Tax Amnesties: Evaluating the Latest State Offers Analyzing Penalty - - PowerPoint PPT Presentation

Tax Amnesties: Evaluating the Latest State Offers

Analyzing Penalty Interest Lookback and Other Terms

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Analyzing Penalty, Interest, Lookback and Other Terms Amid States' Expanding Nexus Policies

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A Live 110-Minute Teleconference/Webinar with Interactive Q&A

Today's panel features: Gary Bingel, Director, State and Local Tax, Amper Politziner & Mattia, Bridgewater, N.J. Patrick Duffany, Tax Partner, J.H. Cohn, Glastonbury, Conn. Michael Jacobs, Partner, Reed Smith, Philadelphia Karen Currie, Jones Day, Dallas y

Thursday, February 11, 2010 The conference begins at: 1 pm Eastern 1 pm Eastern 12 pm Central 11 am Mountain 10 am Pacific

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T A ti E l ti th Tax Amnesties: Evaluating the Latest State Offers Webinar

• Feb. 11, 2010

Gary Bingel Michael Jacobs Amper, Politziner & Mattia Reed Smith bingel@amper.com mjacobs@reedsmith.com Patrick Duffany Karen Currie J.H. Cohn Jones Day pduffany@jhcohn.com kcurrie@jonesday.com

Today’s Program

• Introduction To Amnesties, slides 3 through 12 (Gary Bingel)
• Key Terms Of Recent Upcoming Amnesties slides 13 through 28
• Key Terms Of Recent, Upcoming Amnesties, slides 13 through 28

(Michael Jacobs) F k F D idi Wh th T E ll I A A t lid 29

• Framework For Deciding Whether To Enroll In An Amnesty, slides 29

through 45 (Patrick Duffany and Karen Currie)

• Other Factors To Consider In Evaluating An Amnesty, slides 46

through 50 (Gary Bingel)

2

Introduction To Amnesties

3

Introduction

• Why are amnesties so hot?

Extreme budget shortfalls – Extreme budget shortfalls – Nexus expansion – FIN 48 – Other reasons

• Amnesty vs. VDA?

4

Why Are Amnesties So Hot?

• Extreme budget shortfalls – FY 2009 budget gaps (total all states $110

billion) – AZ: $3.7 billion AZ: $3.7 billion – CA: $37.1 billion – FL: $5.7 billion IL $4 3 billi – IL: $4.3 billion – NJ: $6.1 billion – NY: $7.4 billion

5

Why Are Amnesties So Hot? (Cont.)

• Budget shortfalls estimated to continue for several years as economy

recovers recovers

• FY 2010 total state budget shortfalls estimated to be $194 billion
• The current shortfalls are 2x – 3x worse than last recession (2002 –

2005)

6

Why Are Amnesties So Hot? (Cont.)

• Raises revenues without raising taxes
• Gets delinquent taxpayers current
• Perception that there is a LOT of money out there to be gained

– Poster child is NJ, which estimated $200 million in revenues and raised $725 million

7

Why Are Amnesties So Hot? (Cont.)

• Expansion of nexus-creating activities

Economic nexus – Economic nexus – Affiliate nexus – Agency nexus

• These provisions being applied retroactively
• More and more companies are finding they are taxable in more and

more places

8

Why Are Amnesties So Hot? (Cont.)

• FIN 48/ASC 740 10
• FIN 48/ASC 740-10

– Due to changes in financial reporting requirements, these issues are being examined more closely M i i t f d l ki f – More companies are more cognizant of exposure and looking for ways to remediate

• Creation of “phantom income”

9

Why Are Amnesties So Hot? (Cont.)

• Is it just timing?
• There is some evidence that amnesties merely accelerate collections

– Post amnesty, VDA collections generally drop off – Loss of interest revenues?

• May actually be net loss

10

Amnesty Vs. VDA?

• Many states halt VDA programs during an amnesty
• Many states halt VDA programs during an amnesty
• Need to carefully evaluate terms and conditions of both
• Materiality?

11

Amnesty Vs. VDA? (Cont.)

• Traditional amnesties

Waiver P&I – Waiver P&I – Unlimited lookback

• Traditional VDA

– Waive penalties but not interest – Limited lookback

12

Key Terms Of Recent, Upcoming Amnesties Amnesties

13 13

Key Terms Of Recent And Upcoming Key Terms Of Recent And Upcoming Amnesties

• Common features of 2009 amnesties
• 2010 amnesties
• Di

i f C l bi

• District of Columbia
• Massachusetts
• New York
• Pennsylvania/Philadelphia
• Wisconsin (sales and use tax)
• Illinois (proposed)

