[JPRT 105-2-98]
[From the U.S. Government Publishing Office]
[JOINT COMMITTEE PRINT]
TAX AMNESTY
__________
Prepared by the Staff
of the
JOINT COMMITTEE ON TAXATION
[GRAPHIC] [TIFF OMITTED] TONGRESS.#13
JANUARY 30, 1998
__________
U.S. GOVERNMENT PRINING OFFICE
46-030 WASHINGTON : 1998 JCS-2-98
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For sale by the U.S. Government Printing Office
Superintendent of Documents, Mail Stop: SSOP, Washington, DC 20402-9328
JOINT COMMITTEE ON TAXATION
105th Congress, 2nd Session
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SENATE HOUSE
WILLIAM V. ROTH, Jr., Delaware, BILL ARCHER, Texas,
Chairman Vice Chairman
JOHN H. CHAFEE, Rhode Island PHILIP M. CRANE, Illinois
CHARLES GRASSLEY, Iowa WILLIAM M. THOMAS, California
DANIEL PATRICK MOYNIHAN, New York CHARLES B. RANGEL, New York
MAX BAUCUS, Montana FORTNEY PETE STARK, California
Kenneth J. Kies, Chief of Staff
Mary M. Schmitt, Deputy Chief of Staff (Law)
Bernard A. Schmitt, Deputy Chief of Staff (Revenue Analysis)
C O N T E N T S
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Page
Introduction..................................................... 1
I. Summary of Findings...............................................2
II. Overview and Background...........................................4
A. Overview of Tax Amnesty............................... 4
B. Historical Background on the Federal Government and
Tax Amnesty.......................................... 5
C. Elements of Present Law That Are Similar to Tax
Amnesty.............................................. 6
III.Economic Perspectives on Tax Amnesties............................9
A. Economic Theory of Tax Evasion and Tax Amnesties...... 9
B. Evidence on Efficacy of Tax Amnesties................. 15
IV. State and Foreign Experience With Tax Amnesty....................18
A. State Experience With Tax Amnesty..................... 18
B. Foreign Experience With Tax Amnesty................... 31
V. Design Parameters of a Possible Federal Tax Amnesty..............35
VI. Conclusions Concerning Possible Use of a Federal Tax Amnesty.....38
Appendix. Estimated Budget Effects of Possible Federal Tax
Amnesty Proposals.............................................. 39
INTRODUCTION
This pamphlet,\1\ prepared by the staff of the Joint
Committee on Taxation, discusses tax amnesty. It was prepared
in response to a request dated April 15, 1997, from Congressman
Bill Archer, Chairman of the Joint Committee on Taxation during
the First Session of the 105th Congress.
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\1\ This pamphlet may be cited as follows: Joint Committee on
Taxation, Tax Amnesty (JCS-2-98), January 30, 1998.
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Part I of the pamphlet provides a summary of findings; Part
II provides an overview and background; Part III provides
economic perspectives on tax amnesties; Part IV discusses State
and foreign experience with tax amnesty; Part V discusses
design parameters of a possible Federal tax amnesty; and Part
VI presents conclusions concerning possible use of a Federal
tax amnesty. The Appendix presents the estimated budget effects
of possible Federal tax amnesty proposals.
I. SUMMARY OF FINDINGS
The staff of the Joint Committee on Taxation
estimates that a Federal tax amnesty would result in a
net revenue loss to the Federal Government, as
presented in the Appendix (the revenue table). This net
revenue loss occurs primarily because a Federal tax
amnesty is estimated to have the long-run effect of
reducing overall taxpayer compliance with Federal tax
laws. However, a form of amnesty could be designed to
contain the amount of the revenue loss to relatively
modest levels.
Present law contains certain provisions that
are similar to elements of tax amnesty programs. These
provisions include the installment agreement provisions
and offers in compromise. In contrast to a tax amnesty
program, however, the present-law provisions are
tailored to the situations of specific taxpayers,
rather than providing broad relief from past taxes for
noncompliant taxpayers. The Internal Revenue Service
has substantially increased the use of these provisions
in recent years.
A taxpayer's decision whether to evade taxes
depends in part on the resources and efforts that the
Government expends on the enforcement of existing laws.
While an amnesty may be one way to obtain taxes that
have not been paid and to bring new taxpayers into the
tax system, increasing resources devoted to enforcement
and increasing the penalties for failure to comply with
the tax laws are other ways to achieve the same
objectives.
Economists generally believe that taxpayers
choose a level of compliance with the tax laws by
weighing the tradeoff between compliance and evasion
and choosing the level of compliance that will lead to
the highest expected level of net benefits. Among the
factors that will influence a taxpayer's decision
between compliance and evasion are the probability of
the evasion being detected through audit, the back
taxes and civil and criminal penalties that will be
imposed if evasion is detected, the taxpayer's ethics
or degree of honesty, damage to the reputation of the
taxpayer if the evasion is detected, the taxpayer's
level of ``risk aversion,'' and the perceived benefits
derived from a successful evasion of taxes.
In the standard economic model of tax
evasion, the creation of an amnesty program alone would
have no effect on taxpayer behavior because the
taxpayer has chosen a level of compliance based on a
rational weighing of the benefits and costs of evasion.
If these costs and benefits are not changed, the
taxpayer's behavior will not change. If, however, the
penalties for evasion are increased or the likelihood
of detection through audit increases, then the rational
taxpayer may choose to take advantage of the amnesty
since the expected costs of previous evasion have been
increased.
State experience with tax amnesty will not
necessarily parallel the experience that could be
expected at the Federal level. First, many sources of
State tax revenues do not have Federal counterparts.
Second, pre-amnesty State tax enforcement efforts have
generally been less rigorous than efforts at the
Federal level. Thus, State amnesties that are coupled
with increased enforcement efforts might be expected to
be relatively more successful than a Federal amnesty
because past evasion is likely to have been more common
with respect to State taxes and taxpayers will view the
increased enforcement efforts of the States as
increasing the costs of State tax evasion. Further,
many State amnesties included accounts receivable in
their amnesties, which could be viewed as revenues that
the State was likely to collect in any event.
The experience of foreign governments with
amnesty programs cannot generally be compared to the
experience that might be expected in the United States.
In most foreign countries, a larger portion of the
national economy escapes the tax system than in the
United States. Most foreign countries have larger
underground economies. In addition, many countries
exempt transactions occurring outside the country from
taxation, creating an incentive to move untaxed profits
outside the country. Few foreign countries have the
level of tax enforcement that the United States has at
the Federal level, especially with regard to the use of
computer technology and requirements of withholding and
information reporting.
II. OVERVIEW AND BACKGROUND
A. Overview of Tax Amnesty
Types of amnesty
There are theoretically several types of tax amnesty
programs. The narrowest form of amnesty would require taxpayers
to pay all taxes, interest, and civil penalties, but would
forgive criminal penalties. The goal of this form of amnesty
(as well as the variants of it described below) is both to
collect taxes owing from prior years and to place on the tax
rolls those who had previously escaped taxation. A broader form
of amnesty would require taxpayers to pay all taxes and
interest due, but would forgive all civil and criminal
penalties.
Another form of amnesty would require taxpayers to pay all
(or a portion of) past taxes, but would forgive all (or a
portion of) the interest \2\ due on those taxes. In addition,
all civil and criminal penalties would be forgiven.
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\2\ This form of amnesty highlights two differing views of the role
of interest in the tax system. Some view charging interest on past due
taxes as a penalty. Others view interest provisions as reflecting the
time value of money. Accordingly, absent the requirement to pay
interest, a taxpayer would prefer to delay paying taxes for as long as
possible so as to retain the use of the money for as long as possible.
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The broadest form of amnesty would forgive all past taxes,
interest, and civil and criminal penalties. The goal of this
type of amnesty is not to collect taxes owing from prior years,
but to place on the tax rolls for the future those who
previously had escaped taxation. This type of amnesty has not
been attempted in the United States.
Most of the amnesty programs that have been operated by the
States forgive both civil and criminal penalties; these
programs have differed as to whether all or a portion of the
interest due was forgiven. All have required payment of at
least a portion of the past taxes.
Eligibility for amnesty
Amnesty programs can differ as to whether only nonfilers
may participate, or whether individuals and entities that filed
returns, but also either underreported income or overstated
deductions or credits, may participate.
Amnesty programs can also differ as to the extent to which
known tax evaders can participate in the amnesty. Individuals
or entities under active criminal investigation or prosecution
are generally not permitted by the States to participate in
amnesty. Amnesty programs differ as to whether individuals or
entities under audit or administrative investigation are
permitted to participate. Amnesty programs also differ as to
whether persons in accounts receivable status can participate
in the amnesty. Persons in accounts receivable status are those
for whom the audit and administrative processes have been
completed and it has been determined that the taxpayer owes
additional money, but the taxpayer has not yet paid the
additional amounts determined to be owing.
B. Historical Background on the Federal Government and Tax Amnesty
The Federal Government has never legislatively instituted a
program that provided amnesty from interest and civil and
criminal penalties for taxpayers who both voluntarily disclosed
that they had underpaid their taxes and then paid those
amounts.\3\
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\3\ The Current Tax Payment Act of 1943 initiated the still-
utilized system of income tax withholding by employers from employees'
wages. Prior to this Act, taxpayers made lump sum payments of taxes.
During the first year of wage withholding, taxpayers would be saving
amounts to pay the previous year's taxes as well as becoming subject to
wage withholding. To provide for first-year transition to the wage
withholding system, the 1943 Act also provided for the cancellation of
75 percent of the lower of either 1942 or 1943 tax liability. The
remaining 25 percent was to be paid in two installments, on March 15,
1944, and March 15, 1945. See Tax Notes, September 1, 1997, pp. 1241-
1244. This was not, however, a tax amnesty, but was instead a rate
reduction applicable to all taxpayers. A distinguishing characteristic
of an amnesty is that it treats similarly situated taxpayers
differently, depending on whether they had previously voluntarily
complied with the tax laws and fully paid their taxes, or not.
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The Internal Revenue Service (IRS) had an administrative
policy, officially discontinued in 1952, that in effect
provided amnesty from criminal prosecution (but not from civil
penalties or interest) for taxpayers who voluntarily disclosed
that they had underpaid their taxes. This program officially
ended (though it may have continued informally) for a variety
of reasons: charges of abuse, a desire to prevent use by
organized crime figures, uneven administration of the tax law,
and failure to pay the taxes once amnesty had been granted. In
1961, the IRS issued a news release suggesting to taxpayers
that, since the IRS was then installing new data processing
equipment, it might be a propitious time for taxpayers to
disclose voluntarily any underpayments of tax. The news release
also noted that the likelihood of criminal prosecution was not
high in instances of voluntary disclosure, although the news
release offered no assurances that amnesty from criminal
prosecution would be granted. A current policy statement of the
IRS includes voluntary disclosure of tax underpayments as one
criterion to be considered in determining whether a case
warrants criminal prosecution.\4\
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\4\ IRM (31)330, ``Criminal Tax Policies and Procedures: Voluntary
Disclosure.''
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In his January 25, 1984, State of the Union address,
President Ronald Reagan instructed the Treasury Department to
issue a Report on Fundamental Tax Simplification and Reform.
The Treasury Department submitted its three-volume report to
President Reagan on November 27, 1984 (``1984 Treasury
Report''). The 1984 Treasury Report stated that ``the Treasury
Department rejects'' amnesty.\5\ Treasury rejected any form of
tax amnesty, whether it is restricted only to amnesty from
criminal penalties or whether amnesty also extends to civil
penalties, interest, and past taxes due. The 1984 Treasury
Report rejected amnesty because of its negative effect on
taxpayer morale: ``To include tax, civil penalties, and
interest in an amnesty would further undermine taxpayer morale
by sending a clear signal to the American public concerning
non-compliance and tax fraud: `Don't bother to pay now. We may
forget you owe anything. Even if you have to pay tax, we won't
charge interest.' '' \6\ The 1984 Treasury Report also stated
that amnesty ``can only reinforce the growing impression that
the tax system is unfair and encourage taxpayer noncompliance.
After reviewing State and foreign experience with amnesties,
the Treasury Department rejects their use by the Federal
Government.'' \7\
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\5\ 1984 Treasury Report, Vol. 1, p. 91.
\6\ Ibid.
