Tax Amnesties: Evaluating the Latest State Offers

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

presents

A Live 110-Minute Teleconference/Webinar with Interactive Q&AToday'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, PhiladelphiaKaren Currie, Jones Day, Dallasy

Thursday, February 11, 2010

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

Feb. 11, 2010

Gary Bingel Michael JacobsAmper, Politziner & Mattia Reed Smithbingel@amper.com mjacobs@reedsmith.com

Patrick Duffany Karen CurrieJ.H. Cohn Jones Daypduffany@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

33

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 billionAZ: $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 recoversrecovers

• 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 activitiesEconomic 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 closelyM 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 amnestiesWaiver P&I– Waiver P&I

– Unlimited lookback

• Traditional VDA– Waive penalties but not interest– Limited lookback

12

Key Terms Of Recent, Upcoming AmnestiesAmnesties

1313

Key Terms Of Recent And UpcomingKey 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)

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2009 – A Big Year For Amnesties Alabama New JerseyAlabama

Arizona

Connecticut

New Jersey

Oregon

Vermont

Delaware

Hawaii

Virginia

Louisiana

Maine

Maryland (individuals and Maryland (individuals and small businesses only)

Massachusetts

1515

2009 Amnesties – Common Features Limits to eligibility: Some programs were limited to known liabilitiesLimits 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 withconsistency 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 amnestydown its VDA program during the 2009 amnesty

Non-participation penalties: Louisiana (20%), New Jersey (5%), Oregon (25%), Virginia (20%)

1616

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

1717

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

1919

N Y kNew 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 on 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 prespect 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 madeTiming: 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 caneligible 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 2009returns, 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 of J ne 18 2010

21

of 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 amnestyamnesty

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’sApproved 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 btax 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

2323

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 other 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

2424

Illinois - Proposed Timing: Jan. 1 through Feb. 15, 2010g g ,

Full waiver of penalty and interest for taxes due after June 30, 2002 and prior to July 1 2009and 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 icriminal 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 edAmnesties

P lt W i I t t Li it d L k B k W i f N ti i tiPenalty Waiver Interest Waiver

Limited Look-Back Waiver of Appeal Rights

Non-participation Penalty

DC 100% ? ? ? No.

MA 100% None None None $500 per taxpayer

2626

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

P lt I t t W i Li it d L k B k W i f NPenalty 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

2727

Circular 230 Disclosure

Any U.S. tax advice contained in this presentation was not intended or 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.

2828

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

2929

Discussion TopicsHow Are You Managing?SM

Cost of compliance vs. non-compliance

Tax technical and factual considerationsTax technical and factual considerations

February 11, 2010 3030

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 3131

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

Typical tax and related costs associated with filing yp greturns 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 3232

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 3333

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

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

February 11, 2010 3434

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 3535

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 3636

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 3737

Factual IssuesFactual 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 errorsPotential for return filing errors

• Outstanding state audit issues g

• Reporting federal RAR adjustments

• Know your statute of limitationsN t fil d?– No returns filed?

– Substantial understatement?

39

Tax Technical AnalysisTax Technical Analysis• Nature of the authority underlying the subject tax

– Statutory– Regulatory

C l– Case law– Department policy

• Constitutional protections

• Factual distinctions

• ExamplesExpanding nexus– Expanding nexus

– Applicability of P.L. 86-272 to hybrid taxes40

Waiver Of Ability To Request RefundWaiver Of Ability To Request Refund

• Pennsylvania 2010Pennsylvania 2010– A taxpayer’s participation in the amnesty

program is conditioned upon the taxpayer’s t th t th i ht t t tagreement that the right to protest or pursue

an administrative or judicial proceeding with regard to tax amnesty returns filed under the g yamnesty program or to claim any refund of money paid under the amnesty program is barredbarred

41

Type Of Tax At IssueType Of Tax At Issue• Income taxes

• Sales and use taxes

• Withholding taxes

• Transfer taxes

Other taxes• Other taxes

• Unclaimed propertyp 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 acquisitionq– Asset acquisition

43

Other Relevant FactorsOther 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 amnestiesRepeat 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 tifsystem 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 AmnestyEvaluating An Amnesty

46

Factors To Consider

• Types of taxesIncome/franchise tax– Income/franchise tax

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

• Whom to include– Affiliates/partners?

4747

Factors To Consider (Cont.)

• Materiality – always a consideration

• Outside consultant vs. in-house– Familiarity with facts vs. expertise vs. resource constraints vs.

tcosts– Anonymity and privilege– Timing

4848

Factors To Consider (Cont.)

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

4949

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?

5050