14 14

2009 – A Big Year For Amnesties

• Alabama
• New Jersey

Alabama

• Arizona
• Connecticut

New Jersey

• Oregon
• Vermont
• Delaware
• Hawaii
• Virginia
• Louisiana
• Maine
• Maryland (individuals and
• Maryland (individuals and

small businesses only)

• Massachusetts

15 15

2009 Amnesties – Common Features

• Limits to eligibility: Some programs were limited to known liabilities

Limits to eligibility: Some programs were limited to known liabilities (e.g. Connecticut), while others were related to unknown liabilities (e.g. Alabama), and still others only applied to liabilities for periods ending before a specific date (e.g. Virginia)

• Waiver of appeal rights: Delaware and Virginia required waiver of

appeal rights. Louisiana required waiver of appeal and pledge of consistency for future years. Connecticut made taxpayers with consistency for future years. Connecticut made taxpayers with pending appeals drop appeals in order to qualify for amnesty

• Availability of voluntary disclosure alternative: E.g. New Jersey shut

down its VDA program during the 2009 amnesty down its VDA program during the 2009 amnesty

• Non-participation penalties: Louisiana (20%), New Jersey (5%),

Oregon (25%), Virginia (20%)

16 16

District Of Columbia

• Authorized by D.C. Council, awaiting details on implementation

from D.C. Chief Financial Officer’s Office

• Will apply to taxes for periods ending prior to Dec. 31, 2009
• Full waiver of penalties and collection fees
• Will not apply to real property taxes and ballpark fees

17 17

Massachusetts

• Timing: Two-month period ending before June 30, 2010 (all

g p g ( payments must be made by June 30, 2010). Exact dates TBD by commissioner

• Eligible Taxes: TBD by commissioner. Taxpayers with previously

assessed liabilities (including those under appeal) will be able to participate

• Full penalty waiver (no waiver of interest)
• No requirement that appeal rights be waived
• Non-participation penalty: Maximum of $500 per taxpayer (waivable

18

for reasonable cause)

18

Massachusetts (Cont.)

• Taxpayers subject to tax-related criminal investigation/prosecution

cannot participate

• Unclear whether intangible holding companies and non-filing

financial institutions will be able to participate

• This is the second Massachusetts amnesty in two years

19 19

N Y k New York

• Penalty and Interest Discount (“PAID”) Program.
• Timing: Jan 15 through March 15 2010 (all payments must be made
• Timing: Jan. 15 through March 15, 2010 (all payments must be made

by March 15)

• Eligible taxes: Taxes that have been assessed and final on or before
• Dec. 31, 2006. The Department is notifying eligible taxpayers, but

, p y g g p y , taxpayers that do not receive notification can still participate. Amounts being paid under installment payment agreement are eligible if paid in full by March 15, 2010

• Partial penalty and interest waiver: (80% waiver for amounts billed
• Partial penalty and interest waiver: (80% waiver for amounts billed
• n or before Dec, 31, 2003; 50% waiver for amounts billed on or

before Dec. 31, 2006)

• Taxpayers convicted of a tax-related crime cannot participate with

p y p p respect to tax liabilities that were the source of the conviction

• Program not available for amounts that include fraud penalties or

penalties for failure to participate in 2005 tax shelter voluntary compliance initiative

20

compliance initiative

20

Pennsylvania

• Timing: April 26 through June 18, 2010 (all payments must be made

Timing: April 26 through June 18, 2010 (all payments must be made by June 30, 2010)

• Eligible taxes: All taxes administered by the PA Revenue Department

(only covers IFTA taxes owed to PA) Tax must be delinquent as of (only covers IFTA taxes owed to PA). Tax must be delinquent as of June 30, 2009. Amounts being paid under a deferred payment plan are eligible if paid in full by June 30, 2010. Department will contact eligible participants, but taxpayers with “unknown” liabilities can eligible participants, but taxpayers with unknown liabilities can also participate

• Participants must file an online amnesty return and all delinquent

returns including returns due after June 30 2009 returns, including returns due after June 30, 2009

• Full penalty waiver (50% interest waiver). Waived penalty and

interest can be reinstated based upon a delinquency within two years

• f J ne 18 2010

21

• f June 18, 2010

21

Pennsylvania (Cont.)