\7\ Ibid.
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On July 25, 1990, Michael J. Graetz, then Deputy Assistant
Secretary (Tax Policy) of the Department of the Treasury,\8\
testified on tax amnesty before the Subcommittee on Commerce,
Consumer and Monetary Affairs of the House Committee on
Government Operations. His testimony described the State
experiences, ``outlined important differences in the State and
Federal systems that make it difficult to translate the States'
experiences to the Federal level, . . . and reviewed the
revenue implications of a Federal amnesty program and explained
why we [Treasury] believe substantial revenue increases would
be unlikely.'' \9\ He concluded his testimony by indicating
``our [Treasury's] lack of support for a general Federal tax
amnesty. . . .'' \10\ At that same hearing, Fred T. Goldberg,
Jr., then Commissioner of Internal Revenue,\11\ stated ``[o]n
balance, we believe that a general Federal tax amnesty would be
ill-advised and counter-productive.'' \12\
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\8\ Now Justus S. Hotchkiss Professor of Law, Yale University.
\9\ Page 2.
\10\ Page 8.
\11\ Now a partner at the law firm of Skadden, Arps, Slate, Meagher
& Flom.
\12\ Page 11.
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C. Elements of Present Law That Are Similar to Tax Amnesty
Although there has never been a formal Federal tax amnesty,
there are several aspects of the administration of present law
by the IRS that bear similarities to elements of tax amnesty.
These are described below.
Installment agreements
Section 6159 of the Code authorizes the IRS to enter into
written agreements with any taxpayer under which the taxpayer
is allowed to pay taxes owed, as well as interest and
penalties, in installment payments if the IRS determines that
doing so will facilitate collection of the amounts owed. An
installment agreement does not reduce the amount of taxes,
interest, or penalties owed; it does, however, provide for a
longer period during which payments may be made during which
other IRS enforcement actions (such a levies or seizures) are
held in abeyance. Many taxpayers can request an installment
agreement by filing Form 9465. This form is relatively simple
and does not require the submission of detailed financial
statements. The IRS in most instances readily approves these
requests if the amounts involved are not large (in general,
below $10,000) and if the taxpayer has filed tax returns on
time in the past. Some taxpayers are required to submit
background information to the IRS substantiating their
application. If the request for an installment agreement is
approved by the IRS, a user fee of $43 is charged.\13\ This
user fee is in addition to the tax, interest, and penalties
that are owed.
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\13\ This user fee is imposed pursuant to 31 U.S.C. 9701. See T.D.
8589 (February 14, 1995).
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The IRS enters into a very significant number of
installment agreements each year. For each of the last three
fiscal years, the IRS has entered into on average 2.6 million
new installment agreements. At any given point during the last
three fiscal years, on average 4.4 million installment
agreements were in effect (many are in effect for longer than
one year). The IRS collected $4.7 billion through installment
agreements in FY 94.
Installment agreements may in part resemble tax amnesties
in the effects that they have on certain taxpayers. Taxpayers
who are unable to pay their full tax liability on a timely
basis can obtain (1) partial relief from the IRS via a
lengthier period over which payment is permitted and (2)
forbearance by the IRS from using more disruptive collection
measures.
Offers in compromise
Section 7122 of the Code permits the IRS to compromise a
taxpayer's tax liability. In general, this occurs when a
taxpayer submits an offer in compromise to the IRS. An offer in
compromise is a proposal to settle unpaid tax accounts for less
than the full amount of the balance due. They may be submitted
for all types of taxes, as well as interest and penalties,
arising under the Internal Revenue Code.
Taxpayers submit an offer in compromise on Form 656. There
are two bases on which an offer can be made. The first is doubt
as to the liability for the amount owed. The second is doubt as
to the taxpayer's ability fully to pay the amount owed. An
application can be made on either or both of these grounds.
Taxpayers are required to submit background information to the
IRS substantiating their application. If they are applying on
the basis of doubt as to the taxpayer's ability fully to pay
the amount owed, the taxpayer must complete a financial
disclosure form enumerating assets and liabilities.
As part of an offer in compromise made on the basis of
doubt as to ability fully to pay, taxpayers must agree to
comply with all provisions of the Internal Revenue Code
relating to filing returns and paying taxes for five years from
the date IRS accepts the offer. Failure to observe this
requirement permits the IRS to begin immediate collection
actions for the original amount of the liability.
Starting in 1992, the IRS has both liberalized the terms
under which it will accept an offer in compromise and increased
the publicity of the availability of offers in compromise. The
following table shows the numbers of offers in compromise
received by the IRS.
Table 1.--Offers In Compromise Received By IRS, 1983-1996
------------------------------------------------------------------------
Offers
received
Fiscal year (rounded to
nearest
thousand)
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1983.................................................... 4,000
1984.................................................... 5,000
1985.................................................... 5,000
1986.................................................... 6,000
1987.................................................... 7,000
1988.................................................... 7,000
1989.................................................... 8,000
1990.................................................... 9,000
1991.................................................... 9,000
1992.................................................... 18,000
1993.................................................... 50,000
1994.................................................... 50,000
1995.................................................... 55,000
1996.................................................... 57,000
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Source: IRS Annual Reports.
The percentage of offers in compromise accepted has also
risen significantly. In fiscal year (FY) 1991, 25 percent of
offers in compromise that were submitted to the IRS were
accepted. In FY 1992 the percentage accepted rose to 45
percent.\14\ For FY 1994, 1995, and 1996, the percentage
accepted averaged 49 percent. In FY 1996, the IRS accepted $287
million through the offers in compromise program, and
eliminated a total of $2.2 billion of taxpayers' liability for
aggregated taxes, interest, and penalties. Accordingly, in FY
1996, the IRS accepted on average 12 cents on the dollar
through the offers in compromise program.
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\14\ 1992 IRS Annual Report, p. 8.
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The IRS is currently in the process of issuing a new
publication that will highlight the availability of offers in
compromise and installment agreements.
Offers in compromise strongly resemble tax amnesties in
that taxpayers can obtain forgiveness of a portion of the
taxes, interest, and penalties that they owe. The principal
difference is that offers in compromise are generally tailored
to the financial circumstances of each taxpayer; \15\ their
assets as well as their present and future earnings are
considered by the IRS in determining whether to accept a
taxpayer's offer. For example, an offer may be rejected if the
taxpayer does not agree to liquidate certain assets to pay the
amount owed. Tax amnesties generally are not tailored to the
circumstances of individual taxpayers, but instead offer
identical terms to everyone.
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\15\ It should be noted that installment agreements (described
above), unlike offers-in-compromise, are generally available,
regardless of financial circumstances, to any taxpayer owing less than
$10,000.
III. ECONOMIC PERSPECTIVES ON TAX AMNESTIES
A. Economic Theory of Tax Evasion and Tax Amnesties
A complete discussion of tax amnesties must also address
the related issue of tax law enforcement. Tax noncompliance is
a necessary precursor to an amnesty, and the level of
noncompliance depends in part on the resources and efforts that
the government expends on the enforcement of existing laws.
Thus, the current and past status of the government's
enforcement efforts will in part determine the amount of back
taxes that potentially can be raised in an amnesty.
Furthermore, while an amnesty may be one way to obtain those
back taxes and to bring new taxpayers into the tax system,
increasing the resources devoted to enforcement of the tax laws
is another way to achieve the same objectives. For reasons
described below, both of these measures may be pursued
simultaneously. In fact, it generally has been the practice of
the States that have offered amnesty programs to also increase
enforcement efforts. Because of this, it is important, while
interpreting the results of State amnesty programs, to bear in
mind that the State programs generally have been amnesty/
enforcement programs, and not simply stand-alone amnesty
programs.
The following is a discussion of the economic
considerations that in part determine taxpayers' decisions with
regard to tax evasion or compliance, and whether to take part
in any amnesty program that is offered. The government's
decisions with regard to the setting of enforcement parameters
and the potential offering of amnesty are also examined, as is
the academic literature that has examined the evidence on
amnesties.
Taxpayer's decision
Economists typically view the taxpayer's decision to comply
fully or not to comply fully with the tax laws as a rational
choice. In this view, the taxpayer chooses a level of
compliance by weighing the tradeoff between compliance and
evasion and choosing the level of compliance that will lead to
the highest expected level of net benefits. The taxpayer's
choice will depend on the various factors that affect the
benefits and costs of tax evasion relative to complying with
the tax laws. Among the factors that will influence the
decision are the probability of the evasion being detected
through audit, the back taxes and civil and criminal penalties
that will be imposed if evasion is detected, the taxpayer's
ethics or degree of honesty (alternatively, the expected level
of guilt that would arise from evasion of taxes), damage to the
reputation of the taxpayer if the evasion is detected, the
taxpayer's level of ``risk aversion,'' and the perceived
benefits derived from a successful evasion of taxes.\16\
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\16\ In theory, the net benefits should include consideration of
the impact of one's tax evasion on the provision of public goods from
which the taxpayer benefits. In a large community of taxpayers, the
marginal personal benefit directly derived solely from one's own taxes
is likely to be insignificant due to the diffuse benefits of the public
good. Thus, in large communities the potential tax evader can dismiss
the effect that his evasion may have on his benefits from the provision
of public goods and services.
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On the cost side, the audit probabilities and the penalties
imposed are the principal determinants of the expected costs of
tax evasion. Anything that would raise these expected costs,
such as increased penalties for evasion, both civil and
criminal, or an increased likelihood of evasion being detected
due to increased audit rates, would decrease the amount of
evasion undertaken. Another cost factor is the guilt that one
might feel after evading taxes. While guilt, or more broadly
one's feelings about the morality of paying one's taxes, is not
often modeled in the economic analysis of tax evasion, it
clearly is a factor that influences human behavior. If one
expects to feel guilty from tax evasion, less tax evasion will
be engaged in.
The benefit from tax evasion is primarily the addition to
after-tax income that results from such cheating, but also may
include the avoidance of the costs of complying with the tax
laws. It should be noted that the monetary benefit of tax
evasion in the form of under-reporting income or overstating
deductions will depend on the level of tax rates. For example,
for each dollar of income that is not reported, the taxpayer
will benefit by the amount of the taxes that would have been
paid on that dollar of income, which is equal to the taxpayer's
marginal tax rate multiplied by that dollar. Thus, if other
factors are held constant, tax evasion would be expected to
increase the higher the tax rate that is imposed on the tax
base. While higher tax rates may provide an incentive for
greater cheating, this incentive could well be offset by higher
audit probabilities for persons in higher marginal tax
brackets. If audit rates are correlated with higher tax rates,
then it will not necessarily be the case that persons in higher
tax brackets will have greater propensity to cheat. Again, one
must weigh both the benefit side and the cost side of cheating
before rationally determining a compliance level that maximizes
one's expected net benefits.
Further, there is the taxpayer's ``degree of risk
aversion,'' or the extent to which the taxpayer likes or
dislikes risk taking. Taxpayers will vary in their attitudes
towards risk taking, and thus some will choose to cheat, and
others to comply, even though they might agree as to the
potential costs and potential benefits of cheating. The less
risk-averse taxpayer is more likely to risk the downside of
cheating--getting caught--in order to reap the benefits of
cheating--the addition to after-tax income. Essentially, the
taxpayer's attitude towards risk is the final link in weighing
the cost and benefits to determine whether to evade taxes.
While the government can affect the benefits and costs of
cheating, it basically has no control over the attitudes toward
risk of a given taxpayer.
In the standard economic model of tax evasion, the
declaration of an amnesty standing alone would have no effect
on the behavior of taxpayers. That is, no one would come
forward to take advantage of the amnesty. The reason for this
is that in the standard model, the taxpayer has made a choice
based on a rational weighing of the benefits and costs of
evasion, and because these benefits and costs have not changed,
the taxpayer's chosen level of compliance remains the same. If,
however, the penalties for evasion also are increased, or the
relevant authorities increase the likelihood of detection
through audits, then the rational taxpayer will reevaluate past
choices and may choose to take advantage of the amnesty since
the expected costs of previous evasion have been increased. It
is for this reason that State amnesties have been offered in
conjunction with increased enforcement efforts.
