Buried in the state budget that takes effect Monday is a tax amnesty program that will give delinquent personal and business taxpayers a 2-month window to lower their interest payments and avoid prosecution.
If you owe a tax dating back to last November or earlier, you can come forward and pay up between Sept. 16 and Nov. 15, with 3 percent interest — not the usual 12 percent.
The state tax amnesty was a little-discussed part of Gov. Dannel P. Malloy’s budget plan from the start and it will pull an estimated $35 million out of the woodwork in the 2013-14 fiscal year. It will cost an estimated $7 million in the following year, money the state figures it would have collected eventually.
Obviously that’s a good tradeoff in a tough budget year. The last time the state offered an amnesty window was 2009, and before that it was 2002 and 1995, according to Charles Lenore, a tax partner in the Day Pitney law firm’s Hartford office.
But this year, apparently for the first time, there’s a stick along with the carrot. Any taxpayer who neglected to file in the past and is eligible for the amnesty but fails to come forward during this year’s window will owe an extra 25 percent penalty.
That hefty penalty, which is designed to smoke out more delinquent taxpayers, raises concerns, said Lenore, who generally believes the amnesty is a good move this year.
“It worries me because there can be legitimate differences of opinion as to whether or not you’re supposed to file,” Lenore said. “There’s lots of times when things are gray.”
It’s almost always clear for personal taxpayers. But, for example, a business in another state may or may not have to file in Connecticut depending on whether its operations here form a “nexus,” which basically is a presence in the state. How many visits by a sales team amount to a nexus? Not always clear, Lenore said.
Who will likely use the amnesty? It’s not, for the most part, taxpayers who simply shirked their responsibilities. Many are in disputes with the state Department of Revenue Services, part of the usual run of business.
“It runs the complete gamut from small companies that haven’t paid, can’t pay or are late in paying, to companies that are larger that may have audit issues,” Lenore said.
The state’s sales tax, for example, “is so complex, it’s almost impossible to get it right,” he said
The amnesty creates some immediate tension. If a company is now being audited or thinks it might have a dispute, should it pay up at the lower interest rate and eliminate further risk, or take a chance and wait? Everyone in the audit hopper will want the department to finish up before the amnesty window ends.
Most business and personal taxes are part of the amnesty, including the most violated tax law of them all: Failure to pay a use tax, typically 6.35 percent, for goods bought in other states and shipped here. So if you had B&H ship $6,000 worth of video equipment in early 2012 and you didn’t declare and pay that $381 tax on this year’s return, you have another chance to come clean this fall.
Not eligible are taxpayers in a criminal case as of July 1; those who already signed a payment agreement with the department or reached a compromise agreement; and those who are in a “managed agreement” with a deal to have the department oversee a self-audit.
Like other budget tricks, the amnesty is a way of raising a few million more dollars without raising tax rates. It only works if it’s done rarely, of course, since an annual amnesty would just mean a lower interest rate on late bills.
And as the estimated revenue figures show, it’s not all money that the state would have eventually collected.
“Does it bring in money that the state doesn’t know about? It almost certainly does,” Lenore said. “Out-of-state businesses may use it as an opportunity to come forward and start filing.”
For the state, he said, “getting some cents on the dollar today is probably better than waiting some number of years to see whether you collect.”