For years, governments have instituted and administered tax amnesty programs of various forms. At least as measured by the metric of revenue collections, some of these programs have proven successful and others have not. However, none of these many programs properly accounts for the issue of recidivism in a meaningful manner. To address this problem and to enhance long-term tax compliance outcomes, this analysis advocates that legislative governing bodies make tax amnesty programs a one-time option: taxpayers who participate in one tax amnesty program would be barred from subsequent tax amnesty participation offered by the same taxing jurisdiction involving the same type of tax.
When it comes to fulfilling their civic responsibilities, taxpayers are notorious for not always being forthright. They often underreport their income, overstate their deductions, or simply fail to file their returns. Evidence for this proposition abounds. Consider a salient fact: the nation’s voluntary compliance rate with all federal government taxes hovers slightly above 80%, where it has been for the last half-century. This means that approximately one out of five taxpayers misreports his or her income or other taxes at the federal level. Evidence suggests that the same (often higher) noncompliance rate is likely true at the state level as well.
Governments have instituted all sorts of measures to improve taxpayer compliance. Such undertakings include, but are not limited to, increasing the budgets of their enforcement arms, raising dereliction penalties, and educating the public regarding the virtues of tax compliance. At least as demonstrated by tax compliance rates, the outcomes of such efforts have been mixed.
To augment taxpayer compliance, as well as to generate revenues, another commonplace strategy has been the institution of tax amnesty programs. A tax amnesty program allows individuals or firms to pay delinquent taxes without being subject to some or all of the financial and criminal penalties that the discovery of tax evasion normally brings. A typical tax amnesty program has several common features. Prior to being contacted by tax authorities, participating taxpayers must acknowledge their tax-filing flaws or delinquencies; they must then correct filed returns or submit missing ones; and they must pay the tax owed plus interest and, if applicable, penalties. As a quid pro quo for program participation, taxpayers typically secure relief from criminal sanctions and the reduction or elimination of penalty amounts; in addition, elected and tax officials give taxpayers to a fresh start, tacitly welcoming them back into the compliance fold.
However, such a typical tax amnesty program suffers from a fundamental flaw: the program fails to adequately acknowledge the problem of recidivism, so that those who have a proclivity to cheat are apt to repeat these behaviors. At least in the criminal realm, it is well known that those who commit crimes demonstrate a tendency to do so again, often being referred to as “repeat offenders.” These repeat offenders in the criminal world usually face serious consequences for their actions. However, tax amnesty programs almost always universally welcome all taxpayers, even those who previously demonstrated noncompliance in their tax filing, their payment practices, or both.
As a remedial measure, this analysis advocates that tax amnesty programs embrace a simple participation qualification: taxpayers could seek amnesty to “cleanse” their tax record; thereafter, however, the taxpayer would be barred from subsequent tax amnesty participation offered by the same taxing jurisdiction involving the same type of tax. In short, participation in any tax amnesty program would be a one-time opportunity.
To support this policy, Section II presents background on this issue. Next, Section III analyzes the problem of recidivism and its implications. Section IV then advocates that tax amnesty programs grant one-time access. Finally, Section V concludes.
The notion of an “amnesty” has a commonly accepted meaning that has withstood the test of time. It means an “official pardon.”
Outside the tax context, governments often grant amnesties to groups of people who have committed societal transgressions (typically criminal in nature). Why are governments willing to manifest such magnanimity when important pillars of society are being or have been threatened? As articulated by one commentator, the reason is often because “forgiveness will further the public welfare more than punishment.” Yet, on the basis of retribution, amnesties sometimes frustrate those citizens who want perpetrators to be brought to justice and to face the consequences of their actions.
The manner in which governments orchestrate amnesties generally follows a pattern and tax amnesties are no exception. A governmental body will announce the amnesty program as a policy of forgiveness for individuals who have previously violated the law; once the offer to participate is made, those who have been derelict can opt to participate or not; and those participating in the amnesty are welcomed back among the law abiding or, at the very least, acknowledged for their efforts. The time periods over which amnesties unfold vary tremendously, some lasting a few weeks and others much longer. For example, The General Amnesty Act of 1872 granted permanent immunity to most Confederate soldiers and others who had participated in the Civil War.