Clearly, this theoretical model of tax evasion does not
represent the behavior of all taxpayers, and the real world
certainly would produce some taxpayers who would take advantage
of an amnesty even without changes in the relevant enforcement
parameters. For example, a tax evader might experience more
guilt from tax evasion than expected, or might find that living
with the prospect of the tax evasion being detected is more
unappealing than expected, and wish to reverse the earlier
decision to evade taxes.\17\ However, a possible constraint on
a taxpayer's willingness to take part in an amnesty is that to
do so labels oneself a tax evader and may thus increase the
probability that the IRS would audit that taxpayer's returns in
future years. Even if one intended to comply with the tax laws
in the future, one presumably would prefer to avoid an audit
whenever possible. A possible additional constraint on tax
evaders considering an application for amnesty is the potential
damage to the taxpayer's reputation should such information
become public.
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\17\ See Arun Malik and Robert Schwab ``The Economics of Tax
Amnesties,'' Journal of Public Economics 46, 1991, pp. 29-49, for a
model of taxpayer behavior and amnesties that considers these issues
and allows for adaptive behavior on the part of the taxpayer.
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An important complication in the economics of any amnesty
proposal is the degree to which the amnesty will affect future
tax compliance. Economists typically have noted that the
granting of amnesty will forever change taxpayers' perceptions
of the ``rules of the game'' between the taxing authority and
the taxpayer. Once an amnesty is granted, taxpayers may
perceive that the likelihood of future amnesties has increased,
and thus an incentive may be created to evade current taxes in
anticipation of the future amnesty.\18\ It should also be noted
that serious discussions of amnesty proposals could have the
same effect. While an actual amnesty is likely to increase
one's expectation of a future amnesty, mere discussions of
amnesties in advance of an amnesty will also likely raise
expectations that an amnesty will occur, thus potentially
inducing greater noncompliance in advance of an amnesty.
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\18\ Several States have already offered second amnesties (see
Table 2).
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Any amnesty offer, no matter how designed, could
potentially have an impact on future levels of compliance. Any
amnesty could affect future compliance if it served to indicate
to taxpayers that enforcement of existing tax laws was lax,
leading taxpayers to change their assumptions as to how much
evasion they might reasonably expect to get away with. Contrary
to the result intended, an amnesty that is successful at
increasing tax revenues in the short term might be a signal to
some that enforcement of tax laws is lax, and could induce
these taxpayers to begin to cheat on their taxes, or to
increase existing levels of noncompliance.
The likely effect on future noncompliance from a current
amnesty can be mitigated. The incentive for future tax evasion
stemming from a current amnesty will depend critically on the
design of the amnesty. An amnesty that forgives only criminal
penalties, and requires that all back taxes, interest, and
civil penalties be paid, is unlikely to have a significant
effect on future compliance. That is, the specific expectation
of a future amnesty of the same or similar design would be
unlikely to affect future compliance, though there might still
be an effect on future compliance from an amnesty per se, as
discussed previously. Under the amnesty design just described,
it is unlikely that a taxpayer would simultaneously evade
current taxes and plan to come forward in a future amnesty to
pay the back taxes, interest, and penalties. The rational
taxpayer considering this evasion/amnesty combination would
recognize it as effectively a very expensive loan from the
government under the best of circumstances, or worse, an
expensive loan potentially coupled with a jail term if the
evasion is detected prior to the next amnesty. However, if
civil penalties and some or all interest charges are waived,
then the evasion/amnesty combination begins to resemble an
interest-subsidized or interest-free loan from the government,
and the taxpayer willing to risk the prospect of being caught
prior to the next amnesty may be induced to cheat.\19\ It is
because of this potential dynamic effect that amnesties are
usually advertised as one-time-only events, in conjunction with
a switch to a tougher enforcement regime. However, the
government's credibility in declaring the amnesty a one-time-
only event may be suspect. If the reasons exist to offer an
amnesty once, it is likely that the same reasons will exist at
some future point, and that the same decision to offer amnesty
will be made.\20\
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\19\ To the extent that this is true, second offerings of amnesty
under the same terms might be expected to bring in significant revenues
(though the net revenue effect over the long-run would not necessarily
be positive). Connecticut recently offered a second amnesty, and over
10 percent of the revenues came from taxpayers who had participated in
the first amnesty. New York also recently offered a second general
amnesty, although taxpayers could not participate in it with respect to
a particular type of tax if they had taken advantage of the first
general amnesty for the same type of tax.
\20\ Georgia provided statutorily that its first amnesty would be
its only amnesty. It is unclear whether such a law should be viewed
with any more credibility than the mere promise not to offer a second
amnesty, as the law could easily be overturned in the legislation
offering the second amnesty. To date Georgia has not offered a second
amnesty, although only five years have passed since its amnesty.
---------------------------------------------------------------------------
Government's decision
Most of the above discussion has focused on the individual
taxpayer's rational, benefit-maximizing choices with respect to
compliance with the tax laws and the use of any tax amnesties
that are offered. The government objective is to design a tax
system that raises the desired amount of revenues in an
equitable and efficient manner, taking into consideration the
likely response of the public to the policies it adopts.\21\ In
this system, the government policy options include setting the
enforcement parameters (civil and criminal penalties and the
resources devoted to audits) and making the decisions as to the
granting of amnesties. Like the rational taxpayer, the rational
government should choose from these options with due
consideration of the costs and benefits that result from the
choices it makes.
---------------------------------------------------------------------------
\21\ The general design of this system, in terms of the magnitude
of the revenues raised and from which sources, is beyond the scope of
the current discussion.
---------------------------------------------------------------------------
With respect to the enforcement parameters, the government
benefits from more stringent enforcement in several ways.
First, more stringent enforcement in the form of higher audit
rates will bring in increased revenues by identifying more tax
delinquents and collecting back taxes and penalties. Similarly,
more stringent enforcement in the form of increased monetary
penalties from evasion will result in more revenues for each
tax delinquent uncovered. Second, increasing the enforcement
parameters will lead to greater voluntary compliance with the
tax laws since this will raise the expected costs of evasion to
the taxpayer, and such greater voluntary compliance results in
greater tax revenues.\22\ Furthermore, it seems reasonable to
expect that a given individual is more likely to comply with
the tax laws if it is believed that others are generally in
compliance as well. Such a taxpayer may be more motivated by a
sense of collective responsibility to pay taxes rather than the
strict individualistic cost/benefit analysis previously
outlined, and might willingly pay their tax obligation provided
that others do so as well. However, in the face of widespread
noncompliance, they may come to feel that the tax system is
unjust to those who do pay the tax. If the government cannot
achieve a reasonable level of compliance, a taxpayer's moral
resolve to continue to pay the tax may begin to slip. For these
taxpayers, increased enforcement may not directly keep them in
compliance out of fear of the consequences of cheating, but
rather indirectly keep them in compliance by virtue of keeping
other taxpayers in compliance whose motivations may differ.
---------------------------------------------------------------------------
\22\ For discussion and analysis of the effects of enforcement on
compliance, see Frank Malanga, ``The Relationship Between IRS
Enforcement and Tax Yield,'' National Tax Journal, Vol. XXXIX, No. 3,
September 1986; Ann Witte and Diane Woodbury, ``The Effect of Tax Laws
and Tax Administration on Tax Compliance: The Case of the U.S.
Individual Income Tax,'' National Tax Journal, Vol. XXXVIII, No. 1,
March 1985; and Jeffrey Dubin and Louis Wilde, ``An Empirical Analysis
of Federal Income Tax Auditing and Compliance,'' National Tax Journal,
Vol. XLI, No. 1, March 1988.
---------------------------------------------------------------------------
There are costs to increased enforcement efforts as well.
The most direct of these are the necessary resources devoted to
audits. These resources clearly include the auditor's time, but
also include the time of the law abiding taxpayers that are
subject to audit. Additionally, excessive enforcement efforts
could undermine compliance if such enforcement leads to an
unnecessarily adversarial relationship between the taxpayer and
government, leading taxpayers to ``get back'' at the government
by evading taxes. The government needs to balance these costs
and benefits in setting its enforcement policies.
With respect to the amnesty decision, the potential benefit
of an amnesty program, from the standpoint of the government,
is an increase in tax revenues. However, as the above
discussions have noted, there are potential costs to amnesties
as well, because they could have a negative impact on future
compliance. Thus, in the long-run, there may not be net
increases in revenues from an amnesty. The proponents of
amnesties argue that the long-run effect of an amnesty on
compliance and revenues is positive, since an amnesty would
bring into the system non-filers who would continue in their
non-filing status but for the chance to come clean during the
amnesty. This argument presumes that, in the absence of
amnesty, tax evaders will not come into compliance for the
current and future years for fear that doing so would expose
the new taxpayer to audits for the previous years of non-
filing. Thus, the argument goes, even though the taxpayer would
like to begin complying with the tax laws, he will not do so
without first having been granted absolution for previous
evasion.\23\
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\23\ These long-run effects on revenues would also presumably apply
to underreporting of income, though to a lesser degree if an increase
in reported income due to previously unreported income (as opposed to
from filing de novo) were seen as less likely to trigger an audit for
past returns. To the extent that such a taxpayer can currently begin to
report income accurately at any time without triggering audits for past
behavior, there would be no long-run positive revenue effects from an
amnesty for such taxpayers.
---------------------------------------------------------------------------
The government needs to consider other potential costs of
amnesties prior to embarking on an amnesty program. Among these
potential costs are administrative costs (including any
advertising costs), the production of any new tax forms, and
the manpower to run the program. Diversion of resources from
other compliance efforts is likely to have negative
repercussions that should also be considered. An accurate
accounting of the costs of an amnesty should also consider the
lost penalties and interest from taxpayers who take advantage
of the amnesty but who already have been caught in the usual
enforcement efforts, or who would be so caught in the future.
Benefits from forgone administrative expenses of pursuing the
delinquent taxpayers would offset these costs somewhat.
Perhaps above all, the government objective should be to
strive to maintain a tax system that is broadly viewed as fair
to all. The high level of voluntary compliance with the tax
laws, as compared to numerous other countries, is one of the
greatest assets of the Federal tax system, and such voluntary
compliance will no doubt be aided by fostering fairness in the
tax code.\24\ Views differ as to the fairness of a general tax
amnesty. Opponents believe that an amnesty is fundamentally
unfair to taxpayers who have voluntarily and honestly paid the
appropriate amount of taxes over the years. They see amnesties
as letting dishonest taxpayers off the hook, and rewarding them
for their dishonesty. Proponents argue that amnesties are fair
to the loyal taxpayer because they bring in tax revenues not
otherwise collectable--revenues that can finance additional
public services without raising taxes on the law abiding, or
that can be used to reduce taxes for the law-abiding. Clearly,
the proponent's view is dependent on the long-run revenues from
an amnesty being positive.\25\
---------------------------------------------------------------------------
\24\ See testimony on tax amnesties by Michael J. Graetz, former
Deputy Assistant Secretary, Treasury Department (Tax Policy), before
the Subcommittee on Commerce, Consumer, and Monetary Affairs of the
House Committee on Government Operations, July 25, 1990, reprinted in
Tax Notes, April 11, 1996, p. 32 (herein referred to as ``Graetz
testimony'').
\25\ It should also be noted that if the net long-run revenues from
amnesties are positive, the overall tax structure will be more
efficient because the tax base is effectively broadened, thus allowing
for potentially lower tax rates.
---------------------------------------------------------------------------
In making its amnesty decision a government must weigh all
of the pros and cons outlined above. Specifically, a government
must decide whether it thinks that any long-run compliance
problems from the amnesty are outweighed by the combination of
immediate revenue increases from the amnesty and any future
increases that could possibly stem from adding some new
taxpayers to the rolls. In a system with a very large number of
taxpayers, it should be noted that small changes in voluntary
compliance could have large revenue consequences.
B. Evidence on Efficacy of Tax Amnesties
The experience of the States, 34 of which, plus the
District of Columbia, have had at least one amnesty, might be
expected to provide some data with which to assess the likely
effects of a Federal tax amnesty, at least in the short run.
However, care should be taken in drawing the parallels to the
potential effects of a Federal tax amnesty.
An important consideration is that many sources of tax
revenues for the States do not have Federal counterparts. The
principal example of this is the common State retail sales tax,
which only has a modest counterpart in the Federal excise taxes
on certain products or services such as alcohol and tobacco or
airline tickets. Many States also rely on personal property
taxes as a source of revenue. Despite these differences in
State tax structures compared to the Federal structure, the
income tax was still a major source of revenue in many State
amnesties, and is a major component of state taxes. Income
taxes are also the principal source of Federal revenues.
