(Un)intended consequences? California's 2005 tax amnesty program.

• Author: Rosario, Ric

While most associate "amnesty" with the idea of sanctuary, the word derives from the Greek root for "amnesia," a forgetting. For taxpayers who owe state taxes, California is willing to forgive and forget through its own sanctuary: the 2005 tax amnesty program.

Spurred by last year's tax shelter amnesty program that added $1.4 billion to the state's coffers, California is providing a general tax amnesty to individuals, businesses, fiduciaries, estates and trusts for tax years 2002 and prior.

The program--which began Feb. 1 and runs through March 31--is a last chance for taxpayers to pay past-due income, franchise, sales or use tax and the related interest without penalties and criminal prosecution. The Board of Equalization is administering the sales and use tax portion of the program, while the FTB is handling the personal and corporate income and franchise tax portion.

The program, however, contains a few pitfalls that are causing a concern for taxpayers. The lack of an appeals process, harsh new penalties, indiscriminate assessments and information sharing are just some of the concerns CPAs need to be aware of as they advise their clients regarding tax amnesty.

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NO RIGHT TO REFUND IN FTB PROGRAM

The BOE's amnesty program will allow taxpayers making sales tax payments to seek refunds of amounts paid due to the amnesty program participation. However, taxpayers who participate in the FTB program give up that right to appeal and won't be able to claim a refund for any income tax amnesty-related payments.

The taxpayer will be permitted, however, to claim a refund for income tax amounts paid via withholding or estimated tax; paid with the original return; or paid subsequent to the filing of the original return, but before the taxpayer applied for amnesty.

This could create some liability exposure for the CPA. If your client has an existing income tax protest, appeal or amended return in process, consider whether the benefits associated with participation in the amnesty program are worth the risk of losing the appeal and refund rights.

If the client has a reasonable expectation that the income tax protest or appeal will be successful or the amended return will be accepted, it may be best to have the client pay the expected income tax, interest and penalties outside of the covenants of the amnesty program to preserve their refund rights.

ACCURACY-RELATED AMNESTY PENALTIES

Taxpayers who are eligible, but choose not to...