may undercut incentives for longterm tax compliance. This article is intended only to provide generalized information. It is not intended to provide information or advice with respect to specific situations. To address real-life, specific situations you should obtain appropriate professional assistance. Under the rules of the Supreme Judicial Court of Massachusetts, this article may be considered attorney advertising. For more information, please contact Matthew Morris at Kerstein, Coren & Lichtenstein, LLP. 60 Walnut Street Fourth Floor Wellesley, MA Phone: Fax: mmorris@kcl-law.com