Amnesty proponents suggest that differences in the tax bases
between the States and the Federal Government are not
significant enough to dismiss the State experiences as a
predictor of the revenue results from a potential Federal
amnesty.
Another consideration in drawing parallels to the States'
experiences with amnesties is that State tax enforcement
efforts have typically been lax relative to the Federal
Government, and thus taxpayers are probably more likely to have
evaded State taxes than Federal taxes.\26\ Indeed, the evidence
indicates that most non-filers that came forward in State tax
amnesties had filed their Federal tax returns.\27\ Hence, State
amnesties, especially if coupled with increased enforcement,
might be expected to be relatively more successful than a
Federal amnesty because past evasion is likely to have been
more common. Contributing to this likely greater success of
State programs is the lower cost of coming into compliance with
State taxes, at least for those who have evaded Federal and
State taxes, as State taxes and compliance costs are typically
lower than Federal taxes and compliance costs. Also
contributing to the likely greater success of State amnesties
are the additional enforcement levers potentially at a State's
disposal. For example, States can take actions against evaders
such as revocation of business licenses necessary to practice
in a State. Both Illinois and Massachusetts were known to
threaten such actions as part of their amnesty programs in
order to bring forward evaders.\28\ The Federal Government does
not have similar enforcement levers.
---------------------------------------------------------------------------
\26\ See Graetz testimony, pp 27-35. See also Treasury Study of Tax
Amnesty Programs, Department of the Treasury, Internal Revenue Service,
August 1987, pp. 11-12.
\27\ Ibid.
\28\ See Treasury Study of Tax Amnesty Programs.
---------------------------------------------------------------------------
One has to consider carefully the conclusions some have
drawn from the observation noted above that the typical State
amnesty participant was in compliance with Federal tax laws.
Some opponents of amnesties have cited it as evidence that a
Federal amnesty is unlikely to be as successful as State
amnesties have been, since the data would seem to suggest that
the typical State tax evader has been in compliance with
Federal laws. However, this argument ignores the fact that the
incentives inherent in the State amnesties will likely cause
only certain types of tax evaders to step forward to apply for
amnesty. Those who come forward in the State amnesties are thus
not a random sample of tax evaders but rather a self-selected
sub-group of all State tax evaders. This self-selection could
influence the observed characteristics of the group that comes
forward to participate. Specifically, one would expect that
evaders of both Federal and State taxes will not choose to
identify themselves to a State government amnesty program for
fear that they will then be discovered by the Federal
Government. Hence, only those State tax evaders who are in
compliance with Federal laws are likely to identify themselves
in State amnesties.
Proponents of amnesties cite this same evidence (and the
self-selection argument) as likely to indicate that a Federal
amnesty, especially if coordinated with State amnesties, will
be more successful than States' amnesties have been, on the
grounds that the past State amnesties have been hampered by a
lack of coordination with a parallel Federal effort. However,
without coordination with the State amnesties, which presumably
would be difficult to achieve, the same motivations would
provide a disincentive for those not in compliance with State
taxes to come forward in a Federal tax amnesty. Furthermore, if
State tax evasion is more common than Federal tax evasion,
there may be relatively few people in the group most likely to
come forward in a Federal amnesty that is not coordinated with
State amnesties--that is, those who have evaded Federal taxes
but not State taxes. Thus, it seems likely that a Federal
amnesty that is not coordinated with State amnesties will be
less successful than State amnesties not coordinated with a
Federal amnesty.
One needs also to examine with some skepticism the claims
of success of the State tax amnesties even with respect to the
immediate revenues generated. For example, many of these
programs included accounts receivable in their amnesties, and
thus the amnesty revenues include taxes that would have been
collected in the absence of an amnesty.\29\ With respect to
these taxes, the amnesties may have merely accelerated the
payment of taxes rather than produced revenues that would not
have been collected without an amnesty. Additionally, some who
took part in an amnesty might have been caught in the future
enforcement efforts of the States and also been liable for
greater civil penalties and interest. The reported State
revenue figures should in theory account for these costs,
resulting in downward estimates of the net revenue intake. As
previously discussed, the administrative costs of an amnesty
should also be taken into account, including any advertising
costs, the production of any new forms, and the manpower
necessary to run the program.
---------------------------------------------------------------------------
\29\ Ibid.
---------------------------------------------------------------------------
To date, the evidence on the long-run impact of State tax
amnesties on State tax revenues, inclusive of their effect on
future compliance, has been spotty. One academic study, which
used experimental methods to model the tax system, found that
the subjects decreased their compliance after an amnesty.\30\
The results of Connecticut's second amnesty, discussed in Part
IV of this document, could, in part, be interpreted as
consistent with this experimental result. In the same academic
study, compliance was found to rise when the amnesty was
coupled with increased enforcement. Another academic study
examined the 1985 Colorado tax amnesty and concluded that the
amnesty, coupled with the increased enforcement efforts, had no
long-run effect on either the level of tax revenues, or the
trend growth of tax revenues.\31\ However, this study could not
distinguish between the effect of the amnesty from the effect
of the simultaneous increase in enforcement efforts. The study
thus concluded that Colorado's post-amnesty revenues might well
have fallen had the amnesty not been coupled with increased
enforcement efforts. A study of the Michigan amnesty found that
most non-filers were out of compliance for only a single year,
perhaps indicating that chronic non-filers do not come forward
in amnesties.\32\ If true, this would undermine the claims of
amnesty proponents that an amnesty would induce chronic non-
filers to begin to participate in the tax system and produce
long-run revenue gains.
---------------------------------------------------------------------------
\30\ See James Alm, Michael McKee and William Beck, ``Amazing
Grace: Tax Amnesties and Compliance,'' National Tax Journal, Vol.
XLIII, No. 1, March 1990, pp. 23-37.
\31\ See James Alm and William Beck, ``Tax Amnesties and Compliance
in the Long Run: A Time Series Analysis,'' National Tax Journal, Vol.
XLVI, No.1, March 1993, pp. 53-60.
\32\ See Ronald Fisher, John Goddeeris and James Young,
``Participation in Tax Amnesties: The Individual Income Tax,'' National
Tax Journal, Vol. XLII, No. 1, March 1989, pp. 15-27.
---------------------------------------------------------------------------
Ultimately, the experience of the States provides an
incomplete guide to the likely effect of a Federal tax amnesty.
Federal enforcement practices vis-a-vis the States are a
crucial distinction limiting the comparison between the State
experiences and a possible Federal amnesty. An important
element in the State amnesties has been the simultaneous switch
to more stringent law enforcement. However, Congress has not
proved very willing to appropriate funds for increased
enforcement in the past, and Federal audit rates have been
declining over time. Because State amnesties have taken place
in conjunction with greater enforcement, it is not apparent
that their experiences (even if observers could agree on how to
interpret them) would be relevant for a Federal amnesty that
occurred during stable or decreasing enforcement efforts. An
amnesty under circumstances of decreasing enforcement efforts
could potentially have deleterious revenue consequences.
IV. STATE AND FOREIGN EXPERIENCE WITH TAX AMNESTY
A. State Experience with Tax Amnesty
In general
Since 1983, a total of 44 general tax amnesty programs have
been conducted by 34 U.S. States and the District of Columbia.
A general tax amnesty is a program involving all or a major
portion of the taxes levied by the jurisdiction. In addition to
these general amnesty programs, several States have undertaken
more narrow amnesties covering a single tax or a few types of
taxes. While the terms of each program were different, under
all programs penalties, both civil and criminal, for tax
liabilities owed with respect to certain periods were abated if
the tax liability was paid to the State during the amnesty
period. Almost all of these general amnesties also required
payment of interest on the tax liability owed, although several
amnesties permitted interest payments at less than the normal
interest rate. No State amnesty during the period considered
has allowed reduction of actual tax liabilities, as opposed to
penalties and interest. Six States--Connecticut, Florida,
Louisiana, New Jersey, New York, and Rhode Island--and the
District of Columbia have each conducted two general amnesty
programs since 1983. Arkansas has had three general amnesties
during this period. Many state amnesties have been combined
with announcements of increased State tax enforcement measures
to take effect after the amnesty period. Several local
jurisdictions have also conducted tax amnesty programs, some in
conjunction with their States, others independently.
Significant aspects of the general State and District of
Columbia amnesties since 1983 are set forth in Table 2. As
shown on that table, most of these amnesties applied to all
major taxes levied by the jurisdiction, although several
contained exceptions for certain types of taxes. There was wide
variance among amnesty programs as to which taxpayers already
in the audit process could participate in the amnesty. All of
the general amnesties listed in Table 2 excluded taxpayers who
were under criminal tax investigation or prosecution. Almost
all excluded taxpayers who were in civil litigation with the
State with regard to tax matters.\33\ There was an
approximately equal division among the States as to whether
taxpayers were allowed to participate if their audits had
progressed to the point where the State booked an account
receivable for an amount of tax liability owed.\34\ There also
has been an approximately equal division among States as to
whether taxpayers could benefit from the amnesty if they paid
their tax liabilities in installments after the amnesty period.
---------------------------------------------------------------------------
\33\ Both New York amnesties and New Jersey's second amnesty
allowed taxpayers who were in civil tax litigation with the State to
participate in the amnesty.
\34\ This would be the point in each State's tax procedure that is
analogous to ``assessment'' under Federal tax procedure.
---------------------------------------------------------------------------
There was marked variation in the amounts collected in the
general State amnesties. The 1985-1986 New York amnesty
collected the most in absolute terms, generating $401.3
million. The 1996 New Jersey amnesty collected $350 million,
which was the most relative to State population. Table 2
reports both the gross collections resulting from the amnesty
and collections as a percentage of State revenue for the prior
fiscal year from the taxes covered by the amnesty. The
percentage calculation facilitates cross-State comparisons
since total tax receipts reflect a State's population and
effective tax rates. The percentage figures also improve cross-
year comparisons because the gross collection figures are not
adjusted for inflation and, thus, gross collections in the
1980s are not directly comparable to collections in the 1990s.
The State amnesties with the largest collections as a
percentage of prior-year revenue were the 1996 New Jersey
amnesty, at 2.6 percent, followed by the 1987 New Jersey
amnesty and the 1984 Illinois amnesty, both at 2.2 percent, and
the 1985-1986 New York amnesty, at 2.1 percent.
In addition to the general State amnesties listed in Table
2, several States have conducted amnesties with respect to a
single tax or a few taxes. For example, in 1993, Nevada
conducted an amnesty limited to the use tax on personal
property brought into the State from other jurisdictions. In
1994, Vermont conducted an amnesty limited to the State's meals
and rooms tax for take-out sales. In 1994, New York conducted
an amnesty covering three types of taxes: (1) income taxes owed
by non-resident individuals, trusts and estates; (2) corporate
franchise taxes owed by out-of-State businesses; and (3) use
taxes on personal property.
Since 1983, several local jurisdictions have also conducted
tax amnesty programs. Some of these have been coordinated with
the State amnesty programs set out in Table 2. For example,
during the period of both of New York State's general
amnesties, New York City conducted an amnesty for most city
taxes on the same terms as the State amnesty and with a
coordinated publicity and advertising campaign. Some local
jurisdictions also have conducted amnesties independent of
State amnesties, such as the 1985 amnesty for Chicago city
taxes on all computer leases and other leases of property
involving related parties.
Table 2.--State Tax Amnesty Programs, 1983-1997
--------------------------------------------------------------------------------------------------------------------------------------------------------
Amnesty Collections
Accounts collections as percentage Installments
State Amnesty period Major taxes covered receivable ($ of relevant arrangements
included millions)\1\ revenue \2\ permitted \3\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Alabama........................ 01/20/84-04/01/84 All No 3.2 0.1 No
Arkansas:
First...................... 11/22/82-01/20/83 All No 6.0 0.2 Yes
Second..................... 09/01/87-11/30/87 All No 1.7 0.09 Yes
Third...................... 09/01/97-11/30/97 All No \4\ 3.0 .05(1994) Yes
California..................... 12/10/84-03/15/85 Individual income Yes 154.0 1.7 Yes
Sales & Use No 43.0 0.5 Yes
Colorado....................... 09/16/85-11/15/85 All No 6.4 0.3 Yes
Connecticut:
First...................... 09/01/90-11/30/90 All Yes 54.0 1.1 Yes
Second..................... 09/01/95-11/30/95 All Yes 40.9 0.6 Yes
Florida:
First...................... 01/01/88-06/30/88 All No \5\ 8.4 0.09 No
Second..................... 10/01/92-12/03/92 Most \6\ No 14.0 0.1 No
Georgia........................ 10/01/92-12/05/92 Most \7\ Yes 51.3 0.7 No
Idaho.......................... 05/20/83-08/30/83 All No 0.3 0.02(1981) No
Illinois....................... 10/01/84-11/30/84 All Yes 160.5 2.2 No
Iowa........................... 09/02/86-10/31/86 All Yes 35.1 1.6(1984) N.A.
