Monday, September 22, 2014

WHAT ABOUT A FEDERAL TAX AMNESTY?


A new amnesty-like program for delinquent taxes in New Jersey reminded me of a recommendation I made back in 2008.

The Internal Revenue Service often cannot collect outstanding liabilities because taxpayers can't afford to pay them.  Taxpayers cannot afford to pay the balances because of the substantial accrual of penalty and interest.  An initial outstanding tax liability of $5,000 could easily mushroom to $15,000 over a period of years.  The result in many cases is that the IRS ends up writing off most or all of the amount due after the 10-year collection period has passed.

Obviously the IRS cannot permanently remove penalties and interest.  If they did taxpayers would have no motivation to file and pay their taxes on time.

The answer lies in a one-time temporary Federal Tax Amnesty, similar to state tax amnesty programs that have been highly successful in the past (a 2013 Tax Amnesty Program in Connecticut generated between $175 -$180 Million in collections).  Such a program would –

·   generate millions, if not billions, of dollars for the government,

·   allow taxpayers to get rid of the IRS cloud from over their heads,

·   permit the IRS to "close the books" on overdue accounts, and

·   encourage the filing of delinquent returns.

So everyone wins!

Here is how a Federal Tax Amnesty Program would work -

The amnesty would apply to all federal tax liabilities from, say, tax year 2001 through the current year –

* Individual income taxes, the Alternative Minimum Tax, and the various "other taxes", such as self-employment tax, included on the Federal 1040.

* Corporate income taxes and the corporate AMT.

* Payroll Taxes.

The IRS would begin with the original outstanding tax liability only - no accrued interest and penalties would be included - on all previously filed federal tax returns that are not currently part of a criminal prosecution.  From this they would apply all appropriate amounts to date from direct taxpayer payments, “garnishments” of wages, bank accounts, and federal and state tax refunds and rebates, other federal offsets, etc. against the open liability.  None of these payments would be applied against previously assessed penalty and interest; they would all be used to reduce the original “principal”.

Taxpayers would have 3 to 6 months from the date of the initiation of the Amnesty program to pay the net outstanding tax liability, or perhaps to set up an installment payment agreement, without any penalties or interest.

At the same time individuals, corporations and other businesses who have not filed certain income, payroll or other tax returns could do so during the amnesty period and pay only the tax due, with no penalty or interest assessment.  So if you did not file your 2009 (or 2005 for that matter) Form 1040 (or appropriate business or payroll return) at all because you owed $2,000, you could do so now and pay only $2,000.

The IRS would mail to all delinquent taxpayers an itemized “bill” for the outstanding tax due under Amnesty based on their records, so it would be clear just what needed to be paid.  Taxpayers would have the opportunity to dispute the amount of the bill if they felt it is incorrect. 

If an open tax liability is not satisfied in full or a delinquent return is not filed during the Amnesty period, or if the taxpayer defaults on an agreed upon installment payment arrangement permitted under the Amnesty, a higher penalty and/or interest rate would apply to the remaining outstanding balance – a further incentive to pay up during the program.

This would be a one-time only offer.  The legislation creating the Federal Tax Amnesty Program could so state by forbidding any future Amnesty programs.  Or it could state that the federal government would not be able to institute another Amnesty Program during the twenty years after the end of the current amnesty period.

The idiots in Congress have considered a Federal Tax Amnesty Program in the past.  But a Congressional Joint Committee on Taxation report concluded that amnesty would ultimately hinder tax collection and reduce net revenue.  The report suggested individuals would become less likely to pay their taxes in future years because of expectations that government would once again write off interest and penalty fees under another Amnesty.

I don’t agree.  The concerns expressed by the JCOT regarding reduced payment in anticipation of a future amnesty have not proven to be a problem with past state programs.  And this would be advertised as a one-time only offer, as per the text of the legislation.   

IRS collection activity would not cease or slack off once the initial program has completed in anticipation of future amnesties. If anything the Service should be more aggressive in its collection efforts after the amnesty period ends as there would be substantially less “targets”.

Tax Amnesty is aimed less at tax cheats and more at honest Americans who have been so overwhelmed by the accrual of interest and penalties that they walk away from their tax debt altogether.  And it will help to bring taxpayers who have, for one reason or another, not filed past returns back in the system and become current.

So what do you think? 

TTFN

3 comments:

Chris Johnson, EA said...

Bob,

I think there was one of those programs for federal tax amnesty a couple years ago, when things were really bad and revenues were way down. It wasn't well publicized and while states run programs like this all the time, the IRS rarely does, aside from highly specialized voluntary disclosure programs for people and companies that are hiding their money in offshore accounts. The last time there was one of those programs, it brought in $5.5 billion.

http://www.foxnews.com/politics/2013/04/27/tax-cheats-pony-up-55-billion-in-irs-amnesty-program/

Regarding your comment about the IRS imposing the outstanding tax liability only - and no penalties or interest - I believe that the IRS can easily waive penalties, but interest is statutory (just like it is in most states) and waiving interest would require more legwork by Congress, they would have to pass a special law for that, whereas the IRS always has discretion to waive penalties. Given how little Congress gets done as it is, a special law to waive the interest would be expecting too much of them. They will find time to vote themselves their next raise though.

On another note, there was a great piece by 60 Minutes last night about organized crime rings filing bogus tax returns and claiming other peoples' refunds. I'd heard about it before, but last night's report really blew my mind. If the IRS doesn't get better funding and infrastructure to fight this soon, it will only get worse. Here's a link to it:

http://www.cbsnews.com/news/irs-scam-identity-tax-refund-fraud-60-minutes/

Robert D Flach said...

CJ-

The amnesty program you referenced with the link to Fox News involved voluntarily disclosure of foreign assets. What I am talking about is a blanket Tax Amnesty Program that applies to all outstanding liabilities, and all unfiled returns - like the successful programs offered by various states over the years. Plus my Amnesty suggestion is as much a way for taxpayers who have been inundated with accrued penalties and interest to get out from under as it is a way to raise money for the Treasury.

The success of the program you identified shows that amnesty programs do raise lots of money.

This blanket Tax Amnesty Program would need to be created by special legislation that would permit abatement of interest. I do realize that the current idiots in Congress are incapable of getting anything done – but I can dream, can’t I.

I did not see the 60 Minutes story, but I am aware of it. I do agree that the IRS does need more funding for combatting this problem.

TWTP

Joseph J. Gawalis Jr. said...

OK, let's do it.