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December 10, 2004 - Phil Hodgen

California tax amnesty

The State of California needs money. Lots of it. This means our friendly friends at the Franchise Tax Board and Board of Equalization are going to be even more hard-nosed than usual in their collection efforts.

As a jump-start to this New Era in Friendly Government, we have a tax amnesty (that’s a link to the Franchise Tax Board’s website with information on the amnesty). In a nutshell, it wipes out penalties, but leaves the tax and interest for you to pay. Better yet, if you were at risk of criminal tax evasion charges, you won’t be anymore.

WHO QUALIFIES?

Anyone. Except you can’t be under criminal tax investigation, or have a civil tax court proceeding initiated against you.

WHAT TAXES?

This applies to income tax, franchise tax (for corporations), sales, and use taxes.

The amnesty doesn’t apply to taxes from tax shelters that you could have reported under the Franchise Tax Board’s Voluntary Compliance Initiative, which expired on April 15, 2004. The amnesty doesn’t apply to taxes that could have been reported under the IRS Offshore Voluntary Compliance Initiative, which expired in early 2003. Plain English: if you could have applied under these programs but didn’t, you can’t use the tax amnesty now.

WHAT TAX YEARS?

This applies to taxes for 2002 and before. If you have tax liabilities for 2003 or 2004, forget it. The amnesty doesn’t apply to those years.

WHAT DO YOU HAVE TO DO?

File the application in the 2 month window starting February 1, 2005. The last postmark date acceptable is April 1, 2005.

File all necessary tax returns and pay all taxes and interest due by May 31, 2005. If you can’t pay everything off by May 31, 2005, you may be able to get an installment plan that extends the payment deadline to June 30, 2006.

WHAT IF YOU ALREADY PAID THE PENALTIES FOR THE YEARS COVERED?

Too bad. You can’t participate in the amnesty and get a refund. Uncle Arnold has your money and he’s not giving it back.

WHAT IF YOU ARE ELIGIBLE FOR THE AMNESTY BUT YOU DON’T USE IT?

Can you say “Carrot and Stick” with a smile? The carrot is the amnesty.

The stick? Bigger penalties. The amnesty law increases penalties and creates new penalties. E.g., the Franchise Tax Board usually tags you for a 20% penalty if you have a “substantial understatement of income tax” on your tax returns. The new penalty? It’s now at 40% for tax years 2002 and earlier (the years covered by the amnesty).

ENCOURAGING RIGOROUS HONESTY

If you participate in the amnesty program but don’t divulge all unreported or underreported income, the FTB can tag you with fees, penalties, and criminal charges.

ENCOURAGING FUTURE COMPLIANCE

Amnesties clean up the past, and get people back into the tax-paying system. To encourage you to stay clean, the amnesty rules say that if you don’t pay your 2005 and 2006 income taxes fully, you will lose all of the previous benefits you got from the amnesty program. In a word, “Do Over!” (That’s two words).

TAKE THE OFFER!

As a general rule, amnesties like this one are the government’s best offer. If you go back and wrangle with them, you are exceedingly unlikely to get a better deal later.

If you have tax troubles with the Franchise Tax Board, do yourself a favor and take this opportunity.

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