Kansas......................... 07/01/84-09/30/84 All No 0.6 0.04 No
Kentucky....................... 09/15/88-09/30/88 All No 61.1 1.9 No
Louisiana:
First...................... 10/01/85-12/31/85 All No 1.2 0.04 Yes \8\
Second..................... 10/01/87-12/15/87 All No 0.3 0.008 Yes
Maine.......................... 11/01/90-12/31/90 All Yes 29.0 1.8 Yes
Maryland....................... 09/01/87-11/02/87 All Yes \9\ 34.6 0.7 No
Massachusetts.................. 10/17/83-01/17/84 All Yes 86.5 1.7 Yes \10\
Michigan....................... 05/12/86-06/30/86 All Yes 109.8 1.3(1984) No
Minnesota...................... 08/01/84-10/31/84 All Yes 12.1 0.3 No
Mississippi.................... 09/01/86-11/30/86 All No 1.0 0.06(1984) No
Missouri....................... 09/01/83-10/31/83 All No 0.9 0.02(1981) No
New Jersey:
First...................... 09/10/87-12/08/87 All Yes 186.5 2.2 Yes
Second..................... 03/15/96-06/01/96 All Yes 350.0 2.6(1994) No
New Mexico..................... 08/15/85-11/13/85 Most \11\ No 13.6 1.0 Yes
New York:
First...................... 11/01/85-01/31/86 Most \12\ Yes 401.3 2.1 Yes
Second..................... 11/01/96-01/31/97 Most Yes \13\ 277.5 0.9 Yes
North Carolina................. 09/01/89-12/01/89 Most \14\ Yes 37.6 0.5 No
North Dakota................... 09/01/83-11/30/83 All No 0.2 0.02 Yes
Oklahoma....................... 07/01/84-12/31/84 Income, Sales Yes 13.9 0.9 No\15\
Pennsylvania................... 10/13/95-01/10/96 All Yes 93.0 0.6 No
Rhode Island:
First...................... 10/15/86-01/12/87 All No 0.7 0.08 Yes
Second..................... 04/15/96-06/28/96 All \16\ Yes 7.9 0.6(1994) Yes
South Carolina................. 09/01/85-11/30/85 All Yes 7.1 0.3 Yes
Texas.......................... 02/01/84-02/29/84 All \17\ Yes 0.5 0.006 No
Vermont........................ 05/15/90-06/25/90 All Yes 1.0 0.2 No
Virginia....................... 02/01/90-03/31/90 All Yes 32.2 0.5 No
West Virginia.................. 10/01/86-12/31/85 All Yes 15.9 0.9 Yes
Wisconsin...................... 09/15/85-11/22/85 All Yes \18\ 27.3 0.5 Yes
District of Columbia:
First...................... 07/01/87-09/30/87 All Yes 24.3 N.A. Yes
Second..................... 07/10/95-08/31/95 All Yes 19.5 N.A. Yes
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Where applicable, the amount indicates local portions of certain taxes collected under the State tax amnesty program. Adjustments have not been made
for inflation.
\2\ The figure expresses collections in the amnesty as a percentage of the State's revenue from the taxes covered in the last full fiscal year prior to
the amnesty. E.g., where the amnesty covers only income taxes, the figure represents amnesty collections as a percentage of prior fiscal year income
tax revenue. Where revenue amounts for the prior fiscal year are unavailable, the fiscal year utilized is indicated in parentheses.
\3\ ``No'' indicates requirement of full payment by the expiration of the amnesty period. ``Yes'' indicates allowance of full payment after the
expiration of the amnesty period.
\4\ Estimated as of January 7, 1998.
\5\ Did not include intangibles tax and drug taxes. Gross collections totaled $22.1 million, with $13.7 million in penalties withdrawn.
\6\ Did not include personal property taxes.
\7\ Did not include alcohol and tobacco excise taxes and property and intangibles taxes.
\8\ Amnesty taxpayers were billed for the interest owed with payment due within 30 days of notification.
\9\ Figure includes $1.1 million for the separate program conducted by the Department of Natural Resources for the boat excise tax.
\10\ The amnesty statute was construed to extend the amnesty to those who applied to the tax department before the end of the amnesty period, and
permitted them to file overdue returns and pay back taxes and interest at a later date.
\11\ The severance taxes (including the six oil and gas severance taxes), the resources excise tax, the corporate franchise tax, and the special fuels
tax were not subject to amnesty.
\12\ In both New York amnesties, availability of amnesty for the corporation tax, the oil company taxes, the transportation and transmissions companies
tax, the gross receipts oil tax and the unincorporated business tax was restricted to entities with 500 or fewer employees in the United States on the
date of application. In addition, a taxpayer principally engaged in a aviation, or a utility subject to the supervisor of the State Department of
Public Service was also ineligible.
\13\ As of May 1, 1997.
\14\ Did not include real property taxes.
\15\ Full payment of tax liability required before the end of the amnesty period to avoid civil penalties.
\16\ Employment security taxes were not included.
\17\ Texas does not impose a corporate or individual income tax. In practical effect, the amnesty was limited to the sales tax and other excises.
\18\ Waiver terms varied depending upon the date the tax liability was accessed.
Source: The Federation of Tax Administrators (Updated by Staff of the Joint Committee on Taxation).
Detailed discussion of several States' experiences
New York
New York's amnesty experience is notable for the number of
amnesty programs it has undertaken, the high amounts they have
collected, and the coordination of similar amnesties for New
York City taxes. New York's first general amnesty program in
1985 and 1986 yielded $401.3 million, the highest total
collected in any State amnesty thus far. The 1985-1986 New York
amnesty ranks fourth among the amnesties set out in Table 2 on
the basis of collections as a percentage of prior-year revenue.
This amnesty was coordinated with an amnesty for New York City
taxes available during the same period. During the early 1990s,
New York State and New York City conducted limited amnesties
with respect to specific types of taxes. Then, in 1996 and
1997, New York undertook a second general amnesty program on
terms similar to the 1985-1986 program, but which resulted in
fewer collections. Collections for the 1996-1997 amnesty have
been estimated at $277.5 million. \35\
---------------------------------------------------------------------------
\35\ New York Daily News, May 5, 1997, p. 43.
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New York's first general tax amnesty from November 1, 1985,
through January 31, 1986, yielded collections of $401.3
million. This total came from diverse sources. Over 148,000
taxpayers participated in the amnesty, with payments ranging
from a few cents to $2.5 million from a single individual, and
an average of about $3,000 per taxpayer. Payments came from the
following sources: 44 percent from personal income taxes; 40
percent from sales taxes; and 14 percent from corporate taxes.
One-half of the total revenues and 43 percent of total
applications were received or postmarked on the last day of the
amnesty period. \36\ Nearly 30 percent of the revenue generated
by the amnesty was from tax liabilities for which the New York
Department of Taxation and Finance did not have information,
with the result that at least 1,500 additional businesses were
added to the New York tax rolls in 1986. \37\
---------------------------------------------------------------------------
\36\ ``Tax Amnesty: the New York State Experience,'' New York State
Department of Taxation and Finance, p. 6 (February, 1988).
\37\ ``Federal Tax Amnesty: Reflecting on the State's
Experiences,'' 40 Tax Lawyer 145, p. 176 (Fall, 1986).
---------------------------------------------------------------------------
The New York amnesty provided for a waiver of civil
penalties for taxes owed for periods before January 1, 1985, if
taxpayers made payments of the tax liability plus interest on
or prior to January 31, 1986. The amnesty covered most New York
State taxes, including all personal income, corporate
franchise, sales and use, withholding, motor fuels and estate
and gift taxes. Excluded were excise taxes on alcoholic
beverages, cigarettes and other tobacco, real estate transfer
taxes, real property gains taxes, and corporate income taxes on
banks, insurance companies, public utilities and other
corporations with more than 500 employees.
The 1985-1986 New York amnesty was reported to have
originated as a political compromise between then Governor
Mario Cuomo and Republicans in the State legislature. \38\ The
Cuomo administration initially opposed Republican proposals for
an amnesty. Eventually, the Cuomo administration agreed to an
amnesty in exchange for passage by the State legislature of the
Omnibus Tax Equity and Enforcement Act (``OTEEA'') of 1985, a
comprehensive package of tax enforcement measures that took
effect after the amnesty. \39\ Under the OTEEA, seven tax
offenses were increased to felonies, including failure to file
returns, whether or not willful, for three or more years, and
failure to pay withholding taxes in excess of $250. The maximum
fine for a felony was raised to $50,000 for individuals and
$250,000 for corporations. Civil penalties were also increased,
and broader enforcement and investigating powers were given to
the Department of Taxation and Finance. Finally, $68 million
was appropriated for a new State tax computer system under the
supervision of a new Revenue Opportunity Division in the
Department. This division was directed to undertake broad-
ranging projects to match tax data with other data available to
the State. For example, a State publication about the amnesty
announced a ``doctors project'' for matching tax returns of
medical doctors with the payments they received from Blue
Cross, Blue Shield and Medicaid. \40\
---------------------------------------------------------------------------
\38\ ``Tax Amnesty Enters Final Week: New York May Get $200
Million,'' New York Times, January 26, 1986, p. 22.
\39\ Ibid.
\40\ ``Amnesty Briefing,'' New York State Department of Taxation
and Finance, p. 3.
---------------------------------------------------------------------------
New York State made much of the increased enforcement
measures of the OTEEA in its announcements of the amnesty
program, which attempted to convince taxpayers that ``the rules
of the tax evasion game'' had changed. \41\ An advertising
agency was retained to develop a campaign using bus and subway
posters and some television and radio commercials centered on
the slogan, ``It would be a crime to miss out on Amnesty.''
Officials of the New York Department of Taxation and Finance
also gave over 550 interviews, speeches and presentations on
the program. \42\
---------------------------------------------------------------------------
\41\ ``Tax Amnesty: the New York State Experience,'' supra, p. 9.
\42\ Ibid., p. 10.
---------------------------------------------------------------------------
Coordinated with the New York State amnesty program was an
amnesty conducted by New York City on largely the same terms.
The amnesty applied to several New York City taxes, including
the personal income tax, the general corporation tax and the
unincorporated business tax. The City of Yonkers also conducted
an amnesty for city taxes in conjunction with the State
amnesty.
Both the New York State and New York City amnesties applied
to all taxpayers other than those who were in criminal
litigation, or who had previously been convicted, or were
underinvestigation, for a State tax criminal charge. Thus, taxpayers
who were under audit, including those for whom accounts receivable had
been established, were entitled to participate. Taxpayers in civil
litigation could participate if they withdrew from litigation.
Taxpayers who could demonstrate severe financial need could qualify for
the amnesty by committing to make payments in installments; a down
payment of 50 percent was required for this option. The costs of
administering the amnesty program were approximately $2.8 million.\43\
At the height of the program, 200 employees of the New York Department
of Taxation and Finance were assigned to a separate State building to
administer the amnesty.\44\
---------------------------------------------------------------------------
\43\ 40 Tax Lawyer, supra, p. 176.
\44\ ``Tax Amnesty; the New York State Experience,'' supra, p. 6.
---------------------------------------------------------------------------
The measures of the OTEEA that were used as the incentive
for the amnesty program reportedly led to a significant
increase in New York State enforcement activities.\45\ For
example, in the first six months of 1986, New York handed out
more jail terms for tax offenses than in the previous 20
years.\46\
---------------------------------------------------------------------------
\45\ ``Your Taxes: A Guide to Preparing 1986 Returns,'' New York
Times, February 27, 1987, p. D1.