Of all the types of amnesties that exist, few appear to have the popularity that those in the tax realm enjoy. Worldwide, at any given time, at least one government is almost always promoting a tax amnesty. Based on the general notion that granting amnesty for criminal and civil transgressions yields societal good that outweighs attempts to mete out punishment, tax amnesties have been instituted on a regular and recurring basis.
Most tax amnesties are designed to achieve four commonly articulated objectives:
Underlying these four objectives is the primary goal of increasing tax revenues, both short term and long term.
However, for several reasons, tax amnesties are seldom a panacea to rectify all of the tax compliance woes that a particular government faces. First, some commentators consider tax amnesties fundamentally unfair because they enable taxpayers to display, even flaunt, their noncompliance with impunity. Second, the amount of revenue that tax amnesty programs generate is ordinarily quite small, seldom more than a few percentage points of recurring government revenues. Finally, of perhaps most importance, tax amnesties can have negative long-term implications if honest taxpayers lose faith in the tax system and decide to adopt the habits of the noncompliant.
Despite the real and perceived shortcomings associated with tax amnesties, they have been omnipresent during the course of the past century in the United States. Consider their salient attributes at the state and federal levels, respectively.
States impose a wide and varying range of taxes, such as income, sales, and excise taxes. While many taxpayers are compliant, a significant number fail to comply with their obligations across a broad spectrum of taxes. For those taxpayers falling into the latter category, state governments have routinely turned to tax amnesty programs.
State tax amnesty programs vary tremendously: some state legislatures offer them over short time periods and others over extended time periods; some programs pertain to one tax only (e.g., income tax), and others a range of different taxes (e.g., income, corporate, and sales and use taxes); and, finally, some waive interest and penalties, and others do not. While these programs differ in nature and scope, commentators consider certain amnesty program attributes optimal, including the following:
Measured by several previously enumerated metrics (e.g., revenue collection and adding taxpayers to the tax rolls), state tax amnesty programs have sometimes proven moderately successful. Evidence of their accomplishments manifests itself in the sheer number of tax amnesty programs that exist at any one time, routinely sprinkled throughout the states.
Consider a recent case study in which the state of New Jersey instituted a wide-reaching tax amnesty program. Rather than raise taxes or cut governmental spending, Governor Phil Murphy offered a two-month window (November 15, 2018–January 15, 2019) for taxpayers to come forward and pay back income, sales and use, and corporate taxes, plus interest on the taxes owed. In those instances when taxpayers participated, the state waived penalties; however, in those instances when taxpayers did not participate and were audited, the state sought to impose standard penalties plus an additional five percent levy. The legislative goal was to raise $200 million. Due to widespread publicity and the threat of an additional penalty, the program proved resoundingly successful, raising nearly 50% more revenue than was originally anticipated.
Note that in addition to but different from periodic tax amnesties, many states offer what are commonly referred to as voluntary disclosure programs (VDPs). Unlike tax amnesty programs, which are typically available to all taxpayers and often cover all types of taxes, state VDPs may be available only to specific individual and business taxpayers whose revenue-generating activities in the state may have gone unnoticed by the tax department. For example, state VDPs may be attractive to those involved in specific types of retail sales activities that involve sales and use tax collections, in which taxpayers who have failed to follow proper registration protocols are able to pay previously unpaid tax liabilities without penalties but often with associated interest payments. Notably, unlike tax amnesty programs, state VDPs are usually offered on a continuous or permanent basis, with no specific and limited periods for participation, and their program contours often vary significantly by state. In the end, participating taxpayers often enjoy similar financial benefits under either type of program (i.e., tax penalties are either waived or reduced), but state VDPs often do not present the same recidivism issues associated with tax amnesty programs for one simple reason: once taxpayers “come clean” (i.e., register to report tax in a particular state) and commence reporting, there is no need (or opportunity) for them to come forward a second time to do so again.
To date, the federal government has not instituted a formal tax amnesty program (at least by name). Instead, for over a century, it has offered what it has described as a voluntary disclosure program (the “federal VDP”). While the particulars of this program have varied, it has essentially operated as follows: prior to taxpayers being investigated, they may approach the Internal Revenue Service (“Service”), acknowledge the problem (e.g., failure to report income, the deduction of a fictitious expense, or failure to file a necessary tax return), and then take remedial measures to correct the issue. If taxpayers undertake these steps, the Service has published guidance that declares that those participating will not bear criminal liability, absolving them of any illegal wrongdoing.
