On July 1, Gov. Phil Murphy signed into law a tax amnesty measure that offers relief to many taxpayers in a variety of situations and will help bridge the revenue shortfall in the state budget. It requires the Director of the Division of Taxation to establish a period not exceeding 90 days in duration which shall end no later than Jan. 15, 2019. Anyone behind on taxes owed for the time period between Feb. 1, 2009, and Sept. 1, 2017, would be eligible to participate, as long as they are not under criminal investigation.
Similar to New Jersey’s prior six amnesty initiatives, the new law provides for complete forgiveness of all penalties and one-half of the balance of accrued interest that is due as of Nov. 1, 2018, in return for non-refundable payment of the tax and remaining one-half of accrued interest due, and a waiver of the right to appeal any liability paid under amnesty.
Additionally, a significant aspect of this amnesty law is that it not only applies to unassessed amounts, but also to amounts currently under audit or being contested with the Division of Taxation, either at its Conference Branch or in the New Jersey Tax Court.
The new law applies to all state taxes administered by the Division of Taxation (e.g., gross income, sales and use tax, corporate business tax, motor fuels and so on) but does not apply to unemployment-type taxes administered by the Department of Labor.
Specifically, it applies to state tax liabilities for tax returns due on and after Feb. 1, 2009, and prior to Sept. 1, 2017. Consequently, for example, it can be used to obtain relief for a taxpayer’s 2009 through 2016 gross income tax, corporate business tax returns, and for all sales and use tax quarters ending Dec. 31, 2009, through June 30, 2017.
The Division of Taxation has not yet announced starting date for the amnesty period, which must end by Jan. 15, 2019. Thus, the taxpayers will have to make an amnesty payment within the time period established by the Director to take advantage of amnesty relief.
In that regard, in order to be able to comply with the amnesty period tax payment deadline, it would be advisable in many situations for representatives to initiate contact with the Division of Taxation to obtain an agreed-to tax amount figure in time to mail a payment by the end of the amnesty period.
Exceptions and Pitfalls
An important exception to the tax amnesty bill is that it does not apply to any taxpayer who, at the time of the amnesty payment, is under criminal investigation or charge for any state tax matter, as certified by a county prosecutor or the attorney general to the Director, Division of Taxation.
However, this exception is expected to be narrowly interpreted by the Division of Taxation, which under the prior amnesty program took the position that this exception to amnesty relief did not apply to a taxpayer who was currently being investigated by its Office of Criminal Investigation, so long as the case had not been referred for prosecution to the Attorney General’s Office.
Consequently, it appears that this amnesty measure, as well, could be used to preclude a criminal tax prosecution in such a situation.
With respect to potential federal-tax collateral consequences, the Division of Taxation has represented in the past that it has no intention of affirmatively providing any information obtained through the amnesty program to the Internal Revenue Service.
In that connection, however, tax representatives must recognize that if the IRS makes a request for amnesty-related data pursuant to the general information-sharing agreement it has with the Division of Taxation, the division will comply.
Therefore, the risk that an amnesty disclosure will result in a federal tax inquiry should be carefully considered in deciding whether, and how, to make an amnesty filing.
Furthermore, while the good news of the amnesty legislation is the complete forgiveness of penalties and hefty costs of collection fees and one-half of accrued interest, the bad news is that if a taxpayer is eligible for amnesty and fails to take advantage of it, an additional unwaivable 5 percent penalty will be automatically added to the already imposed statutory penalties and interest on any tax liability that would have been subject to the amnesty program.
Wide Range of Uses
Next, it is important for tax representatives to recognize that, practically speaking, the amnesty program is not limited to being used to preclude a criminal tax prosecution in a failure-to-file-tax-return situation. It can also be used to resolve Nexus issues, and for example, to shut down ongoing tax audits, since the Division of Taxation is instructing its auditors to re-evaluate going forward with audits when amnesty payments are made.
In addition, the amnesty program can be useful in removing Certificates of Debt—the legal equivalent to money judgments—which have already been docketed by the Division of Taxation for unpaid penalty and interest, as well as saving clients’ money in situations where they have already entered into deferred payment agreements with the Division or its third-party collection representatives to liquidate outstanding tax liability.
Moreover, in some situations it could be used to settle tax disputes in the Tax Court or those pending at the administrative/appeal Conference Branch stage.
Finally, in areas like sales and use tax, it can be used for some tax quarters and not others, thereby reducing overall exposure in tax contests, and especially useful in nexus situations after the U.S. Supreme Court’s recent rejection of Quill’s physical presence test in the South Dakota v. Wayfair case.
Although an amnesty payment is nonrefundable, the Division of Taxation retains the right to conduct an audit of any amnesty payment situation, and any additional tax determined by the Division in such a situation would be subject to interest and penalties and, of course, subject to appeal by the taxpayer.
Because of the Division’s expressed policy of not targeting amnesty program situations and processing information obtained through the program through the normal system, however, a taxpayer’s chances of being audited will not be increased by an amnesty program filing.
In view of this amnesty program legislation’s usefulness, and the potential savings it offers, clients with outstanding or potential tax liabilities, as well as those currently contesting an assessment with the Division of Taxation, should be contacted to determine whether amnesty arrangements can be structured.
Robert J. Alter is a partner with McElroy, Deutsch, Mulvaney & Carpenter in Morristown. He serves on the New Jersey Supreme Court Committee on the Tax Court, and is also the NJSBA’s Section of Taxation’s Practitioner Liaison with the IRS. He previously served as Chair of the Section of Taxation of the NJSBA.