The City of Philadelphia has enacted a tax amnesty program that will run for a 45-day period likely to begin in May.* However, taxpayers do not need to wait until May to get the benefits offered under the official Philadelphia amnesty program. In fact, many taxpayers will be better served by participating in the City's voluntary disclosure program or participating in an unofficial pre-amnesty program that has already begun.
The City's "Official" Amnesty Program
The following summarizes the City's official amnesty program:
- Timing: May through June 2010 (likely overlapping with Pennsylvania's amnesty program, which will run from April 26, 2010, through June 18, 2010).
- Coverage: The amnesty applies to taxes that were due on or after February 1, 1986, and on or before June 30, 2009. Assuming that the School District of Philadelphia chooses to participate, virtually all delinquent taxes owed to the City and the School District will be covered, notably including the City's real estate and business privilege taxes.
- Penalty and Interest Waiver: Under the amnesty, all penalties and fines will be waived, and any interest will be reduced by half. (Although the penalty and interest waiver is similar to that offered under other recent amnesties, it is especially beneficial when considered in the context of Philadelphia's harsh penalty and interest provisions. Philadelphia's nonpayment penalty is 30 percent for the first year and 15 percent for each subsequent year. In addition, Philadelphia's annual interest rate on underpayments is a notoriously high 12 percent.)
- Limitations: The amnesty will not be available to any taxpayer who has received notice that he or she is the subject of a criminal investigation, or who has been named as a defendant in a criminal complaint, for an alleged violation of any law imposing a tax eligible for amnesty. Additionally, any taxpayer who participated in a prior amnesty program in Philadelphia will not be eligible. Further, the official amnesty does not provide for any penalty or interest waiver for taxes owed before February 1, 1986.
- Procedure: A participating taxpayer will be required to file an application with the Philadelphia Department of Revenue (the "Department"), pay all tax and interest due during the amnesty period, and sign a closing agreement with the Department containing numerous provisions set forth in the amnesty bill, including that the taxpayer must waive its appeal rights for any tax and interest liability paid. That is, a participating taxpayer will be precluded from later claiming a refund of the tax and interest paid under the amnesty program.
The City's Voluntary Disclosure Program May Offer a Better Deal for Some Taxpayers
It is important to note that the official amnesty program does not provide for a limited look-back period to eliminate prior years' tax liability. This means that a taxpayer that has not been filing Philadelphia returns must carefully consider whether to approach Philadelphia under amnesty, or instead choose to come forward anonymously under a negotiated voluntary disclosure agreement ("VDA"). Philadelphia's current standard VDA terms generally limit the look-back period to three years. Under a VDA, Philadelphia will generally agree to waive all civil or criminal penalties relating to the tax returns and tax periods subject to the agreement. The full amount of interest is typically assessed on the tax due for the tax periods covered by the agreement. As a result, while the interest relief under a VDA may not be as generous as it would be under the amnesty, the limited look-back period under a VDA may produce a better result for some taxpayers.
Unofficial Pre-Amnesty Provides an Incentive for Taxpayers to Act Now
While the City's official amnesty program will not begin until May, the City has authorized an unofficial pre-amnesty program. Under this unofficial program, eligible taxpayers will enjoy the same penalty and interest waiver provided under the official amnesty program. However, the unofficial program will involve less administrative burdens and more flexibility for taxpayers who would otherwise be eligible for the official amnesty program. The pre-amnesty program begins immediately and runs through April 30, 2010.
A taxpayer should carefully consider the pros and cons of both the official Philadelphia amnesty program and the unofficial pre-amnesty. For a non-filer, the benefit of the limited look-back offered under the City's voluntary disclosure program is likely to outweigh the up-side of the penalty and partial interest waiver offered under both amnesty programs.
For those taxpayers who have been filing returns, or who have been discovered by Philadelphia, both amnesty programs present a good opportunity to get current on any unpaid Philadelphia tax liabilities with significant relief from Philadelphia's harsh penalty and interest provisions. However, taxpayers do not need to wait until May to obtain this relief. Taxpayers will find that participation in the unofficial pre-amnesty program, which is already underway, involves much less administrative time and expense than the official amnesty program.