Connecticut Tax Amnesty: Less Than Two Months Remain to Avoid 'Shamnesty' Penalty
Taxpayers should consider whether participation in Connecticut's Tax Amnesty Program may be prudent. The program offers taxpayers a two-month window of opportunity to concede and pay back taxes on all issues they suspect Connecticut may challenge, in order to avoid penalties and reduce interest.
The Connecticut Department of Revenue Services (DRS) is administering the program, which began earlier this week and runs through November 15, 2013. Amnesty applies to virtually all tax types and is open to both businesses and individuals, even those that are currently under audit or involved in civil litigation with DRS. Taxpayers must give up their right to contest disputed issues through the normal administrative appeals process, conceding the merits of tax disputes and paying all back taxes. In exchange, interest on past due liabilities will be generously reduced by 75 percent (as long as all payments are made by November 15), penalties will be waived, and risk of criminal prosecution will be eliminated. In contrast to some other state amnesty programs, however, non-filers are provided no limited "look-back period" under the DRS program.
By participating in the program, taxpayers agree to waive all administrative and judicial appeal rights. Taxpayers that are under criminal investigation, have entered into a closing agreement with DRS, have had an offer in compromise accepted by DRS, or are subject to a managed audit agreement are not eligible. A steep penalty applies to taxpayers that do not file an amnesty application and are later found on audit to owe tax. The 25 percent unwaivable amnesty penalty applies on top of interest and other applicable penalties.
We refer to this type of program as "shamnesty" because the 25 percent penalty was enacted after all of the disputed taxpayer activities and tax positions occurred, and because the threat of the 25 percent penalty makes it economically too risky for some taxpayers to do anything other than concede disputed issues they believe they can win. Put bluntly, amnesty penalties of the type employed in this Connecticut Tax Amnesty Program strong-arm taxpayers into giving up their due process rights to pursue resolution of their tax disputes through the administrative process. Consequently, although some case law suggests the contrary, we believe "shamnesty" penalties are unconstitutional and may be challenged successfully.
Even so, it may behoove some taxpayers to participate in Connecticut's amnesty program in order to avoid unnecessary liabilities and litigation. The Crowell & Moring Tax Team has deep experience handling Connecticut tax matters and we currently represent taxpayers around the country in various amnesty programs. For help determining whether your company ought to participate in this program or how to close an ongoing audit so that you may participate, contact one of the authors of this alert.
IRS Circular 230 Disclosure: To comply with certain U.S. Treasury regulations, we inform you that, unless expressly stated otherwise, any U.S. federal tax advice contained in this communication, including attachments, was not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding any penalties that may be imposed on such taxpayer by the Internal Revenue Service. In addition, if any such tax advice is used or referred to by other parties in promoting, marketing, or recommending any partnership or other entity, investment plan, or arrangement, then (i) the advice should be construed as written in connection with the promotion or marketing by others of the transaction(s) or matter(s) addressed in this communication and (ii) the taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor. To the extent that a state taxing authority has adopted rules similar to the relevant provisions of Circular 230, use of any state tax advice contained herein is similarly limited.
For more information, please contact the professional(s) listed below, or your regular Crowell & Moring contact.