(January 7, 2005) The California Chamber of Commerce is working with state officials and other interested groups to remove unintended negative consequences from a “tax amnesty” program that will take effect starting in February.

The Chamber and other taxpayer representatives are concerned that the breadth of the new program will catch numerous taxpayers unaware, exposing them to extreme financial penalties even though they have not deliberately failed to pay or report taxes accurately.

The stated aim of the program is to encourage taxpayers to pay unpaid or late taxes more quickly — thereby bringing in added revenues to help relieve the state budget — by waiving some penalties for those who apply for the program.

To participate, a taxpayer must file an application between February 1 and March 31, 2005 and indicate for which years or tax reporting periods the amnesty is requested. The taxpayer has until May 31, 2005 to pay all taxes and interest owed, or enter an installment agreement.

Harsh New Penalties
Unfortunately, along with the program are harsh new penalties that could be imposed on all taxpayers, large and small, corporate and individual, for any unpaid taxes for tax years before 2003. The penalties may be imposed regardless of why the tax was unpaid or whether the taxpayer even knew about the deficiency.

For example, after the end of the amnesty period, the Franchise Tax Board (FTB) will assess an accuracy-related penalty and a 50 percent interest penalty for deficiencies assessed for tax years prior to 2003, with the accuracy-related penalty doubling to 40 percent for taxable years before 2003.

Similarly, the State Board of Equalization (BOE) will double penalties for taxes determined on or after April 1, 2005 and will also assess an interest penalty equal to 50 percent of the interest due on amounts “due and payable” after March 31, 2005, computing the penalty from the original date of the return (not taking extensions into account) through March 31, 2005.

Both the FTB and BOE will apply the 50 percent interest penalty from the due date of the original return through March 31, 2005, with no exceptions or dispute allowed.

The tax program applies to all taxpayers for all open tax years before 2003, covering both sales and use taxes administered by the state BOE, and the personal and corporate income and franchise taxes overseen by the state FTB.

The two entities differ, however, on specifics such as waiving fees (the FTB will waive most fees for amnesty participants, but the BOE won’t); and whether they will take installment payments (for business taxpayers, FTB won’t, but the BOE will).

Business Concerns
The Chamber believes the FTB and BOE implementation of the so-called “tax amnesty” program should not punish taxpayers who in good faith are paying their taxes. Taxpayers who believe they have a legitimate issue with their tax assessment or who are under audit should not be indiscriminately penalized. Nor should inadvertent errors be subject to the harsh new penalties.