\46\ ``No More Mr. Nice Guy,'' Wall Street Journal, July 9, 1986,
p.1.
---------------------------------------------------------------------------
Based on the success of the 1985-1986 general amnesty, New
York State conducted two limited amnesties in the early 1990s.
From April 1, 1992, until February 28, 1993, New York offered
an amnesty for the State's real property gains tax. In 1994,
the State of New York granted amnesty for three types of taxes
normally paid by out-of-State residents. From September 1,
1994, until November 30, 1994, amnesty was given for penalties
for income taxes owed by individuals, trusts and estates that
were not residents of the State and corporate franchise and
other business taxes owed by out-of-State businesses doing
business in the State. Also included were use taxes owed by
individuals and certain small businesses on property brought
into the State. The terms of the amnesty were largely the same
as for the earlier general amnesty, except that taxpayers who
had participated in the first amnesty or who had been contacted
for audit could not participate. In coordination with the
State's 1994 program, New York City granted an amnesty for
payments of four specific taxes: the Commercial Rent Tax, the
Utility Tax, the Real Property Transfer Tax and the Hotel Room
Occupancy Tax.
Most recently, from November 1, 1996, to January 31, 1997,
New York State offered a second general amnesty involving most
major taxes. The amnesty applied to penalties on taxes owed for
periods before January 1, 1995. Once again, New York City and
Yonkers offered amnesties for city taxes on a coordinated
basis. To encourage taxpayers to come forward, the State tax
penalties were increased by 5 percent for periods after the
amnesty for taxpayers who would have been entitled to amnesty
under the program. With few exceptions, the taxes and taxpayers
covered and the requirements for the amnesty were the same as
for the 1985-1986 general amnesty.\47\ Taxpayers who received
amnesty under the 1985-1986 program were not entitled to
amnesty under the 1996-1997 program for the same type of tax;
for example, a taxpayer who received amnesty for personal
income taxes in 1985-1986 could receive amnesty for withholding
tax liabilities in the later amnesty, but not for personal
income tax liabilities.
---------------------------------------------------------------------------
\47\ The New York Beverage Container Tax and the Special Tax on
Passenger Car Rentals were subject to the amnesty although they were
not enacted until after the 1985-1986 amnesty.
---------------------------------------------------------------------------
Despite a large-scale publicity effort and commitment of
resources by the New York Department of Taxation and Finance,
payments under the second amnesty fell short of those under the
first general amnesty, indicating that the second amnesty may
have reduced taxpayer expectations of the State's future tax
enforcement.\48\ The State had projected $450 million in
receipts from the second program.\49\ Collections as of May 1,
1997, were estimated at $277.5 million;\50\ $73 million of the
total was from tax liabilities for which the audit system did
not have information. Based on these results, State Comptroller
H. Carl McCall characterized the second amnesty as ``ill
advised'' and a ``disappointment.'' \51\
---------------------------------------------------------------------------
\48\ See discussion at pp. 11-12.
\49\ New York Times, March 15, 1997, supra.
\50\ New York Daily News, May 5, 1997, supra.
\51\ New York Times, March 15, 1997, supra.
---------------------------------------------------------------------------
California
California conducted a tax amnesty program from December
10, 1984, until March 15, 1985, which covered personal income
taxes and sales and use taxes. Corporate franchise taxes were
not covered. Collections under the amnesty program totaled $197
million, the fifth highest total for State amnesty programs
thus far, although it ranks somewhat lower as a percentage of
prior-year revenue. These collections were obtained without a
large expenditure on advertising, which is a dissimilarity
between the California program and most of the other high-
yielding amnesty programs.
The terms of the California amnesty were a waiver of civil
penalties on personal income and sales and use taxes owed for
periods prior to January 1, 1984, if the taxpayer paid the tax
liability during the amnesty period. For both the personal
income tax and sales and use tax, taxpayers did not qualify for
the amnesty if they were involved in a proceeding, or were
subject to an investigation, with respect to a State tax
criminal charge. Taxpayers with accounts receivable were not
entitled to participate in the sales and use tax amnesty,
although other taxpayers under audit could participate.
Taxpayers under audit, including those with accounts
receivable, were entitled to participate in the personal income
tax amnesty. Where full paymentof the tax liability during the
amnesty period would cause undue hardship, taxpayers could qualify for
the amnesty by committing to make payments in installments.
The legislation that approved the amnesty also adopted a
new set of enforcement measures that took effect after the
amnesty period. Penalties for State tax offenses were raised to
a minimum of 5 percent of the liability and a maximum of
$20,000 and three years imprisonment. Special penalties for
failure to report cash payments were introduced, which included
loss of State business and professional licenses. Authorization
was granted to utilize private collection agencies to collect
tax deficiencies, to use California State police to serve
warrants for criminal tax charges, and to institute continuous
levies against non-wage payments. Requirements of information
returns for real property sales and registration of tax
shelters were introduced. Finally, the amnesty legislation also
provided for a new State tax computer system having the ability
to cross-reference with respect to a single taxpayer
information on all State taxes, as well as State and local
business records.
In the months leading up to the amnesty, the State
attempted to project a tough and high-profile image on tax
enforcement, with announcements of tax criminal prosecutions
and arrests, public seizures of boats and luxury automobiles
and auctions of unusual property seized.\52\ Although the State
conducted an advertising and public relations campaign to
increase public awareness of the amnesty, its budget for this
campaign was $550,000, which is one of the smallest for the
State amnesty programs considered, especially when compared
with California's size. The advertising campaign included
brochures, billboards and public-service announcements on
television and radio with the slogan ``Get to us before we get
to you.'' \53\ The amnesty also benefited from widespread
coverage on television news, including dramatic footage by a
local Fresno station of amnesty applicants running out of a
State tax office because they did not want to appear on
film.\54\
---------------------------------------------------------------------------
\52\ E. Dronenburg, Jr, ``Amnesty, a Tool for Closing the
California Tax Gap,'' Tax Notes Today, July 26, 1990, p. 155.
\53\ Ibid.
\54\ ``Amnesty Brings Tax Bonanza; Rush to Beat Cutoff Nets $100
Million,'' Los Angeles Times, March 16, 1985, p. 1.
---------------------------------------------------------------------------
The $197 million collected by the California amnesty was
from diverse sources. About 160,000 taxpayers applied for the
amnesty,\55\ with an average payment of about $1,200 per
taxpayer. For the personal income tax, the receipts break down
as follows: 55 percent from taxpayers who had failed to file
returns; 40 percent from taxpayers who had failed to pay the
tax on previously filed returns; and 5 percent from liabilities
not disclosed on returns as filed.\56\ Payments under the
amnesty ranged from a few cents to a single payment of $1.7
million from a corporate taxpayer.
---------------------------------------------------------------------------
\55\ 40 Tax Lawyer, supra, p. 163.
\56\ ``Study of Tax Amnesty Programs,'' Research Division;
Assistant Commissioner (Planning, Finance and Research), Internal
Revenue Service, Appendix 1, p. 3 (August, 1987).
---------------------------------------------------------------------------
After the amnesty, the State undertook large-scale
enforcement actions using the new mechanisms available under
the amnesty legislation. Special emphasis was placed on tax
protesters.\57\ Based on its favorable experience with the
general amnesty, California conducted an amnesty for the motor
vehicles tax from January 1, 1986, to March 31, 1986.
---------------------------------------------------------------------------
\57\ ``Rise in Tax Protest Cases Because of Crackdown,'' Los
Angeles Times, June 30, 1985, p. 6.
---------------------------------------------------------------------------
Georgia
Georgia conducted a general tax amnesty program from
October 1 through December 5, 1992. Collections under the
program totaled $51.3 million, which ranks eleventh among the
general amnesty programs in the period since 1983. Noteworthy
about the Georgia amnesty is that the State amnesty legislation
provided that there would be no other general amnesty in the
future.
The amnesty applied to almost all Georgia State taxes for
periods before December 30, 1990, including individual and
corporate income taxes, withholding, motor fuel and sales
taxes. Excluded were tobacco and alcohol excise taxes and
property and intangibles taxes. The amnesty applied to all
taxpayers other than those who were in litigation with the
State on criminal tax charges or taxpayers who had received
notice of a criminal investigation on such charges. Taxpayers
under audit, including those for whom accounts receivable had
been established, were eligible for the amnesty.
The terms of the amnesty were a waiver of civil penalties
if payment of the taxes due, plus accrued interest, was paid to
the State no later than December 5, 1992. For taxpayers for
whom full payment during the amnesty period would be a severe
hardship, the Georgia Department of Revenue was authorized to
accept a commitment to make payments in installments.
Both the legislation approving the amnesty and the State's
announcements of it stated that the amnesty was a one-time
offer which would not be repeated,\58\ and no subsequent
amnesty has been conducted by the State. The legislation
authorizing the amnesty also adopted stiffer penalties and tax
enforcement mechanisms that took effect after the amnesty
period. The legislation instituted a new ``cost of collection''
fee of 20 percent of tax deficiencies collected after the
amnesty, which could be raised to 50 percent by regulations of
the Department of Revenue. After the amnesty, willful failure
to file a return, pay taxes, or willful filing of a false
return was made a felony, punishable by a fine of up to $5,000
or imprisonment for up to three years. The Department of
Revenue was authorized to hire additional auditors and agents
and to utilize private collection agencies, and appropriations
were provided for a new computer system that would allow the
Department of Revenue to retrieve information on a taxpayer-by-
taxpayer, rather than a tax-by-tax, basis.
---------------------------------------------------------------------------
\58\ Georgia H.B. 1405, which was substantially unchanged from the
form reprinted in State Tax Notes, April 2, 1992, p. 67.
---------------------------------------------------------------------------
Public awareness of the Georgia amnesty program was
heightened by a media campaign directed by a private
advertising agency and costing over $2 million.\59\ The
advertising campaign included images of barking dogs,
guillotines and open sharks' jaws intended to symbolize the
consequences of non-compliance with the amnesty program.
Despite these efforts, the success of the Georgia program
largely occurred in its last few days. As of December 3, 1992,
two days before the filing deadline, only $20.4 million of the
final total of $51.3 million had been received.\60\
---------------------------------------------------------------------------
\59\ ``Georgia Cashes in on Tax Amnesty Spots,'' The Wall Street
Journal, December 17, 1992, p. B9.
\60\ ``Georgia Tax Amnesty Ends on Successful Note,'' State Tax
Notes, December 14, 1992, p. 240.
---------------------------------------------------------------------------
After the amnesty, the Georgia Department of Revenue
increased enforcement against tax evaders, especially criminal
actions using the new mechanisms provided by the amnesty
legislation.\61\ Based on the success of the State amnesty,
Georgia authorized a property tax amnesty program in 1994, to
be administered by local tax authorities, that was modeled on
the 1992 State program.
---------------------------------------------------------------------------
\61\ The Tax Enforcer (newsletter of the Federation of Tax
Administrators), vol. 2, no. 1 (1994).
---------------------------------------------------------------------------
Pennsylvania
Pennsylvania conducted a general tax amnesty program from
October 13, 1995, to January 17, 1996. The total collected was
$93 million, the eighth highest for State programs since 1983,
although the Pennsylvania total ranks somewhat lower as a
percentage of prior-year revenue. A distinctive aspect of the
Pennsylvania program was the requirement that amnesty
participants file all required State returns and pay all
required State taxes due within two years after the last day of
the amnesty period.
Proposals for a tax amnesty had circulated in the
Pennsylvania State legislature for a number of years. One
general amnesty bill was struck down by gubernatorial veto. The
concept of a general tax amnesty received renewed support in
1994, when gubernatorial candidate Tom Ridge pledged to seek an
amnesty program combined with stepped-up enforcement against
tax violators after the amnesty.\62\ In the final legislation,
the general amnesty was combined with the enactment of a 15-
percent ``non-participation'' penalty for tax liabilities
collected after the amnesty. In addition, the legislation made
appropriations for the ``Keystone Integrated Tax System,'' a
new computer technology system designed to enhance the State's
ability to identify delinquent taxpayers.
---------------------------------------------------------------------------
\62\ ``Pennsylvania DOR Issues Report Regarding Amnesty,'' State
Tax Notes, July 24, 1996, p. 143.
