For the second year in a row, the Arizona Legislature has approved a tax amnesty program, officially known as the “Tax Recovery Program.” This year’s program features significant additional benefits beyond 2015’s highly-successful amnesty program, which reportedly brought in over $55 million in additional tax revenue. Besides abating all interest and penalties, the taxpayer may also pay the amnesty amount over a three-year period, which has never been allowed in an amnesty program before.

When

Beginning September 1, 2016 and ending October 31, 2016.

Taxes Covered

There is no change to the taxes eligible for relief from the 2015 amnesty program. The 2016 amnesty program will cover all taxes administered or collected by the Department of Revenue (Department), including both corporate and individual income taxes as well as transaction privilege (sales) tax, but excluding luxury and withholding tax. The program also covers the following lesser known taxes: the car rental surcharge (§ 5-839), the hotel tax (§ 5-840), county jail district excise taxes (§ 48-4022), the spring training car rental surcharge (§ 48-4234), and the public health services district transaction privilege tax (§ 48-5805).

In 2015, the Department accepted applications related to transaction privilege taxes owed to program cities (because such taxes were administered and collected by the Department), but generally did not accept applications related to transaction privilege taxes owed to non-program cities. It is unclear whether the Department will make the same distinction in the 2016 amnesty program.

Periods Covered

The amnesty program applies to liabilities incurred during any tax period ending before January 1, 2014 (for taxpayers filing annually—this would cover income tax returns through the 2013 year but not for the 2014 year or after) or February 1, 2015 (for other taxpayers; this would cover sales tax returns for the monthly periods up to and including January 2015 but not for any months afterwards).

Note that these periods have not changed from the 2015 amnesty program, meaning that recently unpaid liabilities (i.e., those incurred in 2015 and 2016) are not eligible.

Amnesty is not available for periods currently under audit-recommendation. If a taxpayer is considering the amnesty program and is under audit by the Department, the taxpayer should work with the auditor to get the audit completed and have an assessment issued before the amnesty period expires. Once the audit is complete, it is our understanding that the taxpayer may then apply for amnesty for the completed audit period.

Must File an Application

To participate in the amnesty program, taxpayers must file an application with the Department during the amnesty period—September 1 through October 31, 2016. The application will require the following information:

  • Type of tax
  • Tax period
  • Tax liability
  • Any returns or reports (including amended returns/reports) to support the application
  • Copy of the latest applicable billing notice (for applications based on established liabilities)

The application for the 2016 amnesty program is not yet available from the Department. In 2015, the Department did not permit electronic applications, but it is undetermined whether this limitation will apply during the 2016 program as well.

NEW: Taxpayers May Opt for Payment Plans

Unlike previous amnesty programs, taxpayers have two options to pay the outstanding tax liability:

  • Payment in full on or before October 31, 2016 or
  • Payment in full over three years according to the following schedule:
    • 33% of the liability between September 1 and October 31, 2016
    • 66% of the liability between September 1 and October 31, 2017
    • 100% of the liability between September 1 and October 31, 2018

This marks a significant change from the 2015 program, which required payment in full with the amnesty application.

A “Gross Return” Can Be Filed for Income Tax if the Taxpayer Does Not Have All of the Information

For income tax returns, if the taxpayer does not have sufficient information to file a complete tax return, he or she may file a gross income return, computing the tax due using the established rate brackets based on the average tax rates for the year(s) in question.

All Penalties and Interest Will be Abated, No Criminal Action and No Refunds

If a taxpayer complies with all of the requirements of the section, the Department will waive all penalties and interest for the tax periods and taxes in the application without the taxpayer needing to prove reasonable cause or the absence of willful neglect (note that if a taxpayer opts for a payment plan, the penalties and interest will not be waived until the liability is paid in full). Following a grant of amnesty, the Department may not bring any administrative, civil, or criminal action regarding the tax periods in question. A grant of amnesty does not entitle the taxpayer to a refund or credit for any amount previously paid.

Ineligible Taxpayers

A taxpayer is ineligible for the amnesty program if any of the following circumstances apply:

  • As of January 1, 2016, he or she was a party to any criminal investigation, administrative proceeding, or litigation for failure to file, failure to pay, or tax fraud in Arizona or federal court
  • He or she was the subject of any past tax-related criminal investigation, indictment, or prosecution resulting in a conviction, guilty plea, or no-contest plea
  • He or she was convicted of a crime relating to the period or tax in the amnesty application
  • He or she is a party to a closing agreement with the Department for the periods in question
  • The amnesty application does not include any amount of unpaid tax
  • NEW: The taxpayer’s liability is the subject of an audit being conducted by the Department

The director will deny or revoke a false or fraudulent amnesty application or the application of a taxpayer who otherwise attempts to evade tax through the amnesty program.

Returns Filed With the Application are Subject to Verification

Returns or reports filed as part of an amnesty application are subject to verification (another word for “audit”) by the Department. Tax periods currently under audit are expressly excluded from the amnesty program (a change from the 2015 program, where the Department advised contacting your auditor prior to filing an amnesty application).

Any Ongoing Appeals Must be Dropped

Additionally, an application for amnesty constitutes a waiver of all administrative and judicial rights of appeal for the periods in question. Taxpayers are not permitted to pay part of an assessment under the amnesty program and protest the remaining amount. Any appeals will be dismissed upon notification from the Department that amnesty was granted for the period in question. Taxpayers must also withdraw from a pending proceeding or litigation before and amnesty application will be granted. Nonetheless, the taxpayer retains all administrative and judicial rights of appeal for any additional tax assessed by the Department during a subsequent audit.

Observations

Taxpayers that may have any delinquent taxes, or returns for years or periods that have not been filed, may want to consider taking advantage of the amnesty program. All interest and penalties (usually late payment and/or late payment) will be abated, and the Department will now allow taxpayers to choose whether to pay in full during the amnesty program or participate in a three-year payment plan. Another very important consideration is that taxpayers participating in the amnesty program will not be subject to any criminal prosecution as it is expected that most cases would involve taxpayers who failed to file their income tax returns for past years. Also, taxpayers that have protested a tax assessment and are in the administrative or judicial appeals process can take advantage of the amnesty program but will be required to drop their appeals, although taxpayers currently being audited are excluded. The addition of a payment plan option under the 2016 amnesty program is a significant benefit for taxpayers who may not have had the funds on hand to participate in 2015.

For additional information, please see House Bill 2708.