Thursday, January 31, 2013


With all the talk about reducing the federal deficit perhaps it is time to revisit a recommendation I made back in 2008.

The Internal Revenue Service often cannot collect outstanding liabilities because taxpayers can't afford to pay them - and taxpayers can't afford to pay them because the amount is too high due to accrued penalty and interest.  An initial outstanding tax liability of $5,000 could easily mushroom to $15,000 or more over the years with constant accrual of penalties and interest.  The end result in many cases is that the IRS writes off the entire amount due.

Obviously the IRS could never 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.  Such a program would –

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

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

·      permit the IRS to "close the books" on a substantial number of overdue accounts, and

·      encourage the filing of delinquent returns. 
Everyone wins! 

Here is how a Federal Tax Amnesty Program would work -

The amnesty would apply to all federal taxes –

* 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.

Other federal taxes could be added to the list at the discretion of Congress.

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 subsequent 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 or 4 months from the date of the initiation of the Amnesty program to pay the net outstanding tax liability without any penalties and 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.  

If an open tax liability is not satisfied in full, or a delinquent return is not filed, during the Amnesty period 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, or it could state that the federal government would not be able to institute another Amnesty fifteen (15) or twenty (20) years after the end of the current amnesty period.

Congress has looked at a Federal Tax Amnesty Program in the past.  The Congressional Joint Committee on Taxation had released a report concluding that amnesty would ultimately hinder tax collection and reduce net revenue.  The report indicated that individuals would become less likely to pay their taxes in future years, perhaps in expectation that government would once again write off interest and penalty fees.

I do not agree.  The concerns expressed by the JCOT regarding reduced payment in anticipation of a future amnesty have not proven to be a problem with the various state programs.  Besides this would be advertised as a one-time only offer.    

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.

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.  It is a variation on the current Offer In Compromise program.

All, or perhaps half, of the monies raised under the Federal Amnesty Program could be directly earmarked to pay down the federal debt, and the legislation could so indicate.

So what do you think?


Amber in Albuquerque said...

I like it. Makes sense. So probably won't happen.

Anonymous said...

I agree with Amber, but I feel it is an excellent idea for the honest person that is overwhelmed with penalties and interest.