Does Amnesty Make Sense?

The Philippines have issued a statement clarifying that their ongoing tax amnesty program also applies to estate tax. It’s not a 100% clean slate but does give immunity from prosecution to qualified applicants. The program also imposes an “amnesty tax” of 5% on certain transactions depending on the types of taxpayers and their capitalization (for corporations). Amnesty is only allowable for tax years through 2005 – some other restrictions apply.

That, my friends, is brilliant.

Yes, I believe in tax amnesty. I understand the resentment that many folks have towards allowing those who haven’t paid their taxes to get a substantial break. But this is the scoop.

Most of the folks that walk through my doors with a tax problem aren’t repeat offenders because they want to willfully evade their taxes. Most of them made a mistake – usually connected to a divorce, payroll issue at their place of business or independent contractor gig (by far, the most common) – and they don’t know how to fix the mistake. With interest and penalties, it gets bigger and bigger. So, they stop opening mail from the IRS. They stop filing taxes because they’re hoping to get off of the radar screen. They ask to be paid in cash. They don’t keep bank accounts. In other words, they more or less freeze when it comes to the IRS, taxes and money. If they could make it all go away, most of them would not make the same mistake twice.

I can relate. In law school, I checked out some books from the library. Summer came and went, and I forgot about the books. Then I moved to a new apartment so the books were packed away. Eventually, I rediscovered the books and tried to return them to the library – only the library made it hard. You couldn’t simply drop them in a box. You had to go through security and return them in person at the desk. I was too embarrassed – after all, who is willing to admit keeping Marilu Henner’s autobiography for that long? I called the library on a hopeful note: was there an amnesty program? No. So I kept the books on my desk, trying to figure out what to do. We moved again, this time to a house, and the books were again packed away. Years later, they resurfaced. All grown up now, but still embarrassed, I decided on a course of action. I packed the books up and shipped them to the library together with a check for fees, a note of apology and a donation. But it took me awhile to get to that point. If I could have just dropped them somewhere with a mea culpa, I would have felt better. And I wouldn’t have kept any more books for that long (for the record, I haven’t).

Amnesty offers a chance for a fresh start. Whether their reluctance to resolve their issues stems from fear or embarrassment, most taxpayers would welcome the opportunity to start over. Why not give them one?

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Comments

  1. Robert D Flach

    Right On Kelly!

    I have been saying for a quite a while now that the federal government should institute a “Tax Amnesty” program similar to the kind that the individual states have been using successfully for many years to collect back taxes and raise revenue.

    I agree that a large portion of outstanding IRS debt is the result of the near usurious accrual of penalties and interest to the point that the taxpayer will never be able to settle his account. It would be “more better” for the IRS to be able to collect the actual tax due without penalty or interest than to collect nothing at all.

    The Wandering Tax Pro

  2. Celine

    I live in the city in the Philippines where the local government has been very generous when it comes to giving real estate tax amnesty. This program has been very effective for the city, I think, because more people are becoming better at paying their real estate taxes.

    First of all, with a previous mayor, there was hardly any awareness or reminders that these real estate taxes existed – even sending invoices through the mail proved to be slow and inefficient. But with the last two mayors, large banners announcing tax amnesty has provided more information to the residents, and it also reminds them that “Hey, we’ve been very lenient with you with these amnesties so you no longer have any excuse to forget paying your real estate taxes.” It actually got my mom to pay, which is a big deal because before she started paying it regularly, she would let it sit and gain interest for years.

  3. Robert D Flach

    Kelly-

    I apologize for the delay in responding – but I am usually out of the office all day on Wednesdays.

    Ideally a federal amnesty program would allow individual and corporate taxpayers to pay in full all outstanding federal tax liabilities for income and payroll returns filed prior to the announcement of the program by a certain target date and have all accrued penalties and interest on such liabilities abated. If I owed “Sam” $15,000, which is made up of $9,000 in actual federal income tax and $6,000 of accrued interest and penalties, I could pay $9,000 by a certain due date and have my account marked “paid in full”.

    The amnesty could also give taxpayers who have not filed a required tax form (1040 or 1120) for a past period the ability to file the return and pay the tax by the Amnesty due date and no penalty or interest would be assessed on the payment. So if I did not file my 2004 Form 1040 I could do so under the Amnesty program and pay only the $2,000 net tax liability. There would be no penalty or interest for late filing or late payment assessed on the $2,000.

    The amnesty would not apply to individual or corporate taxpayers who were involved in criminal tax fraud action prior to the announcement of the program. However, it could allow “uncaught” tax criminals, or any other taxpayer, the ability to file a Form 1040X or amended corporate or payroll tax return to properly report income and expenses and pay the additional tax due without penalty or interest charges before they are caught by the IRS
    .
    What the best Amnesty program would be saying is that if the IRS has told you that you owe additional tax, and you agree, or if you discover that you owe additional tax, or did not report all income or claimed erroneous deductions on a past return, if you pay up now all interest and penalties will be abated. You only have to pay the actual tax.

    In determining the amount of tax liability available for amnesty, the IRS should apply all previous payments on the account to tax liability first. So if I initially owed $9,000 in tax and $6,000 in P+I but had made payments of $2,000 prior to the Amnesty, I could satisfy my account by sending “Sam” $7,000.

    While state Amnesty programs have required payment in full by a targeted due date, a federal amnesty program could allow a delinquent taxpayer to pay the outstanding tax liability monthly, quarterly or annually over a 2 or 3 year period and still have all accrued P+I wiped out. If the taxpayer does not make a required payment on time under this type of agreement then all bets would be off and the debtor would owe all penalties and interest.

    The legislation that creates such a program should include the statement that Congress could not institute another such Amnesty program within 10 or 15 years of the passage of the original Act.

    So how does that sound?

    The Wandering Tax Pro

  4. Kelly

    I actually think that an amnesty program that focused on the amount of tax due would really generate some serious revenue – as opposed to chasing for P&I. I had one client who owed $2000 in tax, thought her husband had paid, and ended up owing 5 figures with P&I. She did not qualify for Innocent Spouse. She can’t afford to pay so she’s chosen to ignore it. So now instead of getting any money, the IRS will likely get nothing…

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