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State Collection Efforts – Is a Soft Approach Preferred?


A recession can bring out the best and worst in everyone. The U.S. State governments are no exception. In the face of declining revenues, states frequently begin to more aggressively pursue opportunities to collect additional revenues. Non-filers (who are frequently Canadian companies) are almost always a group targeted by any given state’s tax collectors. A general consensus in the Canadian business community appears to be that the States have in fact increased their pursuit of Non-filers.

However, some states have taken a softer approach. One of the mechanisms a state may utilize to bring in additional revenues is a Tax Amnesty Program.

Tax Amnesty Programs
In a typical amnesty program a governmental agency will develop a safe harbour period (typically two or three months) in which those who owe taxes may file and pay the taxes owed and receive a waiver of related penalties. Generally, a taxpayer must pay owed taxes and related interest in order to qualify for a waiver of penalties. In certain situations a waiver of penalties is a significant benefit.

In order to ensure all eligible taxpayers take advantage of an amnesty program, the state will typically add additional penalties for any eligible liability that could be paid during an amnesty period, but was not voluntarily paid.

In essence, taxpayers are frequently faced with the position of coming forward during an amnesty period, or risk detection after the amnesty period and have additional penalties assessed.

Two states with effective amnesty programs are California, which recovered over $6.3 billion within the states programs and New York, which raised over $931 million during its programs.

States with currently active or proposed amnesty periods include:

  • Alabama
  • Arizona
  • Connecticut
  • District of Columbia
  • Louisiana
  • Maryland
  • Michigan
  • Massachusetts
  • New Jersey
  • New Mexico
  • Vermont
  • Virginia

Voluntary Disclosure Programs
States frequently maintain a Voluntary Disclosure Program. The programs encourage taxpayers to voluntarily file and pay delinquent taxes. To encourage taxpayers to voluntarily come forward, programs will frequently curtail the number of years a taxpayer must file and pay taxes. In addition, under certain voluntary disclosure programs some penalties can be waived. Most programs allow taxpayers (when represented by a tax advisor) to come forward anonymously until a voluntary disclosure agreement has been negotiated to a mutually agreeable resolution.

For taxpayers exposed in multiple state jurisdictions, a program set up by the Multistate Tax Commission (MTC) allows taxpayers to negotiate with multiple states in one process with the MTC personnel. Although not all states participate in the MTC voluntary disclosure program, it can significantly lower administrative costs of voluntary disclosures for certain key states (e.g. California, New Jersey, Massachusetts, Michigan and Texas). There are currently 39 participating states.

Decisions, decisions…
As the recession looms large for all of us, a decision to voluntarily pay tax is not easily made. There are significant arguments for choosing when and how to pay U.S. state taxes. Frequently, if your company is in control of the situation you can mitigate the exposure and attempt to efficiently utilize any foreign tax credits in Canada.

However, once the state takes control (i.e. the audit begins) most soft solutions are no longer available. Amnesty programs and voluntary disclosure programs are rarely, if ever, options once you have been contacted by the state.

Therefore, if an Amnesty or a Voluntary Disclosure program appears to be advantageous to your organization, your company will need to begin to take advantage of the programs before they expire or your company is contacted by a state tax collector.

For more information on state tax collection and your options, please feel free to contact me or your local MNP advisor.