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To Tell or Not to Tell: Will Kentucky’s new tax amnesty program benefit you or your business?
Posted in Tax and Finance

During its recently concluded 2012 Regular Session, the Kentucky General Assembly passed House Bill 499, which created a tax amnesty program. The amnesty program will provide a window of opportunity for certain taxpayers to voluntarily come forward to the Kentucky Department of Revenue to resolve certain known Kentucky tax liabilities for taxable periods ending or transactions occurring after Dec. 1, 2001, and prior to Oct. 1, 2011. While not yet confirmed, it is widely believed that the department will conduct the amnesty program sometime around September or October of 2012, and it will run for at least 60 days.

Benefits and drawbacks

One benefit of this new amnesty program is that a taxpayer may be eligible for a waiver of all penalties (both civil and criminal) and fees assessed for the taxable years or periods for which the tax amnesty is requested and granted. Another benefit of the program is a waiver of half of the interest accrued on the tax liability involved in the amnesty.

But the amnesty program contains more than just carrots. There are sticks, too. The amnesty program permits the department to impose additional interest, penalties and “cost-of-collection fees” (of up to 50 percent) if a taxpayer does not disclose an amnesty-eligible tax liability during the amnesty period.

Eligibility

The amnesty program is available to any taxpayer owing taxes, penalties, fees or interest for all Kentucky taxes except for certain taxes on real property and personal property, including motor vehicles and motor boats, and penalties related to certain cigarette tax-related violations. A taxpayer is still eligible for the amnesty program despite being under audit by the department, or being the recipient of an assessment, notice or demand for payment by the department. The amnesty program, however, does not apply to a taxpayer under criminal investigation or involved in criminal litigation with the Kentucky or federal government that is pending on the day of the taxpayer’s application for tax amnesty.

To be a taxpayer eligible for the amnesty program, the taxpayer must file an application with the department, file all returns and/or amended returns for tax periods which have not been filed or were underreported, and pay all tax owed in full. Given these payment requirements in order to apply for the amnesty program, each taxpayer must determine whether it has the present ability to make such payments. And even though the amnesty program does offer an option for an installment agreement, all tax must still be paid rather quickly – by May 31, 2013.

Additional considerations

In addition to determining whether one has the ability to make the payments necessary to apply for the amnesty program, the taxpayer must evaluate a number of other considerations before deciding whether to apply for the amnesty program. For example, if a taxpayer potentially owes some, rather than all, of the tax assessed, the taxpayer should consider entering into the amnesty program if the tax assessed can be resolved or negotiated down to the amount that is believed to be due and for which the taxpayer is able to make full payment. When a taxpayer, however, believes that tax is not owed and has substantial authority for this position, the amnesty program may not be an ideal option. And again, if a taxpayer is not able to make full payment for all tax believed to be owed, the amnesty program is generally not a viable option.

Potential disqualifications

It is important to note that that even if a taxpayer ultimately applies for and is accepted into the amnesty program, the program packs quite a bite if the taxpayer does not meet all of its requirements. More specifically, the department has the authority to invalidate any amnesty received by a taxpayer for failure to:

  1. timely file any tax return or pay any tax and interest due for any period between Dec. 31, 2001, and Oct. 1, 2011; or,
  2. timely file any tax return or pay any tax after Oct. 1, 2011 for up to three years after the date amnesty was granted to the taxpayer.

If a taxpayer fails to do any of the above, then any civil penalties, fees and interest that were waived through the amnesty program will be reinstated, subject to immediate collection by the department, and not subject to protest.

The department is planning to release administrative and/or public guidance regarding the implementation of the amnesty program in the near future. Bingham Greenebaum Doll LLP will continue to monitor the development of any additional details related to the program. If you have questions about how this program will affect you, please contact one of the attorneys in our Tax and Finance Practice Group.

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