United States: Massachusetts Enacts Tax Amnesty Program, Further Delays FAS 109 Deduction, And Increases Earned Income Credit

On July 17, Massachusetts Governor Charlie Baker signed the state's budget bill for the upcoming 2016 fiscal year.1 The legislation includes a 60-day tax amnesty program that the Commissioner of Revenue must conduct by June 30, 2016.2 The budget passed by the legislature included a provision that increased the earned income tax credit (EITC), but this provision was contingent on the repeal of the so-called FAS 1093 deduction.4 Governor Baker returned this provision with recommendations for amendment.5 On August 5, Governor Baker approved legislation that increases the EITC and delays implementation of the FAS 109 deduction for a fifth time.6 In addition to postponing the FAS 109 deduction for five more years, the legislation extends the period during which the deduction may be claimed from seven years to 30 years.

Tax Amnesty Program

The legislation authorizes the Commissioner of Revenue to establish a tax amnesty program which will allow taxpayers to settle outstanding tax liabilities without penalty.7 The Commissioner may offer tax amnesty to taxpayers who have failed to file required returns due for any tax period beginning before January 1, 2014.8 Specifically, penalties will be waived without any need for the taxpayer to demonstrate reasonable cause or the absence of willful neglect for the failure of the taxpayer to: (i) timely file any proper return for any tax type and for any tax period; (ii) timely pay any tax liability; or (iii) pay the proper amount of any required estimated payment toward a tax liability.9 The waiver of a taxpayer's liability applies if the taxpayer, prior to the expiration of the amnesty period, files proper returns and pays the full amount of tax shown on the taxpayer's returns or upon the Commissioner's assessments with all interest due.10

Scope and Timing of Program

The scope of the tax amnesty program, including the tax types and periods covered, will be determined by the Commissioner.11 The legislation requires the tax amnesty program to include a limited look-back period for unfiled returns not to exceed three years.12 The tax amnesty program must be conducted for a period of 60 days and conclude by June 30, 2016.13 The Commissioner is directed to determine the exact period during which the amnesty will occur. If a taxpayer fails to pay the full liability by June 30, 2016, the Commissioner must retain any payments and apply them against the outstanding liability.

Limitations

The tax amnesty program will not apply to a tax liability for a period beginning on or after January 1, 2014.14 The waiver does not apply to penalties for underpayment15 or failure to disclose an inconsistent position16 with regard to returns filed under the tax amnesty program.17 The Commissioner's authority to waive penalties is limited and does not apply to any taxpayer subject to a tax-related criminal investigation or prosecution or to any taxpayer who delivers or discloses specified fraudulent information.18 Also, tax amnesty does not apply to penalties that the Commissioner would not have the sole authority to waive including, but not limited to, fuel taxes administered under the International Fuel Tax Agreement (IFTA) or under the local option portions of taxes for the benefit of cities, towns or state governmental authorities.19 The Commissioner may not waive any interest or any amount treated as interest.20 Finally, taxpayers who utilize the tax amnesty program may not participate in a future tax amnesty program for the next consecutive 10 years, beginning in calendar year 2015.21

Any taxpayer who delivers or discloses a false or fraudulent application, document, return or other statement to the Department of Revenue in connection with a tax amnesty minimis or other exceptions that the Commissioner may consider appropriate.23 This penalty is subject to the applicable penalty statutes and must be added to the tax due.

FAS 10924 Deduction Delay

Under the new law, the first year of the period in which to claim the FAS 109 deduction is the combined group's taxable year that begins in 2021 (previously, 2016).25 Also, the deduction will be taken over a 30-year (previously, seven-year) period.26 Originally included in the legislation which imposed mandatory combined reporting for tax years beginning on or after January 1, 2009, the legislature enacted a special deduction for certain publicly held companies.27 Massachusetts corporate excise taxpayers that experienced an increase in a combined group's net deferred tax liability as a result of the enactment of combined reporting are entitled to a FAS 109 deduction in order to alleviate the potential financial statement impact resulting from the move from separate to combined reporting.28 Originally scheduled to provide benefit over a seven-year period for taxable years beginning in 2012,29 the delay imposed by this legislation is the fifth such delay to the application of this provision.30

Increased Earned Income Tax Credit

For tax years beginning on or after January 1, 2016, the EITC that may be taken against personal income tax is increased from 15 percent to 23 percent of the federal EITC.31

