Tax Amnesty Pays Off as Taxpayers Pay Up

A growing fad, state tax amnesty is a simple concept. For a brief period, a state promises tax cheats that if they come clean, they won’t be carted off to the stake in a tumbrel, and people pour in to declare their unreported income and pay up.

Among the dozen states that have tried amnesty programs, Illinois collected $152 million in two months last fall. Massachusetts took in $81.7 million in three months ending January, 1984, and California is hoping for $70 million by its March 15 deadline.

But it’s no sure thing. Initially, says Massachusetts Revenue Department spokesman Harry Durning, everyone has “this panic: What if you gave an amnesty and nobody came?” And some worry that the very idea of amnesty, however temporary and successful, threatens all future tax collection.

The reasons behind tax amnesty are sagging revenues and lagging tax collection. “We were in the worst financial crunch in state memory,” says Greg Smith, spokesman for Arizona’s Department of Revenue, whose two-month program in late 1982 was one of the first. “We also had a new director who’d heard people say, ‘You don’t need to file an Arizona state return because they don’t check here.’ ”

Range of Participants

Most amnesties take a carrot-and-stick approach: Promising tough new enforcement after the amnesty period, the state temporarily suspends criminal and civil penalties for those who turn themselves in. Illinois waived not only criminal charges but civil penalties and half of the interest ordinarily charged.

Participants have ranged from self-employed individuals to large corporations. Most common, says Smith, are taxpayers “who’ve just had a bad year during the recession, couldn’t come up with their tax money and then were afraid to file because they were in arrears.” (In California so far, and inexplicably, they’re 40% single men, many of whom “had never bothered to file tax returns,” says California Franchise Tax Board spokesman Vicki Vance.)

Whoever they are, more than 80% file in the program’s last week. Illinois took in only $28.1 million--18% of the eventual total--before that final week. Massachusetts had $13 million--or 16%--with less than a week to go; on the last day, 10,000 taxpayers were lined up to file.

Mass promotion helps amnesties. Missouri, which took in only $854,000 ($750,000 of it from two corporations) didn’t advertise at all. Massachusetts spent $40,000 on publicity and got a lot more free--billboards, transit signs, newspaper and radio coverage of its tax commissioner’s weekly cross-state personal appearances.

Obviously, publicity also has to reach businesses, and not just home-state businesses. Massachusetts got $1 million in corporate excise tax from just one out-of-state Fortune 500 company, and California has already received $1.7 million in sales tax from an oil company and $520,000 in sales tax from a “major bank.” In Illinois, which advertised in trade magazines and the Wall Street Journal as well as local media, business income and sales taxes accounted for 28% of amnesty filings and 92% of the money, while individual taxpayers represented 55% of the filings and only 4% of the dollars.

‘Fear, Guilt and Gratitude’

Business or individual, most amnesty participants respond, as Massachusetts Tax Commissioner Ira Jackson liked to say, out of “fear, guilt and gratitude, in that order.” Most programs therefore publicized the downside risk of not responding--California’s “Get to us before we get to you,” Arizona’s Monopoly boards with jail in every corner. Nor were they idle threats: Amnesty is usually followed by new enforcement programs, justifying warnings, says California’s Vance, that “the price of cheating is going up.”

Some states increased the severity of their punishments. Civil penalties in Illinois went from 5% to 7.5% of tax owed, and criminal penalties went up one step; failure to file, for example, went from a Class A misdemeanor (up to a year in jail and $1,000 fine) to a Class 4 felony (up to 3 years in state prison and a $10,000 fine).

Many beefed up detection programs as well, perhaps adding auditors, collectors, criminal investigation staff, perhaps just finally taking advantage of available information. California, seeking an estimated $300 million from unreported capital gains on real estate transactions, will start extracting recent property transfers from local assessors’ rolls--as local service businesses have for years-- so they can demand reports on the transactions.

Many more, under traditional exchange agreements, will computer-match their tax filings against the IRS’, figuring the federal rolls will provide names they don’t have. “A lot of people take the IRS very seriously,” says Barbara Clark, Kansas Revenue Department spokesman, “but they give Kansas the raspberry.”

Fewer will do so in the future: There’s now more downside risk for those who don’t jump at amnesties. There’s also a down side for those who do jump: The IRS gets state data by exchange as well, including all the amnesty filings. Unfortunately, the IRS is not offering similar amnesty.

Nor will it do so, say IRS officials, believing that amnesties bear a downside risk even for taxing authorities. They undermine the taxing authority’s image of strength and impartiality among faithful taxpayers: It is simply unfair to expect continued honesty from one group while forgiving dishonesty in another.

The offer of an amnesty program, moreover, might destroy voluntary compliance, in spite of better enforcement, because people will see it as a possible alternative. It’s therefore considered important to emphasize that it’s a one-shot deal, and never ever to do it twice, or at least, like Illinois (which tried a fortnight’s mini-amnesty three years ago), not to admit it was done before. “Particularly if you’re dealing with procrastinators,” says Arizona’s Smith, “they’d spend the rest of their lives waiting for the next amnesty program.”