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States Provide Penalty Relief to Qualifying Businesses with Unpaid Tax Liabilities by Michael Hirsch, JD, LLM

Posted on February 12, 2018 by Michael Hirsch,

Most U.S. states offer businesses an opportunity to potentially avoid penalties when they voluntarily report and pay previously unpaid liabilities of state and local taxes. In addition, many states establish temporary tax amnesty programs that also allow certain taxpayers to avoid the interest and penalties that accrued on their delinquent taxes. Taking advantage of these programs requires taxpayers to understand their eligibility to participate and the time frame in which the program will apply.

It is not uncommon for businesses to unintentionally forget one of the many tax-reporting responsibilities they are exposed to when doing business in a state, including, but not limited to, state-level sales and use tax, corporate tax, gross receipts tax, franchise tax, and/or motor and other fuels taxes. In addition, thanks to complex tax laws, businesses may overlook or miscalculate their true tax liabilities within those states where they operate. For example, a business headquartered and based in Florida may overlook filing corporate income tax returns in other states in which it rents commercial property.

Generally, Voluntary Disclosure Programs apply only to businesses that have not previously been contacted by a state taxing authority about an outstanding liability and whose delinquencies are neither intentional nor obvious.  Where states differ in their application of these programs is the number of years they will “look back” at a business’s tax liabilities after making the disclosure. For example, Florida looks back three years, whereas California relies on a longer six-year look-back period.

Once businesses report and pay their outstanding tax and interest liabilities through a Voluntary Disclosure Agreement (VDA), all penalties will be waived. However, as state governments continue to look for ways to bolster their budgets, many offer qualifying businesses a brief window of opportunity to also avoid paying interest on delinquent tax liabilities when they voluntarily comply with state and local tax laws. These tax amnesty programs not only help states close revenue gaps, they also help broaden their tax base by allowing previously unidentified taxpayers to enter and remain in the system.

For taxpayers, interest and penalty relief will apply when they voluntarily come clean within the applicable time frame. For example, both Ohio and Rhode Island have tax amnesty programs in place until Feb. 15, 2018. In Texas, delinquent businesses will have an opportunity to qualify for amnesty from interest and penalties on unreported state tax liabilities when they come into compliance between May 1 and June 29, 2018. The program applies to periods prior to Jan. 1, 2018, and includes only previously unreported liabilities.

Businesses with operations in multiple states should engage the services of State and Local Tax (SALT) professionals to regularly assess their tax reporting and payment responsibilities, assist in complying with voluntary disclosure programs and avoid potential risks of double taxation.

About the Author: Michael Hirsch, JD, LLM, is a senior manager of Tax Services with Berkowitz Pollack Brant’s state and local tax (SALT) practice, where he helps individuals and businesses to meet their corporate, state and local tax reporting requirements. He can be reached at the CPA firm’s Fort Lauderdale, Fla., office at (954) 712-7000, or via email at info@bpbcpa.com.

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