The recently announced California Amnesty Program is not just the typical opportunity for non-filers to clean up outstanding liabilities. It is a double-edged sword that can impact every company doing business in the state. Every company doing business in California should carefully evaluate whether an amnesty filing is in their best interest. Decisions must be made quickly, as the amnesty application period ends March 31, 2005.
Careful consideration of amnesty program provisions is necessary due to the substantial penalties imposed under the amnesty statutes on any tax liabilities that were not volunteered through the Amnesty Program. Any liabilities discovered during future audits of amnesty periods will be subject to a 50% increase in interest accrued through March 31, 2005, plus a doubling of any potential penalties. Furthermore, the statute of limitations for all periods subject to the Amnesty Program is extended to 10 years.
As a result of this new law, businesses currently filing sales and use or income and franchise tax returns in California must make a choice between two options. The first option is to estimate any potential liability for the periods under amnesty, file an amnesty application (under penalty of perjury), prepare appropriate amended returns that reflect the increased liability, and pay the additional tax plus standard interest. Which in effect, is pre-paying a potential undiscovered audit liability. The second option is to do nothing and accept the 50% increase in interest and a doubling of any potential penalties that will be assessed in the event of an audit.
The Amnesty Program also applies to taxpayers currently under audit or in the appeals process. In the event the audit or appeal is not resolved prior to March 31, 2005, the increased interest and potential penalties will be applied to the final deficiency determination, unless the taxpayer pre-pays the assessment under the amnesty provisions.
The program details relating specifically to sales and use taxes are as follows:
Amnesty Period:
- February 1 through March 31, 2005
Periods Covered:
- All periods open under statute as of August 16, 2004 (the day the amnesty legislation was enacted) through December 31, 2002
- For taxpayers filing standard quarterly returns, who have not extended the statutory period through a waiver of limitations, the periods covered will be July 1, 2001 through December 31, 2002
- Periods extended by waiver of limitation or by the issuance of a Notice of Determination and the filing of a petition are subject to the amnesty provisions
Procedures:
- File an amnesty application, signed under penalty of perjury, during the amnesty period
- File amended returns for all periods where additional liability is established
- Pay all additional tax and computed interest or enter into an installment payment agreement
Important Dates:
- March 31, 2005 - amnesty application periods ends
- May 31, 2005 - amended returns and payment due; no extensions granted
Post-amnesty Provisions:
- Double the rate of any penalty added to a deficiency assessment for a period covered by amnesty
- Additional interest penalty equal to 50% of the interest payable through March 31, 2005 on any deficiency or other late payment for a period covered by amnesty
- For any period covered by amnesty the Board of Equalization ("BOE") may issue a deficiency determination within 10 years of the due date of the return period
- No offset of overpayments from one period will be allowed against a tax deficiency of another period covered by amnesty, unless an amnesty application was filed
Possibility for Penalty Relief:
- Auditors have no discretion on the interest increase or the doubling of other applicable penalties. The elected Board, however, may grant relief for reasonable cause, subject to the taxpayer's filing of a statement under penalty of perjury pursuant to Section 6592 Cal. Rev. & Tax.
Recommendations:
Businesses with operations or a filing responsibility in California should consider taking the following precautions, whether or not returns have been filed:
- Review all open periods, with reference to any prior audit history, to ascertain the likelihood of tax reporting deficiencies
- Conduct refund reviews to identify offsets for amnesty periods
- Consider amnesty protection for any anticipated deficiencies, particularly if there is potential for negligence penalties (e.g., repeat errors from prior audit, significant deficiencies, etc.)
- Undertake efforts to accelerate any ongoing audits or appeals that could possibly be resolved before the end of the amnesty period
- Strongly consider filing an amnesty application for periods with unresolved audits or appeals where deficiencies have been proposed, even if in dispute. Claims for refund can be filed with such payments to protect the disputed amounts
- As this program is unprecedented and quite controversial, changes or further clarification is expected in the weeks ahead. To stay up to date, monitor the BOE's website at http://www.boe.ca.gov/, or contact Ryan & Company
The Amnesty Program also extends to individual and corporate income and franchise taxes, with similar interest and penalty provisions.