---------------------------------------------------------------------------
The terms of the Pennsylvania amnesty were abatement of
civil penalties for tax liabilities for periods before January
1, 1994, if payment of the tax liability plus interest was made
during the amnesty period. The amnesty was originally announced
to be from October 15, 1995, until January 10, 1996, although
the deadline was extended until January 17, 1996, due to a
major blizzard on the East coast. Eighteen State taxes were
covered by the amnesty, including personal and business income
taxes, sales and use taxes, employer withholding, inheritance
taxes and the motor fuels tax. As noted above, there was an
additional requirement for amnesty that the taxpayer file all
required State returns and pay all required State taxes due
within two years after the end of the amnesty period. If this
condition was not met, the State could retroactively assess the
penalties abated in the amnesty. Taxpayers who could
substantiate a severe financial hardship could make payments in
installments, but such payments did not qualify for the
abatement of penalties under the amnesty. They were, however,
not subject to the new 15-percent ``non-participation''
penalty. All taxpayers were entitled to participate, other than
those who were in litigation with the State on a criminal tax
charge or who had received notice from the State of a criminal
tax investigation. Other taxpayers under audit, including those
for whom accounts receivable had been established, were fully
entitled to participate.
In the weeks leading up to the amnesty, the Pennsylvania
Department of Revenue mailed 600,000 notices of the amnesty to
known delinquent taxpayers, which emphasized the higher
penalties and enforcement effort planned for the post-amnesty
period.\63\ Public awareness of the amnesty also was increased
by a $2 million advertising campaign run by a private
advertising agency with the slogan that the State would ``look
the other way'' about tax liabilities only for the amnesty
period. The principal television commercial featured
conversations with somber men cast as revenue agents who
proceeded to look away from the camera.\64\ Seventy-five
employees of the Department of Revenue worked on the amnesty
full-time. The total administrative costs of the program
(including advertising) were $10 million.\65\
---------------------------------------------------------------------------
\63\ ``Special Edition of `Pennsylvania Tax Update' Announces First
Ever Tax Amnesty Program,'' State Tax Notes, December 7, 1995, p. 235.
\64\ ``Tax Amnesty Ads are Heavy-Duty,'' Pittsburgh Post-Gazette,
November 8, 1995, p. C11.
\65\ ``Pennsylvania DOR Issues Report Regarding Amnesty,'' supra.
---------------------------------------------------------------------------
The $93 million collected under the Pennsylvania amnesty
was from widely diverse sources. More than 63,000 taxpayers
applied for amnesty--6,000 of whom were unknown to the
Department of Revenue prior to the amnesty. Payments ranged
from a few dollars to a single payment of $1.4 million.\66\ The
total amount collected came from the following sources: 22
percent from sales and use taxes; 15 percent from personal
income taxes; 14.4 percent from employer withholding; and 9.5
percent from inheritance taxes. Motor taxes, realty transfer
taxes, fuel taxes and the special oil company franchise tax
accounted for most of the remaining 39.1 percent.\67\
---------------------------------------------------------------------------
\66\ Ibid.
\67\ ``Pennsylvania Tax Amnesty Yields $93 Million,'' State Tax
Notes, July 22, 1996, p. 141.
---------------------------------------------------------------------------
After the amnesty, the Pennsylvania Department of Revenue
undertook a large-scale enforcement effort against taxpayers
who had not applied for amnesty. An additional 174 criminal tax
prosecutions were filed. Collections due to enforcement actions
of the Department of Revenue in 1995 (not including the
amnesty) totaled $488.1 million, just $18.9 million less than
the record set in previous year.\68\
---------------------------------------------------------------------------
\68\ ``Pennsylvania DOR Issues Report Regarding Amnesty,'' supra.
---------------------------------------------------------------------------
Connecticut
Connecticut is one of several States that have offered
amnesty to tax evaders more than once. Connecticut's first
general amnesty was from September 1, 1990, to November 30,
1990, and covered all major taxes. This amnesty raised $54
million. The second amnesty occurred over the same dates in
1995, and also covered all major taxes. The primary rationale
for offering the second amnesty was that a new tax, the
personal income tax, was introduced since the last amnesty, and
thus there was potentially an entire new class of tax evaders.
Connecticut's literature discussing the results of the second
amnesty also states that the Connecticut General Assembly and
Governor mandated that the Department of Revenue Services (DRS)
offer the second tax amnesty program, and indicates that the
DRS was ``given a goal to collect $31 million in additional and
unanticipated revenues'' and ``to collect $31 million in back
taxes to meet expected State budget requirements.'' \69\
---------------------------------------------------------------------------
\69\ ``1995 Connecticut Tax Amnesty Final Report,'' pp. ii and 1.
---------------------------------------------------------------------------
This second Connecticut amnesty generated $40.9 million as
of June 30, 1996. The principal sources of revenues in this
amnesty were the sales and use taxes (44 percent of
collections), and the personal income tax and corporation taxes
(both at 26 percent).\70\ The revenue raised from the amnesty
with respect to the personal income tax accounted for less than
0.5 percent of the annual revenue collections resulting from
the personal income tax.
---------------------------------------------------------------------------
\70\ Ibid., p. 4.
---------------------------------------------------------------------------
The data that Connecticut has released concerning the
second amnesty are worth highlighting. First, more than half of
the revenues (51 percent) came from accounts receivable, and
thus, as previously discussed, these revenues may merely
represent an acceleration of revenues that would have been
eventually collected. Second, a subset of the data shows the
amnesty revenues raised from participants in the second amnesty
who had also participated in the first amnesty. These are the
only available data on taxpayers who have taken advantage of
more than one amnesty.
The 1995 Connecticut amnesty had 219 participants, out of a
total of 14,929 applications accepted for amnesty, who had also
participated in the 1990 amnesty. In the 1990 amnesty, these
219 taxpayers accounted for $2.4 million of the amnesty
revenues, or about 4.5 percent of total amnesty collections. In
the 1995 program, these same taxpayers accounted for
collections of $4.2 million or about 10.3 percent of total
collections.\71\ In inflation-adjusted dollars, these figures
represent approximately a two-thirds increase in the dollar
amount of non-compliance by these taxpayers.
---------------------------------------------------------------------------
\71\ Ibid., p. 7.
---------------------------------------------------------------------------
Definitive conclusions cannot be drawn from these data
about the general impact of amnesties on future taxpayer
compliance. However, these data do show that at least some
taxpayers who participate in amnesties continue in their non-
compliance, and perhaps even increase the dollar magnitude of
their non-compliance. For at least these taxpayers, this
contradicts the notion that amnesty participants ``come clean''
and henceforth are compliant taxpayers.
B. Foreign Experience with Tax Amnesty
The history of tax amnesties in foreign countries is far
longer than in the United States, going back to ancient Rome.
Many foreign jurisdictions have had tax amnesties, both general
amnesties and amnesties covering only certain taxes. Some
foreign amnesties have yielded larger collections than those of
U.S. States. For example, the general Argentine amnesty of 1995
yielded about $3.9 billion.\72\ The Irish amnesty of 1988
yielded more than $700 million.\73\ Some foreign countries have
made repeated use of amnesties, whereas no U.S. State has had
more than three general amnesties. Ireland offered five
amnesties in six years, and Italy has had more than a dozen
amnesties.
---------------------------------------------------------------------------
\72\ ``Argentine Tax Amnesty Promises Big Yield,'' Tax Notes
International, December 14, 1995, p. 240.
\73\ ``Irish Run Out of Luck over Tax Amnesty,'' The Independent,
July 4, 1993, p. 6.
---------------------------------------------------------------------------
There are several aspects of foreign amnesties that limit
their comparability with the United States. In most foreign
countries, a larger portion of the national economy escapes the
tax system than probably occurs in the United States.\74\ For
example, many estimates put the portion of the Italian economy
that escapes taxation in the 20 percent range.\75\ Most foreign
countries have larger underground economies than the United
States, which means that they have greater reliance on cash and
barter as forms of payment.\76\ Many foreign systems also
exempt transactions occurring outside the country from
taxation, giving an incentive to move untaxed profits outside
the country. Few foreign countries have reached the U.S.
Federal level of development of enforcement mechanisms,
especially with regard to use of computer technology and
requirements of withholding and information reporting. In fact,
some foreign amnesties have been used as an accompaniment to
introducing enforcement measures that incurred popular
resistance, but that are already utilized in the United
States.\77\
---------------------------------------------------------------------------
\74\ L. Talley and W. Morrison, Tax Amnesty: State and European
Experience,'' Congressional Research Service, p. 13 (1984).
\75\ The Taxing Problem Italy Faces,'' Financial Times, August 7,
1989, p. I-15.
\76\ Talley and Morrison, supra, pp. 13-14.
\77\ Ibid.
---------------------------------------------------------------------------
Some foreign countries that have recently adopted
sophisticated tax systems, such as those in Eastern Europe,
have relied on amnesties to deal with honest confusion as to
what tax liabilities were owed.\78\ Some foreign amnesties,
including several of the Argentine tax amnesties, have
coincided with a change in government, and thus suggest a
repudiation of the previous government's policies.\79\ Another
factor in the comparability of the foreign experience is that
many foreign jurisdictions, including those of Western Europe,
raise a high proportion of revenue from value-added taxes and
other direct taxes, as opposed to personal income taxes.
Because value-added taxes are collected by businesses, amnesty
programs in these countries can generate large totals as a
result of a few large payments by delinquent businesses.
---------------------------------------------------------------------------
\78\ ``Russia Announces Tax Amnesty,'' Tax Notes International,
November 16, 1993, p. 220.
\79\ ``Study of Tax Amnesty Programs,'' Internal Revenue Service,
supra, p. 13.
---------------------------------------------------------------------------
The terms offered to taxpayers in many foreign amnesties
also have been different from U.S. state practices. Many
foreign amnesties have not only abated penalties but also
interest and even liabilities for tax. In the 1996 Venezuelan
amnesty, tax liabilities of participating taxpayers were
reduced by 75 percent and, in the 1974 Panamanian amnesty, by
80 percent. Most foreign amnesties have allowed taxpayers with
accounts receivable or in civil tax litigation to participate.
Some, such as the 1995 Argentine amnesty, have even allowed
participation of taxpayers involved in criminal tax
proceedings. Many foreign systems allow the national tax
administration to waive penalties and interest as a matter of
administrative discretion, which can be used for ``standing''
offers of amnesty.
As a result of the level of their economic development and
the sophistication of their tax systems, the experiences of
Western Europe and the other countries in the Organization for
Economic Cooperation and Development are probably most relevant
to the United States. In 1982, France undertook both a general
tax amnesty and a special program to encourage repatriation of
untaxed assets from abroad. The general amnesty applied to all
income and value-added taxes, and offered an abatement of both
interest and penalties for participating taxpayers. Collections
were relatively small compared to U.S. State amnesties,
amounting to about $19 million from 2,786 taxpayers.\80\ Under
the repatriation program, French residents who brought back
capital from abroad that represented undeclared income or that
was illegally exported were taxed at a flat rate of 25 percent
(regardless of the original rate owed, which was in most cases
higher). The repatriation program had 276 participants, from
whom a total of about $22 million was collected.\81\ In 1986,
France undertook a second special amnesty for assets held
abroad with a tax rate of 10 percent on the assets repatriated.
---------------------------------------------------------------------------
\80\ Talley and Morrison, supra, p. 14.
\81\ Ibid., p. 16.
---------------------------------------------------------------------------
Ireland conducted a total of five amnesty programs in six
years, with general amnesties in 1988 and 1993, both of which
received considerable publicity. The 1988 general amnesty
yielded more than $700 million in collections.\82\ This amnesty
offered participants a waiver of all penalties and interest and
was publicized as an opportunity to pay tax liabilities before
increased penalties, interest and enforcement measures were
adopted as part of an overall tax reform. Although the 1988
amnesty was publicized as a one-time opportunity, Ireland
undertook a second general amnesty in 1993. Faced with a budget
deficit, the Irish government announced a special amnesty for
repatriation of undeclared income from abroad.\83\ In addition
to waiver of all penalties and interest and promises of
confidentiality, the repatriated funds were subject to a
special low rate of 15 percent, in contrast to normal Irish tax
rates which rose above 50 percent. The amnesty was criticized
by the parliamentary opposition and trade unions as a
concession to wealthy taxpayers.\84\ In response, the Irish
government also adopted a general tax amnesty.\85\ The general
amnesty offered abatement of both penalties and interest,
although no liabilities were reduced. Collections for the 1993
amnesty were widely reported to be significantly lower than for
the 1988 amnesty,\86\ which is consistent with the view that
repeated tax amnesties decrease taxpayer expectations of
enforcement.\87\ Moreover, the 1993 amnesty has continued to
receive negative publicity, especially due to the revelation
that the chief suspect in Ireland's biggest robbery benefited
from the amnesty for a large tax deficiency.\88\
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\82\ ``Irish Run Out of Luck over Tax Amnesty,'' supra.
