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The Tax Prophet Newsletter   Issue #15 September, 2004

In This Issue:

How It Works
Waiver of Penalties
Increased Penalties
No Refunds

Limited Amnesty for
California Taxpayers

Introduction On August 18, 2004, Governor Schwarzenegger signed legislation providing for taxpayer amnesty for certain unreported income and sales taxes. Buoyed by the success of the California Voluntary Compliance Initiative involving abusive tax shelters earlier this year in which California raked in $1.1 billion, the legislature has high hopes this newest amnesty offering will fill its depleted tax coffers with millions. A similar program in New York netted more than $500 million.

The amnesty period lasts only two months, from February 1, 2005 though March 31st, during which time taxpayer must complete and submit an amnesty application (applications will be posted on the Franchise Tax Board's website by January 15, 2005). This newsletter discusses the income tax aspects of the amnesty program. See the October 2004 Hot Topics for a full discussion of the amnesty program.

How It Works

Those applying for amnesty must file tax returns reporting delinquent taxes for tax years prior to January 1, 2003 and pay the taxes and interest. Both filing of returns and payment of taxes and interest must occur on or before May 31, 2005; however, taxpayers may enter into an installment payment arrangement permitting full payment by June 30, 2006.

The Carrot: Waiver of Penalties

California will waive penalties and criminal prosecution during the years covered by the amnesty application. The waiver of criminal penalties does not apply if the taxpayer is already under criminal investigation or involved in court proceedings relating to reporting irregularities.

The Stick: Increased

California hopes to coerce taxpayers compliance by increasing the penalties on those who fail to apply. Accuracy related penalties increase from 20% to 40% and interest on unpaid taxes increases 50%.

For example, if you do not apply for amnesty and California determines you have a $10,000 liability for a tax year covered by the program, the accuracy related penalty will be $4,000 (40% of the $10,000 liability). In addition, if the interest rate for unpaid taxes was 10%, it will be increase 50% to 15%.

No Refunds

There will be no refunds of penalties actually paid prior to amnesty and no claims for refunds will be permitted regarding any taxes or interest paid for years covered by the amnesty application. Thus, if you file a delinquent return, pay the taxes and later discover you've made a mistake in the government's favor, you cannot claim a refund.

Note: The increase in penalties does not apply to taxpayers currently under administrative or court proceedings with FTB or IRS regarding a tax liability incurred during a year covered by the amnesty program. Thus, taxpayers may continue to resolve the tax dispute without fear of an increase in penalties.


Taxpayers must sign a sworn application with FTB; and by May 31, 2005 --

(i) File completed tax returns (or amended returns) for all reporting periods not previously reported or under reported; and

(ii) Pay in full all taxes and interest due for the requested periods, or apply for an installment plan agreement. This requirement can also be satisfied when payment is made within 15 days of notice and demand.
Taxpayers who have filed for bankruptcy protection must submit an order court permiting them to participate in the amnesty program.


Remember, this is a California amnesty program, IRS has not granted amnesty and California shares tax information with IRS. Taxpayers need to weight the benefit of claiming amnesty on California returns with the potential for exposure to federal tax liability.


California's amnesty program has an extremely short window and participation could expose taxpayers to federal tax liabilities and penalties. Candidates include those without corresponding federal tax liabilities who can fully paid the delinquent taxes and interest by June 30, 2006.

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All contents copyright C 1995-2004 Robert L. Sommers, attorney-at-law. All rights reserved. This newsletter provides information of a general nature for educational purposes only and is not intended to be legal or tax advice. This information has not been updated to reflect subsequent changes in the law, if any. Your particular facts and circumstances, and changes in the law, must be considered when applying U.S. tax law. You should always consult with a competent tax professional licensed in your state with respect to your particular situation. The Tax ProphetR is a registered trademark of Robert L. Sommers.