Close to two decades ago in 2003, the Service instituted a variation of the federal VDP program known as the Offshore Voluntary Disclosure Program (OVDP). The Service began this program after the agency learned that taxpayers were using credit cards with offshore bank accounts, hiding billions of dollars of unreported income offshore. Because the Service knew that it lacked the necessary funds and resources to audit and prosecute all non-law-abiding taxpayers who parked unreported income offshore, it commenced a series of four additional OVDPs in which taxpayers could participate. The financial penalties associated with program participation were steep, but participating taxpayers could once again know that they were no longer under threat of criminal prosecution.
Recently, in 2018 the Service commenced a new version of the federal VDP. Introduced via a pronouncement, it offers taxpayers a pathway to criminal absolution. As has been true with other iterations of the program, the metaphoric “toll charge” associated with program participation is financially hefty. Over a six-year lookback period:
One possible problem with the current version of the program is that it vests Service examiners with tremendous latitude in deciding whether harsher penalties could apply, a factor that may discourage taxpayer participation.
Over the years, in an effort to expand the Service’s approach beyond the federal VDP, policy experts inside and outside of Congress have strongly advocated that the federal government consider instituting broad and far-reaching amnesty programs. Indeed, several congressional bills were introduced in the mid-1980s that endorsed the institution of such programs. The debate on these bills raged along familiar lines. On the plus side, amnesty advocates pointed out potential revenue generation and the addition of new taxpayers to the tax rolls; on the minus side, amnesty critics claimed that such a program would raise anemic revenue and would have a detrimental effect on taxpayer morale and compliance going forward. To date, the federal government has resisted instituting such a broad amnesty program.
This part of the Article has demonstrated that tax amnesty programs in the United States—whether at the state or federal level—typically share similar traits and posit comparable goals. However, these programs fail to take into account the behavioral aspects of tax compliance, namely, that taxpayers who cheat on their taxes are apt to repeat their behavior, particularly if they think that they will not be caught or that another amnesty program will be forthcoming. The experience of the United States is not an isolated one: other countries around the world face the same trade-offs. The next part of this Article addresses the issue of recidivism and its relationship to tax amnesty programs.
Investigations conducted on amnesty programs and their short-term and long-term implications have been undertaken by academics, government officials, and others. The research demonstrates both positive and negative aspects of amnesty programs. One fact, however, that needs little further investigation is the recognition that tax amnesty programs have become addictive to government officials: once offered, notwithstanding the claim that they represent a “one-time opportunity,” they are routinely repeated. This is true at the state level, and indeed it is a worldwide phenomenon.
Considering only state tax amnesty programs, most states that adopted a first amnesty program have continued to offer subsequent ones. According to the Federation of Tax Administrators, the most striking examples of this phenomenon are Louisiana (eight amnesties since its first amnesty was enacted in 1985), Massachusetts (seven amnesties since 1983), Arizona (six amnesties since 1982), Connecticut (six amnesties since 1990), New Jersey (six amnesties since 1987), Alabama (five amnesties since 1984), New York (five amnesties since 1985), Oklahoma (five amnesties since 1984), Rhode Island (five amnesties since 1986), and Texas (five amnesties since 1984).
In general, amnesty programs are most favored by legislatures when certain conditions are met, including the following:
Since situations involving tax delinquencies often meet all five of these conditions, it is easy to understand the attractiveness of tax amnesty programs. Another reason that politicians relish their use is that their key attraction, at least from a political perspective, is almost immediately realized—namely, the receipt of additional revenue without the need to raise taxes—whereas the major associated cost of disadvantaging otherwise compliant taxpayers is borne by subsequent political administrations.
The repetition of tax amnesty programs, however, has important public policy implications. Delinquent taxpayers have no incentive to change their behavior and timely pay their taxes, if they can pay them late with little or no consequence. Moreover, by signaling to taxpayers that tax violations carry little or no sanction, repeated tax amnesties undermine the goal of deterring bad acts in the first instance. Further, repeated tax amnesties tacitly encourage recidivism. Consider the cyclical behavior pattern that taxpayers are apt to exhibit: because the very notion of amnesty presumes that those eligible have already violated established legal requirements, the repeated reductions of any punishment for such behavior reinforce this behavior, thus promoting further bad acts, rather than fostering tax compliance. Finally, the resulting revenue shortfall deprives governments of financial means to support important and critical programs.
