Pennsylvania and Philadelphia have instituted tax amnesty programs. Under both programs, eligible taxpayers can satisfy certain known and unknown tax liabilities by paying 100 percent of the tax, 50 percent of the interest, and none of the penalty due.
The Pennsylvania amnesty period runs from April 26, 2010, to June 18, 2010. Under the Pennsylvania amnesty program (but not the Philadelphia amnesty program), taxpayers that participate in the amnesty program with respect to tax liabilities that the Pennsylvania Department of Revenue ("PA DOR") does not know about must pay the tax and interest for periods going back to July 1, 2004, and will not have any liability for taxes for periods before July 1, 2004. To obtain amnesty benefits, taxpayers that have been contacted by the PA DOR with respect to (i) a tax liability for which no return was filed and no payment was made, or (ii) a tax liability that was underreported on a filed return must pay taxes plus one-half of the interest due for all periods for which tax was underpaid.
The Pennsylvania amnesty program applies to all state taxes that were delinquent on June 30, 2009, including corporate net income tax, capital stock franchise tax, personal income tax, and realty transfer tax ("PA Eligible Taxes"). The Pennsylvania program does not apply to any local taxes except local sales and use taxes and hotel occupancy taxes.
A taxpayer that has an active administrative or judicial appeal may participate in the Pennsylvania amnesty program provided that the taxpayer withdraws the appeal that relates to taxes for periods that are accepted in the amnesty program. Also, a taxpayer that has entered into a deferred payment plan may participate in the amnesty program; relief is available for only 50 percent of the interest and 100 percent of the penalty that remain unpaid under the deferred payment plan. However, to participate in the amnesty program, a taxpayer who is a party to a deferred payment must forfeit the ability to pay any of the delinquency after June 18, 2010, and pay the entire delinquency before June 18, 2010.
The only taxpayers who are not eligible to participate in the Pennsylvania amnesty program are (i) taxpayers currently under criminal investigation for an alleged violation of any tax law imposing a PA Eligible Tax, (ii) taxpayers who before April 26, 2010, were named as defendants in criminal complaints alleging violations of a PA Eligible Tax, or (iii) taxpayers who are defendants in pending criminal actions for alleged violations of any Pennsylvania law imposing a PA Eligible Tax.
How to Participate
To participate in the Pennsylvania amnesty program, a taxpayer must:
- file all required tax returns for periods after June 30, 2009, and through the amnesty period and pay the taxes in full;
- between April 26, 2010, and June 18, 2010, file an amnesty return online with respect to PA Eligible Taxes;
- between April 26, 2010, and June 18, 2010, pay all of the PA Eligible
- Taxes shown on the amnesty return plus one-half of the interest due;
- between April 26, 2010, and June 18, 2010, file returns disclosing the PA Eligible Taxes for all required periods for which the taxpayer failed to file a return; and
- between April 26, 2010, and June 18, 2010, file amended returns disclosing the PA Eligible Taxes for all required periods for which the taxpayer underreported a liability with respect to PA Eligible Taxes.
It is unclear whether the PA DOR will require taxpayers that have not been contacted by the PA DOR to file returns for periods before July 1, 2004.
The PA DOR may audit amnesty returns and assess additional tax but normal statute of limitations periods apply to its review. Additional taxes assessed with respect to amnesty returns are subject to normal rules relating to interest and penalties.
A taxpayer that participates in the amnesty program must waive any rights it has to appeal, protest, or pursue an administrative or judicial remedy in connection with any amnesty returns, including contesting any additional taxes assessed with respect to such returns. The taxpayer must further agree that it will not claim any refunds of amounts paid in connection with the amnesty program. Any refund of a PA Eligible Tax paid to a taxpayer who participates in the amnesty program within 180 days of the expiration of the amnesty period will not carry interest.
Continuing Compliance and Nonparticipation Penalty
A taxpayer that participates in the amnesty program will lose all amnesty benefits if before June 18, 2012, (i) for any semi-monthly, monthly, or quarterly filing (e.g., wage withholding or sales tax remittance) due after June 18, 2010, the taxpayer becomes delinquent for 3 consecutive periods unless the taxpayer has timely filed an administrative or judicial appeal, or (ii) for any annual filing due after June 18, 2010, the taxpayer becomes delinquent for more than 8 months unless the taxpayer has timely filed an administrative or judicial appeal. Also, any taxpayer that participates in this amnesty program is prohibited from participating in any future amnesty program.
Beginning after June 18, 2010, any taxpayer eligible for the amnesty program that does not participate will be subject to a 5 percent nonparticipation penalty that is applied to tax, interest, and penalty. The nonparticipation penalty does not apply to taxpayers that entered into deferred payment plans before April 26, 2010, taxpayers that have active appeals pending, or taxpayers in bankruptcy.
The Philadelphia amnesty period runs from May 3, 2010, to June 25, 2010. The Philadelphia Revenue Department (the "Department") will promulgate regulations establishing procedures and technical details for the Philadelphia amnesty program.