• Taxpayers with “unknown” liabilities will benefit from limited look-

Taxpayers with unknown liabilities will benefit from limited look back to July 1, 2004

• Participants must waive the right to contest amounts paid under

amnesty amnesty

• Non-participation penalty: 5% of unpaid tax, penalty and interest

(does not apply to amounts covered by deferred payment plans or t b i t t d b f J 30 2010) amounts being contested before June 30, 2010)

• Participants will not be able to participate in future amnesty programs
• Open issues:

Ope ssues:

• “Unknown” RAR liabilities
• Application of amnesty to payments made before April 26, 2010

22

• Application of amnesty to partial payments

22

Philadelphia - Proposed

• Approved by City Council in December 2009. Mayor Nutter’s

Approved by City Council in December 2009. Mayor Nutter s approval expected soon

• Timing: 45-day period in May/June 2010 (overlapping with PA

amnesty) amnesty)

• Eligible taxes: Business privilege tax, net profits tax, real estate

transfer tax, use and occupancy tax, wage tax; school district income t ill l b i l d d if di t i t l t t ti i t T t b tax will only be included if district elects to participate. Tax must be delinquent as of June 30, 2009. Delinquencies existing before Feb. 1, 1986 are not eligible

• Full penalty waiver (50% interest waiver)
• Taxpayers under criminal investigation or that have been named in a

criminal complaint related to the delinquency cannot participate

23 23

Wisconsin – Sales And Use Tax

• Timing: July 1, 2009 through Sept. 20, 2010
• Eligible taxes: Sales and use tax only. Available to vendors that

register to collect tax during amnesty period for Wisconsin and all

• ther SSUTA states
• Waiver of liability for failure to collect tax prior to registration
• Does not apply to use tax liability as a purchaser or sales tax

collected and not remitted

24 24

Illinois - Proposed

• Timing: Jan. 1 through Feb. 15, 2010

g g ,

• Full waiver of penalty and interest for taxes due after June 30, 2002

and prior to July 1 2009 and prior to July 1, 2009

• Taxpayers under criminal investigation or that are the subject of

i i l li i i i l i Illi i i i criminal litigation in relation to any Illinois tax cannot participate

• If bill moves forward, timing will likely change

, g y g

• Unclear if proposal has support of Democrats in the General

Assembly or of Gov Quinn

25

Assembly or of Gov. Quinn

25

Summary Of 2010 Scheduled Su y O 0 0 Sc edu ed Amnesties

P lt W i I t t Li it d L k B k W i f N ti i ti Penalty Waiver Interest Waiver Limited Look-Back Waiver of Appeal Rights Non-participation Penalty DC 100% ? ? ? No. MA 100% None None None $500 per taxpayer 26 26

Summary Of 2010 Scheduled Su y O 0 0 Sc edu ed Amnesties (Cont.)

P lt I t t W i Li it d L k B k W i f N Penalty Waiver Interest Waiver Limited Look-Back Waiver of Appeal Rights Non- participation Penalty NY 80% (pre- 80% (pre- N/A (only applies to N/A None. 12/31/2003)/50 % (pre- 12/31/2006) 12/31/2003)/50 % (pre- 12/31/2006) known liabilities) PA 100% 50% No liability for unknown liabilities due before 7/1/2004 Yes. 5% of unpaid tax, penalty and interest 27 27

Circular 230 Disclosure

• Any U.S. tax advice contained in this presentation was not intended
• r written to be used, and cannot be used, for the purpose of avoiding

penalties under the Internal Revenue Code or applicable state or local tax law provisions.

• These slides are intended solely for educational purposes and should
• These slides are intended solely for educational purposes and should

not be relied upon as legal advice.

28 28

Framework For Deciding Whether To Enroll In An Amnesty Enroll In An Amnesty

29 29

Discussion Topics

How Are You Managing?

SM

• Cost of compliance vs. non-compliance
• Tax technical and factual considerations

Tax technical and factual considerations

February 11, 2010

30 30

Cost Of Compliance Vs. Non-Compliance

• Costs may not be limited to “tax and tax-related”

costs

I th titi d t ?

• Is there a competitive advantage?
• Is there a risk of negative publicity?
• Systems considerations?
• Shareholder or officer liability?
• In-house resource capabilities?
• Considering selling all or a portion of the business?

g g p

• Other?

February 11, 2010

31 31

Cost Of Compliance Vs. Non-Compliance (Cont.)

• Typical tax and related costs associated with filing

yp g returns under a VDA or amnesty program

• VDA or amnesty applications

T i i d/ ifi f h i

• Tax registrations and/or certificates of authority
• Required returns
• Tax and interest (and sometimes penalties) due

( p )

• Appeals to waive penalties
• Potential audit requests or desk audits

O i t d t li t

• Ongoing tax and tax compliance costs
• Closely held businesses – credit for tax paid

February 11, 2010

32 32

Cost Of Compliance Vs. Non-Compliance (Cont.)

• Typical tax and related costs associated with NOT

filing returns under a VDA or amnesty program

• Tax due if ultimately found liable for the tax
• Penalties
• Interest
• Interest
• Costs of having to respond to a “discovery” audit
• Difficulty in obtaining data

February 11, 2010

33 33

Cost Of Compliance Vs. Non-Compliance (Cont.)

• Typical tax and related costs associated with NOT

filing returns under a VDA or amnesty program (Cont.)

