By Michael J. Fleming
On June 15, 2012 Rhode Island Governor Lincoln Chafee signed the 2013 budget bill into law.[i] Included in this bill were provisions for a Tax Amnesty Program. The 75-day program will begin on September 2, 2012, and run through November 15, 2012. During this time it appears the program will be open to all taxpayers who are delinquent on any state taxes. Upon acceptance into the Amnesty Program the Tax Administrator will generally waive all related penalties and reduce the applicable interest by 25 percent. The taxes and the balance of the interest must be paid. In addition there appears that there is a payment plan available for reasons of financial hardship. [ii] The Rhode Island Division of Taxation currently has the following statement on their website, “Details Coming Soon.”
So is the Rhode Island Amnesty one you should cross the road for? The answer, as is so often the case when it comes to state tax is: It depends! It depends on your particular set of circumstances and it depends on the details, once the program is more fully explained. For example, one of the main details we do not currently know is how far back they plan to go. If the program requires you to go back more than 3 years, it may be a bad deal. We’ll discuss this in more detail below, but there are other reasons why this amnesty may not be the best option for you.
In general we prefer voluntary disclosure agreements (VDAs) over amnesties as we detail in two of our previous articles; You Missed the Tax Amnesty Express: Don’t Worry. You are probably better off with a VDA anyway! and Texas Tax Amnesty: Is Fresh Start the Best Start? Let’s take a quick look at Rhode Island’s VDA program and then cover the five situations we believe it would be best to cross the road.
Rhode Island Voluntary Disclosure Program
The VDA program covers just about all taxes administered by the Rhode Island Division of Taxation and has some great features and benefits. One of the greatest features of the program is the anonymity it provides for during the application process. The process is usually started by the taxpayer’s representative writing a letter on an anonymous basis with some basic information and the reason for the request. The state will then respond with a letter outlining its position and the conditions for the program. Once the taxpayer knows the state’s position they can decide whether or not to disclose who they are.
Another benefit of the VDA is the limited look back period. When a taxpayer who is required to be registered and file returns has not, there is usually no statute of limitations. In theory, a state can go back to the date the taxpayer started to do business in the state. In reality, most states go back seven to 10 years. For sales tax, Rhode Island can make assessments covering six years.[iii] This is double the Rhode Island VDA look back period of three years.
Some additional benefits include the waiver of penalties, a declination by the state to file criminal charges and the ability to submit spreadsheets rather than back returns on some taxes. Spreadsheets are usually easier and cheaper to prepare than back returns.
The biggest negative of a VDA program are the limiting factors of acceptance. Each state has different factors. Rhode Island has five limiting factors that may either exclude you from the program altogether or at the very least could exclude you from the limited look back provision. They are:
- Previous contact with the division of taxation;
- Having been registered for the tax in question;
- Headquartered, organized, or incorporated in Rhode Island;
- Registration with the Rhode Island Secretary of State; or
- Collecting but not remitting tax.
While these five limiting factors are considered in any application, they do not automatically exclude you from eligibility. Contact someone with experience in these matters so they can guide you through the process.
Five Reasons to Choose the Rhode Island Tax Amnesty over the VDA
- The biggest reason we see to choose the amnesty is if the VDA is not available. If you will not be accepted into the VDA, and you have significant exposure, then you should consider taking advantage of the amnesty.
- If you have been doing business for three years or less then you may want to take advantage of the amnesty for the 25 percent interest reduction as well as the simplified process.
- Under certain circumstances, you may be eligible for all the benefits of the VDA program, except the limited look back period. In those types of situations you would probably want to take advantage of the amnesty for the 25 percent interest reduction as well as the simplified process.
- If you require a payment agreement due to financial hardship, than you may want to pursue the amnesty over the VDA.
- If, when they announce the details of the amnesty, there is a limited look back period equal to, or less than the 3 year look back offered under the VDA, then you will probably want to take advantage of the amnesty for the 25 percent interest reduction, as well as the simplified process. No interest reduction is offered with the VDA program.
If you currently owe back taxes, now is the perfect time to step forward and become compliant. In general, states usually step up enforcement activities after an amnesty ends. If you are contacted prior to stepping forward, you will end up owing all the tax, penalty, and interest. Either the VDA or the amnesty are a better option. As we mentioned earlier, we generally prefer VDAs over amnesties. We see no reason to change our position with Rhode Island unless they announce a limited look back when they release the details of the program. At this point we believe that to be unlikely. However, your particular circumstances may necessitate you to cross the road.
Peisner Johnson & Company, founded in 1992, is the largest national CPA firm that is focused entirely on solving state and local tax problems. Peisner Johnson is comprised of former state auditors and other professionals with years of state and local tax experience. Peisner Johnson has worked with clients of all sizes, in all industries and currently works in all 50 states, U.S. territories, and Canadian Provinces. We work with many CPAs who find us to be a perfect complement to their business since we limit our practice to state and local taxes. We do nothing else. If you would like information on any of our free webinars, free chart services or would like to learn how we may be able to help, you may email Michael Fleming or call him at 972-277-4820.