Like the Pennsylvania amnesty program, an eligible taxpayer who participates in the Philadelphia amnesty program must pay (i) 100 percent of the required taxes plus (ii) 50 percent of the interest due on such taxes in order to obtain the amnesty benefits. However, the Philadelphia amnesty program is far less attractive to taxpayers than the Pennsylvania amnesty program because it does not cut off liability for delinquent taxes for years before 2004 unless the taxpayer demonstrates to the satisfaction of the Department that the taxpayer does not have the financial ability to pay the taxes.
The Philadelphia amnesty program applies to all delinquent City taxes and, assuming the School Reform Commission passes an appropriate resolution, School District taxes, including business privilege tax, net profits tax, wage tax, school income tax, real estate tax, and realty transfer tax that were originally due or payable from February 1, 1986, through June 30, 2009. The amnesty program applies to non-filed returns and underpaid, unpaid, and under-reported taxes whether known or unknown to the Department.
A taxpayer that has entered into a payment agreement may participate in the amnesty program provided that all payments due under the agreement between July 1, 2009, and the start of the amnesty period are current and the payment agreement did not compromise the principal portion of the tax claimed in settlement of litigation.
A taxpayer is not eligible to participate in the Philadelphia amnesty program if (i) the taxpayer received a notice that it is the subject of a criminal investigation for an alleged violation of any law imposing a City tax that is eligible for amnesty, (ii) the taxpayer has been named as a defendant in a criminal complaint alleging a violation of any law imposing a City tax that is eligible for amnesty, or (iii) the taxpayer participated in any prior City amnesty program or was an officer or a company that participated in a prior City amnesty program. Additionally, any taxpayer against whom the City has secured a judgment for delinquent taxes before a date to be specified by the Department (which date will not be prior to December 31, 2008) is not eligible for the City amnesty program for the taxes that are the subject of the judgment.
How to Participate
To participate in the Philadelphia amnesty program, a taxpayer will be required to file an application in a form required by the Department. Upon acceptance in the Philadelphia amnesty program, the taxpayer must enter into a binding agreement with the Department that:
- sets forth the total amount of tax delinquency and the payment due;
- sets forth the taxpayer's obligation to pay 100 percent of all delinquent taxes plus 50 percent of the accrued interest;
- provides that the taxpayer must make all of the required payments during the amnesty period;
- provides that the taxpayer will not seek, and the Tax Review Board will not grant, any further relief from interest and penalties with respect to the subject taxes; provides that any refunds due the taxpayer and paid by the City within 180 days of the expiration of the amnesty period will not carry interest; includes a certification by the taxpayer (i) disclosing all delinquent City taxes (either underpaid or with respect to an unfiled return), (ii) confirming that the taxpayer has filed or contemporaneously with the agreement filed complete and accurate returns with respect to all subject City taxes, (iii) that the taxpayer either is making payments pursuant to the amnesty program or does not have the financial ability to make such payments, and (iv) that the taxpayer neither participated in a prior City amnesty program nor was an officer of a taxpayer that participated in a previous City amnesty program; and includes any other information that the City deems necessary.
As is true of the Pennsylvania amnesty program, the Philadelphia amnesty program is intended to cause delinquent taxpayers to clear up delinquencies and become compliant in the future. The Philadelphia ordinance provides that a taxpayer who participates in the amnesty program will lose the amnesty benefits and will owe the abated interest and penalties if, within 3 years after the end of the amnesty period, (i) the taxpayer becomes 6 or more months delinquent in paying a tax or filing a tax return for any tax eligible for the City amnesty, (ii) the Department notifies the taxpayer that the taxpayer substantially understated the liability for taxes in its application for the City amnesty program, or (iii) the taxpayer violated any provision of its City amnesty agreement. The 3-year and 6-month periods referred to above are tolled during the pendency of a timely filed, good faith, administrative or judicial appeal relating to the subject taxes.
VOLUNTARY DISCLOSURE PROGRAMS
Pennsylvania has a formal voluntary disclosure program that allows taxpayers to come forward and report underreported taxes and taxes due with respect to unfiled returns. Generally, for non-corporate taxes, the taxpayer has to pay only three back years plus the current year and for corporate taxes, the taxpayer has to pay 5 back years plus the current year. The PA DOR informally has advised practitioners that it does not expect its voluntary disclosure program to be as generous to taxpayers after June 18, 2010.
Philadelphia currently has an informal voluntary disclosure program that permits taxpayers who voluntarily step forward before the amnesty period begins to pay delinquent taxes for a limited number of years. Because Philadelphia's formal amnesty program requires delinquent taxes to be paid back to 1986, it is not clear how many taxpayers will step forward during the amnesty period and it is equally unclear whether Philadelphia will continue to have an informal voluntary disclosure program after the end of the amnesty period. Consequently, taxpayers with Philadelphia tax liabilities should consider seeking a voluntary disclosure agreement before the amnesty period officially begins.