In light of these concerns, Part III.A below examines how the criminal law system has historically viewed the issue of recidivism, and Part III.B sets forth how, in recognition of the prevalence of recidivism, politicians have sought to shape tax amnesty programs.
A common human characteristic is that we tend to repeat behavior. Often, this may be beneficial, particularly insofar as good habits are concerned. For example, those who eat a healthful diet, exercise, read, and socialize regularly know this pattern well and can readily retrace their steps. Such repetition proves both enriching and efficient.
However, as social scientists will attest, humans can also exhibit behavioral patterns that are counterproductive. We can eat too much, engage in unhealthful habits (e.g., cigarette smoking), watch a lot of meaningless television, and spend hours immersed in distracting social media. Notwithstanding the shortcomings associated with such habits, and even though we know that these habits can be dangerous to our health, many people gravitate to behaviors that offer short-term gratification but have harmful long-term consequences.
The impact of this human tendency for repeat behavior has important implications with regard to criminal activity. Criminals know that their actions are transgressions that often carry consequences ranging from modest sanctions such as public shame and the requirement to perform community service, to more serious penalties such as serving time in prison and paying stiff financial penalties. Notwithstanding these risks, a common trait among criminals is that they will keep repeating their illicit behavior until, at some point, they are caught, reprimanded, and punished.
During the punishment phase, society often hopes for various positive results. In some cases, society seeks to rehabilitate the wrongdoer, to extract retribution from the transgressor, and to deter others from engaging in these same acts. When it comes to amnesties, however, these programs do little to further these objectives. Rather, the punishment for tax violations is lessened or even eliminated. As a result, many argue that tax amnesties are counterproductive and allow recidivism to thrive.
Statistics related to general criminal behavior support this claim. In virtually every sphere of criminal enterprise, those who break the law are the most likely candidates to do so again. Indeed, the criminal law system anticipates this result, and, in an endeavor to stop the cycle, it imposes even harsher consequences on repeat offenders.
While research on whether harsher penalties serve as a meaningful deterrent is decidedly mixed, amnesties undermine the objectives that punishment—and particularly increased punishment for repeat offenders—seeks to achieve. Wrongdoers are not deterred from repeating their offenses, suffer no retributive consequences, and are unlikely to be rehabilitated. Whatever goals might be achieved by imposing increasing harsher sanctions for repeat offenders are compromised. Furthermore, it is often asserted that punishing repeat offenders apparently satisfies society’s psychological need for distributive justice. In other words, in the minds of many, if repeat offenders are truly incorrigible, then they should get their fair dues in the form of enhanced punishments. Constantly offering tax dodgers amnesty may undermine the public perception that those flaunting the rules deserve severe sanction.
When it comes to tax amnesties, governments are not oblivious to the problem of promoting recidivism. In response, they have typically taken four measures: (1) issuing pseudo-edicts that a proposed amnesty will be offered only once; (2) precluding persons with prior criminal records from participation; (3) increasing post-amnesty delinquency penalties; and (4) strengthening future enforcement. All measures have the goal of minimizing recidivism. This analysis details each measure below.
A common mantra associated with tax amnesty programs is that they are a once-in-a-lifetime opportunity. If that is the case, taxpayers who fail to take remedial measures now to set their records straight will not have the opportunity to do so later down the road. Upon hearing this declaration, risk-adverse taxpayers must carefully weigh the choice between taking their chances of not being caught or paying a financial price now for the privilege of securing a clean record going forward.
Some tax amnesty programs limit their availability to those taxpayers who had a momentary ethical lapse in fulfilling their civic duties and who now wish to make amends. A predicate to the entry of at least some tax amnesty programs is thus a record devoid of prior criminal convictions. Taxpayers who otherwise have no criminal record aside from a tax-related dereliction can therefore participate.
