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Before You Apply for Tax Amnesty

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Taxpayers of all types, both individuals and business, sometimes forget to file a tax return, or sometimes they overstate expenses and deductions in order to get a bigger refund. Tax Amnesty and Voluntary Disclosure programs are designed to help state governments by allowing these taxpayers to come forward and pay their taxes with reduced penalties. Most tax amnesty programs require payment of tax and any penalties in full. Taxpayers will also need to file returns with the IRS. Unlike state agencies, the IRS does not reduce penalties and interest during an amnesty program.

The Goal of a Tax Relief Program

Both Tax Amnesty and Voluntary Disclosure programs encourage people to file and to pay their back taxes. In return, the state tax agency may reduce penalties, or even waive the penalties entirely. In order to qualify for the waiver of penalties, the taxpayer must pay the entire amount of taxes due, plus any interest, by the program's deadline. Also, the taxpayer may have to sign a settlement agreement in which the taxpayer agrees to file and to pay all taxes on time in the future. Be aware that you will likely need to file original or amended tax returns with the IRS reflecting the taxes reported to the state.

Amnesty Programs

A Tax Amnesty program provides comprehensive tax relief. Typically an amnesty has a very short window of opportunity. The goal is to collect as much tax revenue as possible in a very short period of time, usually two or three months. Generally, the state will waive penalties if you file returns and pay your taxes during the amnesty period. Typically, the state will impose larger than normal penalties if you fail to take action during the amnesty period. Through an amnesty program you can file late returns, revise returns to report additional income or improper deductions, and pay off an outstanding balance in full.

Voluntary Disclosure Programs

A Voluntary Disclosure program tends to be more open-ended. Voluntary Disclosure programs encourage people to file and to pay their back taxes without the state having to contact the person first. If you have received a letter from the state asking you to file a return, or proposing that you owe more taxes, then you do not qualify for a Voluntary Disclosure program. Several states have on-going voluntary disclosure programs. This means there is no firm deadline.

Voluntary Compliance Programs

A hybrid of the two programs is called a Voluntary Compliance Initiative. Typically, the voluntary compliance initiative will run during a short period of time, and targets taxpayers in very specific situations. However, the tax agency does not know who these taxpayers are. For example, the IRS operated a Voluntary Compliance Initiative to uncover taxpayers who utilized certain types of tax shelters to hide income.
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