United States: Rhode Island Enacts Tax Amnesty Program

On June 15, Rhode Island Governor Lincoln D. Chafee signed budget legislation, enacting a state tax amnesty program that is set to run during a 75' day period from September 2 through November 15, 2012.¹ For qualifying taxpayers, the Tax Administrator will generally waive penalties for any state tax liabilities² for taxable periods ending on or prior to December 31, 2011.³ In addition, the applicable interest rate will be reduced by 25 percent.⁴

Program Overview

Under the amnesty program, taxpayers will submit a written application to the Tax Administrator of the Rhode Island Division of Taxation and pay all taxes and interest due to Rhode Island for tax periods ending before 2012.⁵ The legislation directs the Tax Administrator to prepare tax amnesty forms that require the taxpayer to clearly specify the tax due and the taxable period for which amnesty is being sought.⁶ The Tax Administrator will not seek to collect any penalties or pursue civil or criminal prosecution for the taxable period for which amnesty has been granted.⁷

Participants will not only obtain a waiver of penalties, but will also receive the benefit of reduced interest.⁸ The interest will be computed at the normally applicable rate, reduced by 25 percent. For example, the interest rate of 18 percent for 2011 would be reduced to 13.5 percent.

Qualifying Taxpayers

The amnesty program will be available only to two specific groups of taxpayers who are delinquent on any state taxes. The first group consists of taxpayers "who have paid the tax and interest due upon filing the amnesty tax return."⁹ The second group of taxpayers that will qualify for the program are those "who have entered into an installment payment agreement for reasons of financial hardship and upon terms and conditions set by the tax administrator."¹⁰ If a taxpayer fails to make a payment under the agreement, then the agreement will cease to be effective and the remaining balance will be due immediately.¹¹ Taxpayers will not qualify for the program if they are either under criminal investigation, or a party to a proceeding for "fraud in relation to any state tax imposed by the law of the state and collected by the tax administrator."¹²

Comparison to Voluntary Disclosure Program

Taxpayers who have failed to report their taxes should carefully consider whether to participate in the new amnesty program or alternatively, the state's long standing voluntary disclosure program.¹³ There are some key differences between the two programs to take into consideration when determining which of the two is better suited for a particular taxpayer.

First, the voluntary disclosure application requires more information to be provided by the applicant than the application for the amnesty program. A higher degree of discretion is involved in deciding whether to accept a voluntary disclosure application. Such a denial is to a more significant extent dependent upon the facts and circumstances of the particular applicant, including requirements that a voluntary disclosure applicant submit both a general description of his or her activities in Rhode Island, and an explanation as to the reason why filings and payments were not previously made to the state. The amnesty program, on the other hand, does not require a description of activities or an explanation for the taxpayer's delinquency.

Second, the voluntary disclosure program cannot be used by taxpayers who have been contacted by the Division for delinquencies or tax liabilities, whereas in some instances, the amnesty program is available to such taxpayers. For example, amnesty will be granted to taxpayers who have undergone an audit, but have not been billed for the audit. The voluntary disclosure program, unlike the amnesty program, is also unavailable to taxpayers who are already registered for the particular tax type that is being disclosed.

In addition, unlike the amnesty program which waives all penalties, the voluntary disclosure program only waives certain penalties for certain tax types. Specifically, the voluntary disclosure program waives the late filing and late payment penalties for corporate income taxes, withholding and personal income taxes, and the negligence penalty for sales and use taxes, withholding and personal income taxes.

The amnesty program also offers greater benefits with respect to the interest and the risk of prosecution against the delinquent taxpayer. With respect to interest, the voluntary disclosure program does not reduce the applicable interest amount while the amnesty program reduces it by 25 percent. With respect to the risk of prosecution against the delinquent taxpayer, both programs ensure that the Division will not pursue criminal prosecution against the taxpayer, but only the amnesty program also ensures that the Division will not pursue a further examination of the taxpayer for the tax periods covered under amnesty.

However, despite the amnesty program's more favorable waiver of penalties and reduction of interest features, the voluntary disclosure program limits the period of liability to the current year plus the three previous years (three year look back period) and waives the liability associated with any years preceding that period. Meanwhile, the amnesty program requires that the taxpayer disclose and pay the tax due for all previous years during which the taxpayer was delinquent. Therefore, for taxpayers that have liabilities going further back than the prior three years, it may be more beneficial to take advantage of the voluntary disclosure program due to the limited look back period.

Commentary

The Division is expected to issue informal guidance, and/or to promulgate rules, addressing the implementation and detailed procedures of the amnesty program.¹⁴ To take advantage of the upcoming amnesty program, taxpayers must await and follow the Division's guidance.

Unlike some other state amnesty programs, Rhode Island's amnesty legislation does not impose any penalties for a taxpayer's failure to participate in the program. Therefore, delinquent taxpayers, who do not apply for amnesty and are assessed a delinquency notice after the close of the amnesty period, are not subject to any additional penalties. Moreover, after the close of the amnesty period, delinquent taxpayers can still avail themselves of the voluntary disclosure program if they meet the relevant requirements. Following the lead of other states, such as Ohio, by enacting the amnesty program, Rhode Island seeks the short term benefit of increased revenue. However, there will be increased administrative costs as well as forgone revenue (waived penalties and reduced interest) that may negatively impact the state's budget in the long run. Because of these costs, taxpayers should evaluate the application of the program to their circumstances, and should not necessarily expect that the program will be extended or repeated.

Footnotes

1 Ch. 241 (H.B. 7323), Laws 2012, enacting R.I. GEN. LAWS § 44'6.4'1 et seq., effective July 1, 2012.

2 Amnesty applies to taxpayers "subject to any tax imposed by any law of the state of Rhode Island and payable to the state of Rhode Island and collected by the tax administrator." R.I. GEN. LAWS § 44'6.4'2(2). Thus, the amnesty program covers liabilities under the corporate income tax, personal income tax, sales and use tax, unemployment insurance tax, etc.

3 R.I. GEN. LAWS § 44'6.4'3(b). Taxable periods also include periods for which a bill or notice of deficiency determination has been sent as well as periods for which an audit has been completed but not yet billed. See R.I. GEN. LAWS § 44'6.4'3(c).

4 R.I. GEN. LAWS § 44'6.4'4.

5 R.I. GEN. LAWS § 44'6.4'3(b).

6 R.I. GEN. LAWS § 44'6.4'3(a).

7 R.I. GEN. LAWS § 44'6.4'3(b).

8 R.I. GEN. LAWS § 44'6.4'4.

9 R.I. GEN. LAWS § 44'6.4'3(b).

10 Id.

11 Id.

12 R.I. GEN. LAWS § 44'6.4'3(d).

13 For information on the Rhode Island Voluntary Disclosure Program, see http://www.tax.ri.gov/misc/voluntary_disclosure.php.

14 The amnesty legislation explicitly authorizes the Department to "promulgate such rules and regulations as are necessary to implement" the program. R.I. GEN. LAWS § 44'6.4'9.

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