SALT Blawg – State and Local Tax
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During April, both the Commonwealth of Pennsylvania and the City of Philadelphia implemented separate tax amnesty programs with the hope of generating revenue for the cash-strapped state and local coffers. Both programs were slated to run for 54 days, with Pennsylvania’s from April 26, 2010 through June 18, 2010, and Philadelphia’s from May 3, 2010 through June 25, 2010. The Pennsylvania amnesty program was modeled after the highly successful New Jersey 2009 amnesty program, which generated $725 million within six weeks. At the close of the Pennsylvania and Philadelphia 54 day amnesty periods, the programs are expected to generate $25 to $30 million for the City, and $190 million for the Commonwealth.
The Pennsylvania amnesty program waives all penalties and one-half of all interest for those who pay their delinquent state taxes and file the necessary documentation. Pennsylvania's amnesty distinguishes between "known" and "unknown" liabilities. Unknown liabilities are unfiled returns or underreported tax amounts about which the Department of Revenue (“Department”) is unaware. Apart from the waiver of penalties and reduced interest, Pennsylvania’s program offers an added incentive for taxpayers with previously unknown liabilities. Those individuals or businesses with unknown liabilities who qualify for amnesty and who agree to future compliance will not be held responsible for taxes due before July 2004. Conversely, for those individuals with known liabilities to receive the amnesty benefit of penalty forgiveness and reduced interest, they must still satisfy any obligations which predate July 2004.
Pennsylvania’s amnesty program applies to anyone with a tax delinquency from June 30, 1999, through June 30, 2009, unless the individual is under investigation for an alleged violation of tax law, was a defendant (prior to the amnesty period) in a criminal complaint alleging a violation of tax law that was administered by the Department, or is a current defendant in a pending criminal action for an alleged violation of any tax law covered by the amnesty program. The types of taxes covered by the program include corporate net income, employer withholding, gross premiums, hotel occupancy, realty transfer and gross receipts, Pennsylvania sales use taxes and for Philadelphia County and Allegheny County sales and use and hotel occupancy taxes. The state program does not include other city or county taxes, penalties or interest.
Of the $2.1 billion of delinquent Pennsylvania taxes, approximately 62% is owed by corporations and 33% by individual taxpayers, including many small businesses. Approximately 80% of all known tax delinquents live within Pennsylvania (more than one million tax delinquents), while approximately 20% of all known tax delinquents reside out-of-state. Of those residing in Pennsylvania, Philadelphia accounts for the largest number of tax delinquents. Thus, it is not surprising that the City instituted its own amnesty program to coincide with the Commonwealth’s program. Like the Pennsylvania program, the Philadelphia amnesty program waives all penalties and one-half of all interest for those who pay their delinquent City taxes and file the necessary documentation with the City.
Eligibility for the City amnesty includes anyone with a tax delinquency dating from February 1, 1986 through June 30, 2009, unless the individual is under criminal investigation, a defendant in a criminal complaint related to City taxes, or has participated in prior Philadelphia amnesty programs. The program covers all City taxes, except for the sales and use and hotel occupancy taxes, which are included as part of the state amnesty program.
While participation is not mandatory, both amnesty programs contain harsh repercussions for not participating. For Pennsylvania amnesty program purposes, those nonparticipating delinquent taxpayers will be assessed a five percent penalty upon the unpaid tax liability, penalties and interest. Additionally, Pennsylvania’s program requires continued compliance. If a taxpayer granted amnesty later becomes delinquent within two years after the end of the program, the Department can re-impose and collect all waived penalties and interest. Pursuant to Philadelphia’s amnesty program, nonparticipating delinquent taxpayers will be subjected to aggressive tax collection efforts. Tax debts will be referred to third party collection agencies for further action, fines of up to $5,000 may be sought, and other legal action may be taken, including suits for collection which could lead to the seizure and sale of property.
Applications for both Pennsylvania and Philadelphia’s amnesty programs are available online. To receive amnesty for either program, an individual must file a completed application, file complete or amended returns for all applicable periods, and pay the entire delinquent tax assessment by the last day of the particular program’s amnesty period. Unlike the Pennsylvania amnesty, the Philadelphia amnesty does permit a partial payment if financial hardship prevents full payment. If financial hardship prevents full payment, for Philadelphia amnesty purposes, payment must be the total amount due for a specific tax year or a specific tax type. Notably, no extensions will be granted. As both deadlines to file for amnesty are quickly approaching, those hoping to take advantage of the amnesty programs must act fast.