\83\ Ibid.
\84\ ``Irish Count on Windfall from Tax Amnesty to Ease Budget
Shortfall,'' The Guardian, November 27, 1993, p. 37.
\85\ Ibid.
\86\ ``Irish Run Out of Luck over Tax Amnesty,'' supra.
\87\ See discussion at pp. 11-12.
\88\ ``Someone's Got to Do It,'' The Guardian, December 4, 1995, p.
T14.
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Italy has conducted more than a dozen tax amnesties, an
average recently of about one every two years. Collections in
recent Italian amnesties have not been large, supporting the
view that repeated use of amnesties reduces their
effectiveness.\89\ For example, for its general amnesty in
1982, the Italian government predicted collections of $4.6
billion, but actual collections totaled less than $700,000.\90\
Tax amnesties have occurred so regularly in Italy that the
expectation of future amnesties has been cited as a factor in
the low national level of tax compliance.\91\
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\89\ See discussion at pp. 11-12.
\90\ Talley and Morrison, supra, p. 17.
\91\ ``The Taxing Problem Italy Faces,'' supra.
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In Canada, a flexible program of tax ``compassion'' was
begun in 1993 by the Ministry of National Revenue, utilizing
the Ministry's discretionary authority to abate penalties and
interest.\92\ Non-filers who voluntarily came forward were
offered a waiver of all penalties. Others with outstanding tax
liabilities were promised the opportunity to pay in
installments and offered the possibility of penalty waivers.
The tax administrations of several countries, including
Germany, the Netherlands, Sweden, Norway and Denmark, have in
recent years had ``standing'' offers of amnesty, under which
the national tax administration has committed to use its
authority to abate all or a portion of penalties or interest
for taxpayers who voluntarily pay their tax liabilities.\93\
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\92\ ``Hard-hit Taxpayers May Get Amnesty from Fines,'' Toronto
Star, August 17, 1993, p. A1.
\93\ ``Study of Tax Amnesty Programs,'' Internal Revenue Service,
supra, pp. 13-17.
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There has been no tax amnesty in the United Kingdom in
recent years.
Although not a foreign country, the amnesties conducted by
Puerto Rico are also relevant. Puerto Rico undertook general
tax amnesties in both 1988 and 1991 on very similar terms.
Participating taxpayers were offered an abatement of all
interest and penalties, plus a special flat rate of 20 percent
for payment of liabilities (compared with a top individual rate
of 41 percent in 1988). Both taxpayers under audit and those
involved in civil tax litigation were entitled to participate.
V. DESIGN PARAMETERS OF A POSSIBLE FEDERAL TAX AMNESTY
The following are the principal parameters employed by the
staff of the Joint Committee on Taxation in estimating the
individual income tax amnesty proposals contained on the
revenue table in the Appendix:
1. The IRS would be given a lead time of approximately six
to nine months between the date of enactment and the
commencement of amnesty. A shorter period would not be feasible
because it would not give the IRS sufficient time to redeploy
and train staff resources, to develop and print appropriate
forms, applications, and instructions, and to publicize the
coming of tax amnesty. A significantly longer period would not
be desirable because it would increase the open window during
which taxpayers may alter their current behavior in
anticipation of the amnesty.
2. The determination of the exact starting and ending dates
of the amnesty must be done carefully to provide the optimal
scheduling of the amnesty. For example, an amnesty that
overlapped the April 15 filing date could seriously overburden
the administrative systems of the IRS and lead to serious
difficulties with or the failure of the filing season or of the
amnesty (or of both). Alternatively, an amnesty that occurred
solely during the summer months or during the Thanksgiving
through New Year's Day holiday period might not achieve optimal
results because many individuals' attention would be focussed
elsewhere. Most State amnesties have occurred in the fall; that
is likely to be the optimal time for a Federal amnesty as well.
One alternative would be to permit the IRS to select the exact
starting and ending dates within legislatively established
parameters.
3. The amnesty would be approximately 90 days in length. A
shorter period may not allow sufficient time for the amnesty
publicity to affect taxpayers' behavior. Too lengthy a period
may cause taxpayers to wait until later in the amnesty period
to come forward; some of those who delay may never come
forward.
4. Participants would be permitted to pay through
installment agreements. Although this is not a universal
feature of State amnesties, it is a necessary feature of a
Federal amnesty seeking to maximize receipts. This is because
the average size of the amounts owed to the Federal Government
is significantly larger than the average size of amounts owed
to State governments. Absent installment agreements, some
taxpayers who wish to avail themselves of amnesty would be
unable to do so because they could not afford to make one lump
payment. The permissible period for installment payments cannot
be too lengthy, however, because increasing its length also
increases the risk of loss attributable to taxpayers being
unable to meet their installment agreement obligations. A
taxpayer would continue to owe interest (as under present law)
during the period the taxpayer was making installment payments.
5. The amnesty would apply to all open tax years (except as
noted in the next item). Taxpayers who, prior to the
commencement of the amnesty, resolved a dispute with the IRS
and paid the amount owed would not be eligible for a refund of
amounts paid (although if they had waited for the amnesty to
commence, they would have paid a lesser amount).
6. Amnesty would not be available with respect to
liabilities incurred in the year in which amnesty is announced
nor in the year of the amnesty.
7. Amnesty would not be available to individuals currently
under criminal investigation.
8. Participants in the amnesty generally would not be
subject to criminal penalties.
9. An amnesty would require widespread publicity. Most
States provided significant funding for amnesty publicity;
significant additional funding would also be necessary so the
IRS can publicize the Federal tax amnesty.
10. The amnesty would explicitly state that no future
amnesty would be offered. There are, however, several reasons
why not all taxpayers will necessarily believe that that will
be true. First, several States have had second amnesties
despite pronouncements that the first amnesty would be the only
amnesty. Second, it is not legally possible to prevent future
Congresses from enacting a subsequent amnesty.
In addition to these design parameters, the staff of the
Joint Committee on Taxation made the following assumptions for
the purposes of preparing the revenue estimates in the
Appendix:
1. There would be a reduction in receipts attributable to
IRS staff redeployment regardless of how staffing is provided
for the amnesty. If no new employees are provided to the IRS,
but rather existing IRS employees are redeployed, there would
be a reduction in receipts due to reallocation of IRS
resources. This would occur because IRS employees who would
otherwise perform audits or bring in collection receipts would
instead process requests to be included in the amnesty program.
Even if the IRS is provided with additional personnel to handle
the work created by a Federal tax amnesty, this effect would
not be eliminated because there are practical limitations on
how rapidly the IRS can hire and train new employees;
consequently, some redeployment (and consequent revenue loss)
would be inevitable. Providing the IRS with more lead time for
hiring and training can minimize their redeployment losses, but
providing more time would also increase the period during which
some taxpayers would reduce their current compliance levels in
anticipation of the amnesty (see next item), which would
further reduce receipts.
2. There would be a reduction in receipts upon announcement
of amnesty even if amnesty is not enacted. There are two ways
in which this would occur. First, some taxpayers currently
involved in disputes with the IRS would cease working to
resolve those disputes in anticipation of a possibly better
deal under amnesty. Consequently, voluntary enforcement
collections would be substantially reduced. Second, some
taxpayers might alter their current behavior and reduce their
compliance in the current year in the erroneous anticipation of
amnesty applying to them. A small number might do so by ceasing
to file tax returns; those individuals are, however, likely to
be caught. Most of those who reduce their compliance are likely
to do so by altering slightly reporting positions taken on tax
returns that they will still file with the IRS. The IRS may be
unable to either detect or respond to numerous relatively small
changes on tax returns.
3. Two factors would result in a reduction in receipts in
years following the amnesty. First, some taxpayers may alter
their behavior to reduce their compliance in anticipation of a
future amnesty (whether or not that is explicitly ruled out as
part of the first amnesty). Second, some taxpayers may believe
that amnesty was unfair, in that taxpayers who cheated and then
took advantage of the amnesty receive a ``better deal'' from
the Government than those who voluntarily complied with the
laws (or who did not but were caught by the IRS prior to the
amnesty). To the extent that some of these taxpayers respond to
these perceptions of unfairness by reducing their compliance in
the future, there would be a reduction in receipts in years
following the amnesty.
4. Tax amnesties generally are not tailored to the
circumstances of individual taxpayers, but instead offer
identical terms to everyone. For example, the Minnesota amnesty
forgave 20 percent of the total interest and penalties owed for
taxpayers who had filed returns (up to a $2,000 limit). Amnesty
would consequently have two opposing effects. On the one hand,
it would accelerate collections due to more prompt payment of
amounts owed than would otherwise occur through the normal
collection process. On the other hand, however, amnesty would
reduce collections in that some taxpayers will avail themselves
of amnesty (and the consequent reduction in the total amount
owed) who may otherwise have the ability to pay a larger
portion of the total owed and who would have paid it in the
course of the normal collection process. This means that there
would be an initial acceleration into the first year of the
amnesty amounts that would otherwise be collected (absent the
amnesty) in later years, but that there also would be a loss in
the later years because some taxpayers would pay less under
amnesty than they would have paid in the course of the normal
collection process.
VI. CONCLUSIONS CONCERNING THE POSSIBLE USE OF A FEDERAL TAX AMNESTY
There are several factors that may influence the decision
as to whether to employ a Federal tax amnesty. One is the
revenue consequences of a Federal tax amnesty. The staff of the
Joint Committee on Taxation estimates that a Federal tax
amnesty would result in a net revenue loss to the Federal
Government. This net revenue loss occurs primarily because a
Federal tax amnesty will have the long-run effect of modestly
reducing overall taxpayer compliance with Federal tax laws.
Other factors in addition to revenue effects may
significantly influence the decision as to whether to employ a
Federal tax amnesty. One factor might be whether the Internal
Revenue Code is being significantly reformed or replaced. For
example, in the context of a complete restructuring of the
Internal Revenue Code, consideration might be given to
implementing a Federal tax amnesty to ``wipe the slate clean''
for prior noncompliance.
Another context in which a Federal tax amnesty might be
considered is whether it might be an appropriate element of
legislation to restore taxpayers' confidence in the fairness of
the Internal Revenue Service. Some might argue that a Federal
tax amnesty would provide an appropriate opportunity to resolve
prior disagreements with the IRS, which could help restore
confidence. Others might argue that amnesty would not be an
appropriate mechanism to restore confidence in the fairness of
the tax system, since some taxpayers who fulfilled their tax
obligations could view it as unfair that others received a
``better deal'' under amnesty.
APPENDIX--ESTIMATED BUDGET EFFECTS OF POSSIBLE FEDERAL TAX AMNESTY PROPOSALS
Fiscal Years 1998-2007
[Billions of Dollars]
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Proposal Effective 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 1998-2002 1998-2007
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1. Individual taxpayers only: aco 10/1/98 ...... 4.2 -1.7 -1.7 -1.8 -1.8 -1.8 -1.9 -0.7 -0.7 -1.0 -8.0
waiver of penalties and 50%
interest, include accounts
receivable, for taxpayer
years 1996 and prior; amnesty
period for 90 days.
2. Individual taxpayers who aco 10/1/98 ...... (\1\) (\2\) (\2\) (\2\) (\2\) (\2\) (\2\) (\2\) (\2\) (\2\) -0.2
have not filed returns with
the IRS only: waiver of
penalties and 50% interest
for taxable years 1996 and
prior; amnesty period for 90
days.
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\1\ Gain of less than $10 million.
\2\ Loss of less than $50 million.
Legend for ``Effective'' column: aco=amnesty commencing on
Note. Details may not add to totals due to rounding. Estimates do not include outlay effects for promoting and administering a Federal income tax
amnesty.
Source: Joint Committee on Taxation.