| |
|
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 regarding 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.
|
|
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.
Note: The amnesty process may require
filing several deficient or overdue returns in an extremely short time
frame and during the period when tax preparers and CPAs are preparing
2004 federal and state income tax returns. In short, the professional
accounting resources to implement the program may not be available.
|
|
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: Increase in Future Penalties
|
|
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 tax 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 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.
|
|
No Amnesty for Tax Shelters
|
|
Taxpayers involved in abusive tax shelters who failed to take advantage
of the California Voluntary Compliance Initiative or the IRS Offshore
Voluntary Compliance Initiative cannot now claim amnesty for delinquent
taxes that were covered by those programs.
|
|
Requirements
|
|
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 permitted them to participate in the amnesty program.
|
|
Caveats and Concerns
|
|
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. In most cases, amnesty
will be suitable when a taxpayer filed federal returns, but did not
accurate file with California.
Amnesty requires prompt filing of tax returns and payment of taxes.
Thus, it seems geared to wealthy taxpayers will sufficient funds to pay
the taxes owed.
Those under federal tax audit face the prospect that an increase in
federal taxes may cause a proportional increase in California taxes
after the amnesty period has expired.
|
|
Sales and Use tax
|
|
Taxpayers will be subject to sales and use tax penalties equal to 20 percent (50 percent in cases involving fraud) for deficiency determinations based upon a return filed after the amnesty program. Such sales and use tax penalties will also be imposed for any other nonreporting or underreporting of tax liability by any person who could have otherwise been eligible for amnesty.
Note: Use taxes are owed by California residents on mail-order or internet purchases originating outside the state. The ban on collection of sales taxes from an out-of-state vender or seller does not apply to California's right to impose a use tax on its residents for such purchases.
Thus, California's amnesty program may be aimed at those businesses and individuals who are currently evading the use-tax requirement on purchases of computer equipment and other valuable property through the interest or by mail order.
|
|
Limitations Period
|
|
Deficiency determinations may be issued within 10 years from the last day of the calendar month following the quarterly period for which the amount is proposed to be determined.
|
|
Use Tax Rules for Vehicles, Vessels and Aircraft
|
|
From October 1, 2004 until July 1, 2006, vehicles, vessels and aircraft purchased by a California resident outside of California are presumptively subject to California use tax if:
(i) the vehicle is subject to California motor vehicle registration during the first 12 months of ownership;
(2) the vessel or aircraft is subject to California property tax during the first 12 months of ownership; or
(3) the vehicle, vessel or aircraft is used or stored in California more than half the time during the first 12 months of ownership.
This presumption may be defeated by evidence showing that the vehicle, vessel or aircraft was purchased for use outside California during the first 12 months of ownership or registered out of state. This presumption does not apply to vehicles, vessels or aircraft purchased or subject to a binding purchase contract entered into on or before October 1, 2004.
Note: Vehicles, vessels or aircraft used in interstate or foreign commerce are not subject to use tax.
|
|
Conclusion
|
|
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.
Taxpayers must consider the trade-off of incurring additional penalties
if they do not participate in the program and are later audited by
California, with the prospect that:
(i) California will never discover
the potential tax liability; and
(ii) whether participation in the
amnesty program will expose them to federal tax liabilities and
penalties substantially in excess of the amounts owed to California.
|
