Amnesty – Background
Virginia has established a tax amnesty program called "Get Square VA" that will run for a 60-day period from October 7, 2009 through December 5, 2009.1 The amnesty will apply to all liabilities and delinquent returns for taxes administered by the Virginia Department of Taxation, including the corporate income tax, the motor vehicle fuel sales tax, the retail sales tax, and employer income tax withholding. The amnesty is not available to any taxpayer who, at the time of payment, is under criminal investigation or charged with filing a fraudulent return or failing to file a return with the intent to evade tax. The amnesty also does not apply to corporate, fiduciary or personal income tax liabilities, and returns for tax years after 2007. Full details of the taxes and periods eligible for the amnesty can be found in the Virginia Department of Taxation's Tax Amnesty Guidelines.2
Under the amnesty, all penalties will be waived and any interest will be reduced by half. To participate in the amnesty, the tax, plus one-half of the interest due on eligible taxes, must be paid in full between October 7, 2009 and December 5, 2009.3 Importantly, a taxpayer that participates in the amnesty must waive its appeal rights with respect to any tax liability paid. As a consequence, a taxpayer that participates in the amnesty by paying a tax liability will be precluded from later claiming a refund of the tax paid. Taxpayers will be subject to an additional 20 percent penalty on any amnesty-eligible liabilities not paid on or before December 5, 2009, unless those liabilities are already under appeal.
How Do I Participate?
The Get Square VA program presents a simple solution for a Virginia taxpayer that has been filing returns, but has unpaid tax assessments for amnesty eligible taxes and periods. A taxpayer in that situation can participate in the amnesty program simply by paying all of the assessed tax and half of any assessed interest by December 5, 2009. If a taxpayer has already appealed an assessment and wishes to participate in the Get Square VA program, again, all it must do is pay all of the assessed tax and half of any assessed interest by December 5, 2009. By choosing to pay the assessed tax, the taxpayer will effectively withdraw/terminate the appeal or protest and relinquish any future right to appeal.
Risk of Cumulative Amnesty Penalties – Should I Consider a VDA Instead?
The Get Square VA program creates a potential trap for the unwary. A taxpayer that chooses not to participate in the amnesty will be subject to a 20 percent penalty for failure to participate. This penalty will be in addition to all other penalties. This exposes non-filers to the risk of being subject to cumulative Virginia amnesty penalties on certain liabilities. In 2003, Virginia conducted a nearly identical Tax Amnesty program, with the same 20 percent non-participation penalty. As a consequence, a non-filer with a tax liability that was eligible for both amnesty programs could be subject to both 20 percent penalties, resulting in total penalties that could reach as high as 70 percent (20 percent 2003 Amnesty Penalty, 20 percent 2009 Amnesty Penalty, 30 percent maximum underpayment of tax penalty).
Further, in this scenario, after a non-filer has disclosed its identity, there is no limit as to how far back the Department of Taxation can go in assessing tax, penalty and interest. (Unlike some state tax amnesty programs, Get Square VA does not provide a limited look-back to eliminate prior years' liability.) The Department of Taxation has the authority to assess tax against a non-filer that had nexus with Virginia at any time, because if no return was filed, the statute of limitations would never have begun to run. As a consequence, although a non-filer that chooses to participate in the Get Square VA program would be able to benefit from the abatement of penalties and one-half of the interest with respect to any eligible taxes paid as part of the program, the non-filer would still face the risk that the Department of Taxation could assess tax, penalty and interest for prior periods. Thus, a non-filer that participates in the Get Square VA program could face a disastrous tax result if it fails to properly evaluate and pay all of its existing tax liabilities under the program.
The result would be different, if a non-filer instead chose to come forward under the terms of the Department of Taxation's standard negotiated voluntary disclosure agreement ("VDA"). The Department's current standard VDA terms generally limit the look-back period to three years. In addition, under a VDA, the Department generally will agree to waive the late filing, late payment, civil or criminal penalties relating to the tax returns and periods subject to the agreement. (The Department is also willing to waive the non-participation amnesty penalty for the 2003 amnesty under certain circumstances.) Interest is then assessed for the tax returns and periods included in the agreement. As a result, while the interest relief under a VDA may not be as generous as it would be under the Get Square VA program, the limited look-back under a VDA could produce a better result for some taxpayers.
Another option that taxpayers should consider in connection with the Get Square VA program is the opportunity for "partial amnesty." If a taxpayer has a current assessment (whether or not that assessment is already under appeal), we expect that the Virginia Department of Taxation will allow the taxpayer to take advantage of the amnesty for specific audit adjustments. Thus, taxpayers should be able to take advantage of the amnesty for audit adjustments that they are willing to concede, while preserving their appeal rights for audit adjustments that they are not willing to concede.4
A taxpayer with a current assessment should review and evaluate all of the items that have been assessed and perform a risk-weighting exercise. There are likely some assessed liabilities that, if protested, have a high probability of being eliminated through the appeals process, or significantly reduced through a favorable negotiated settlement after the amnesty period has expired. Therefore, a taxpayer should consider proceeding with its appeal of these stronger issues while choosing to take advantage of the amnesty on issues with a lower probability of being successfully eliminated or diminished through appeal and negotiation. Under this "hybrid" method, a Virginia filer with a current assessment may be able to obtain a result that is potentially better than amnesty or appeal alone. It is important when performing this risk-weighting, to keep in mind that all items not reconciled and paid under the terms of the amnesty program by December 5, 2009, and not dismissed on appeal, will be subject to full penalties and interest, including at least, an additional 20 percent amnesty penalty on the outstanding tax amount due.
A taxpayer should carefully consider the pros and cons of the amnesty offered under the Get Square VA program. For a non-filer, it is likely that the up-side of the penalty and interest waiver offered under the program will be outweighed by the program's lack of a limited look-back period. Coming forward under a VDA may continue to be a better option for non-filers. For current filers, a careful analysis and scrutiny of assessment issues and the opportunity for partial amnesty is likely the most effective way of maximizing relief under the amnesty.
Of course, these issues are not necessarily specific to Virginia's amnesty program. Similar issues may arise under other amnesty programs, like the programs that are currently ongoing in Delaware and Maryland.