• Prohibition from being included in future VDA or amnesty

programs programs

• Expansion of the lookback period
• Continued costs of “maintaining” reserves/liabilities for GAAP

February 11, 2010

34 34

Cost Of Compliance Vs. Non-Compliance (Cont.)

• Other considerations?
• “Benefit” of waiting a few years and then filing a VDA
• “Benefit” of never getting “caught”
• New IRS guidance on requiring taxpayer to disclose “uncertain

tax positions” on their tax returns beginning in 2010! tax positions on their tax returns beginning in 2010!

• When will the states follow IRS’ lead?
• Information-sharing

February 11, 2010

35 35

Cost Of Compliance Vs. Non-Compliance (Cont.)

• What does all this mean?
• Each taxpayer will need to consider its own facts and risk profile
• Typically, a “practical approach” is used

C id i ll f th f t th lti t ti i Wh t

• Considering all of these factors, the ultimate question is: What

makes the most sense for your business?

February 11, 2010

36 36

Cost Of Compliance Vs. Non-Compliance (Cont.)

• Financial statement implications
• FIN 48 (only relates to “income” taxes)
• “More likely than not” standard
• When can a “reserved benefit” be released for financial statement purposes?
• FAS 5 (governs most other potential tax liabilities)
• Liability is recorded when it is “probable” the liability exists and such liability can

be “reasonably estimated”

February 11, 2010

37 37

Factual Issues Factual Issues

• Nature of contact with the state

– Continuous – Future plans

• Amount of business transacted in the state
• Type of business

Know your facts

• Know your facts

– What are employees really doing? – What do the documents say? y

38

Factual Issues (Cont ) Factual Issues (Cont.)

• Potential for return filing errors

Potential for return filing errors

• Outstanding state audit issues

g

• Reporting federal RAR adjustments
• Know your statute of limitations

N t fil d? – No returns filed? – Substantial understatement?

39

Tax Technical Analysis Tax Technical Analysis

• Nature of the authority underlying the subject tax

– Statutory – Regulatory C l – Case law – Department policy

• Constitutional protections
• Factual distinctions
• Examples

Expanding nexus – Expanding nexus – Applicability of P.L. 86-272 to hybrid taxes

40

Waiver Of Ability To Request Refund Waiver Of Ability To Request Refund

• Pennsylvania 2010

Pennsylvania 2010 – A taxpayer’s participation in the amnesty program is conditioned upon the taxpayer’s t th t th i ht t t t agreement that the right to protest or pursue an administrative or judicial proceeding with regard to tax amnesty returns filed under the g y amnesty program or to claim any refund of money paid under the amnesty program is barred barred

41

Type Of Tax At Issue Type Of Tax At Issue

• Income taxes
• Sales and use taxes
• Withholding taxes
• Transfer taxes

Other taxes

• Other taxes
• Unclaimed property

p p y

42

Type Of Tax At Issue (Cont ) Type Of Tax At Issue (Cont.)

• Officer and director liability

– Trust fund taxes – Non-trust fund taxes (e.g., use tax on h ) purchases) – Income/franchise taxes (e.g., MI, TX)

• Successor liability

– Stock acquisition q – Asset acquisition

43

Other Relevant Factors Other Relevant Factors

• Future business in the state
• Plans to sell business in the future
• Potential exposure to other taxes
• Program limitations
• Other options for becoming compliant

– VDAs – Repeat amnesties Repeat amnesties – Unofficial options

44

Other Relevant Factors (Cont ) Other Relevant Factors (Cont.)

• Increased audit efforts
• Increased audit efforts

– Alabama 2009: Post-amnesty, the Department brought online a new $26 million computer t t t i it bilit t id tif system meant to increase its ability to identify those who are not paying taxes or who are under-reporting the taxes they owe

• Cost of litigation
• Setting precedent for other cases

45

Other Factors To Consider In Evaluating An Amnesty Evaluating An Amnesty

46

Factors To Consider

• Types of taxes

Income/franchise tax – Income/franchise tax – Sales/use tax – Non-resident withholding – Taxation at partner level

• Whom to include

– Affiliates/partners?

47 47

Factors To Consider (Cont.)

• Materiality – always a consideration
• Outside consultant vs. in-house

– Familiarity with facts vs. expertise vs. resource constraints vs. t costs – Anonymity and privilege – Timing

48 48

Factors To Consider (Cont.)

• Outside consultants
• Outside consultants

– Accountants vs. attorneys vs. both – Outsource whole process vs. use as a sanity check/resource

49 49

Factors To Consider (Cont.)

• Issue: Can you use your auditor for amnesty/VDA without impairing
• Issue: Can you use your auditor for amnesty/VDA without impairing

independence? – Is there a negotiation/advocacy component? O it t i t ?

• Or, can it turn into one?

– For public companies – probably not – For private companies – open issue?

50 50