Commentary

This is the third tax amnesty program that Massachusetts recently has enacted. In fact, Massachusetts had two tax amnesty programs during the fiscal year ending on June 30, 2015. The fiscal year 2015 budget legislation included a tax amnesty program that the Department conducted from September 1 to October 31, 2014.32 This first fiscal year 2015 tax amnesty program applied to most tax types except for the state's corporate excise tax. On February 13, 2015, Massachusetts enacted legislation directing the Commissioner to establish a 60-day tax amnesty program during the fiscal year ending June 30, 2015.33 This second fiscal year 2015 tax amnesty program, which the Department conducted from March 16 to May 15, 2015, included corporate excise tax. The Department limited application will not be eligible for amnesty and will be subject to the greater of: (i) the applicable statutory penalties;22 or (ii) a penalty not to exceed $10,000 which must be calculated and assessed according to the Commissioner's rules and may be subject to de participation in both of these programs to taxpayers that received a "tax amnesty notice" from the Department for unpaid liabilities that had already been assessed.34

The Commissioner has broad power in implementing the tax amnesty program and determining its scope. Unlike the prior tax amnesty programs, this new program appears to include taxpayers who have not filed returns. For many taxpayers, the amnesty program may not provide any more benefit than a voluntary disclosure agreement (VDA).  However, taxpayers that filed in the past but stopped filing returns would be ineligible for a VDA, but might be eligible for tax amnesty. Taxpayers will need to watch for guidance from the Department concerning the implementation of the new tax amnesty program.

The budget legislation as passed by the legislature repealed the FAS 109 deduction, but a subsequent compromise between the governor and the legislature retained, but further delayed, the FAS 109 deduction. While the eventual retention of the deduction is a positive development for corporate taxpayers, the delay of the FAS 109 deduction for a fifth time may leave many wondering whether the deduction will ever take effect. The concession for this deduction paved the way for the enactment of mandatory combined reporting in Massachusetts during 2008, as many taxpayers had expressed concern about the financial statement impact of combined reporting to their provisions for income taxes.

The increase in the EITC is intended to provide tax relief for over 400,000 working individuals and families in Massachusetts.35 This increase of the state EITC from 15 percent to 23 percent of the federal EITC increases the maximum state credit from $951 to $1,459.

Footnotes

 1 Ch. 46 (H.B. 3650), Laws 2015.

2 H.B. 3650, § 151.

3 Although the provisions of FAS 109 were moved into the Accounting Standards Codification as ASC 740, the legislation and related Department guidance refer to the deduction using this superseded term.

4 H.B. 3650, § 67.

5 FY 16 Budget Letter, Office of Massachusetts Governor Charlie Baker, July 17, 2015. On this same day, it was announced that the governor had reached an agreement with legislative leaders to retain the EITC increase and postpone implementation of the FAS 109 deduction. Press Release, Office of Massachusetts Governor Charlie Baker, July 17, 2015.

6 Ch. 52 (H.B. 3671), Laws 2015.

7 H.B. 3650, § 151.

8 H.B. 3650, § 151(c)(1).

9 H.B. 3650, § 151(a).

10 Id.

11 H.B. 3650, § 151(a).

12 Id.

13 H.B. 3650, § 151(b).

14 H.B. 3650, § 151(a).

15 MASS. GEN. LAWS ch. 62C, § 35A.

16 MASS. GEN. LAWS ch. 62C, § 35D.

17 Id.

18 H.B. 3650, § 151(c)(3).

19 H.B. 3650, § 151(d).

20 H.B. 3650, § 151(c)(2).

21 H.B. 3650, § 151(f).

22 MASS. GEN. LAWS ch. 62C.

23 H.B. 3650, § 151(c)(4).

24 Although FAS 109 is no longer an operative accounting principle, the legislation and related Department guidance continue to refer to the deduction using this language.

25 H.B. 3671, § 3.

26 H.B. 3671, § 2.

27 Ch. 173 (H.B. 4904), Laws 2008, § 95.

28 Id.

29 Ch. 173 (H.B. 4904), Laws 2008, § 95(2).

30 Previous delays were enacted by H.B. 3581, Laws 2011, H.B. 4200, Laws 2012, H.B. 3535, Laws 2013, and H.B. 4001, Laws 2014.

31 MASS. GEN. LAWS ch. 62, § 6(h).

32 Ch. 165 (H.B. 4001), Laws 2014; Technical Information Release 14-8, Massachusetts Department of Revenue, Aug. 25, 2014. For a discussion of the first fiscal year 2015 tax amnesty program, see GT SALT Alert: Massachusetts Enacts Tax Amnesty Program, Further Delays FAS 109 Deduction and Codifies Administrative Updates.

33 Ch. 2 (H.B. 52), Laws 2015. The second tax amnesty program was included in legislation enacted to address the fiscal year 2015 budget shortfall and is discussed in GT SALT Alert: Massachusetts Enacts Tax Amnesty Program Required to Include Corporate Excise Tax.

34 Technical Information Release 15-2, Massachusetts Department of Revenue, March 16, 2015; Technical Information Release 14-8, Massachusetts Department of Revenue, Aug. 25, 2014.

35 Press Release, Office of Massachusetts Governor Charlie Baker, Aug. 5, 2015.

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