State legislatures are not unaware of the fact that old habits are hard to break and that financial temptations to skirt tax obligations loom large. Tax amnesty participants know that they are turning themselves in based on their own recognizance, not as the result of being audited. On a going-forward basis, this reality may harden participants’ mindsets that they can continue to be noncompliant and that their actions will be met with impunity. In recognition that this sentiment may lurk in the minds of taxpayers and in order to dissuade taxpayers from embracing it, government officials will often take an additional course of action. Specifically, along with instituting a tax amnesty program, they will stiffen future tax penalties and the sanctions for those that fail to come forward to claim the amnesty. This action is an endeavor to make taxpayers who engage in a cost/benefit analysis think twice before going down the noncompliance path once again.
Finally, beyond increasing tax-related delinquency penalties, government officials also often strengthen tax enforcement agencies by bolstering their budgets. With additional financial resources, tax compliance agencies may add auditing staff to their ranks and augment their capacities to detect noncompliance (e.g., increase their computer-data-mining abilities). Taking these measures can inspire public confidence in the tax authority, spur tax compliance, and potentially chill taxpayers’ propensities toward recidivism.
Although government officials have not been completely oblivious to the issue of recidivism when instituting tax amnesty programs, critics of amnesties nevertheless claim that amnesties do severe harm to taxpayer morale when they are offered on a repeated basis. After all, critics contend, no one wants to be viewed as a taxpaying chump, and if tax amnesties are always an available option, only those who are foolish would not choose this option for themselves.
This part of the Article examines the well-grounded concern that repeated tax amnesty programs undermine a tax compliance ethos. In response to this concern, Part IV.A spells out a proposed reform measure, namely, limiting eligibility for participation to single amnesty (either without regard to tax type, or at least for the specific tax for which amnesty is sought); Part IV.B details the implications associated with the institution of more limited amnesties; Part IV.C describes variations on the one-time amnesty proposal; and Part IV.D offers lessons learned.
The reform measure that this Article advocates centers on restricting participation in a tax amnesty program. More specifically, a tax amnesty program could only be utilized by those taxpayers who had not previously participated in an amnesty program offered by the same governmental authority.
Consider a simple example. Suppose in 2018 the state of Louisiana offered a tax amnesty program for those taxpayers who had filed inaccurate income tax returns. If the state legislature later decided to offer another tax amnesty program that related to income delinquencies, say in 2022, then those taxpayers who participated in the 2018 tax amnesty program would be precluded from participating in the 2022 program.
Governmental bodies could formulate the proposed one-time option in a variety of fashions. In some instances, they could grant fairly broad latitude to taxpayers. To illustrate, governments could permit taxpayers who participated in an income tax amnesty program to partake in a subsequent amnesty for a different type of tax, such as sales and use tax. In other instances, a government might not wish to be so magnanimous, declaring that participation in a tax amnesty for one type of tax precluded subsequent utilization of any other amnesty for another type of tax.
One question that governments must resolve for business taxpayers is “Who is the taxpayer?” Individual taxpayers are just that—people who, for tax amnesty purposes, cannot easily disguise themselves or masquerade as others. However, the same is not true of legal entities such as corporations and partnerships, which can change form, transfer assets, pass business operations to successor entities, etc., leading to the possible circumvention of the one-time-option limitation.
In general, this concern can be readily addressed. Governments can design amnesties in a manner that requires taxpayers (or their principals) that have the same Social Security number or employer identification number as a prior participant to demonstrate their eligibility or be precluded from participation in multiple programs. In the majority of cases, institution of this basic restriction should work well.
Even for tax avoiders willing to spend additional time, effort, and energy to form a new business enterprise simply for the opportunity to participate in a potential future tax amnesty program, preventive measures are viable. Consider a hypothetical situation in which Taxpayer A owns all of the outstanding shares of Corporation X, the latter of which participates in Louisiana’s aforementioned hypothetical 2018 tax amnesty program. Taxpayer A, knowing about the one-time limitation and seeking to keep his options open, decides to form another wholly owned corporation, say, Corporation Y, to be the successor to Corporation X and assume its business affairs. If Louisiana decides to offer a 2022 tax amnesty program, Taxpayer A’s strategy may be realized insofar as Corporation Y, with its new and unique employer identification number, may be a candidate for participation.
However, state taxing authorities could develop amnesty applications that mandate disclosure of information regarding an entity’s shareholders (for closely held businesses), members (for limited liability companies), or partners (for a partnership), and the authorities could also request the disclosure of predecessor entities. Furthermore, legislatures could adopt penalties for failure to make required disclosures that might include loss of eligibility or additional sanctions for transgressors or both. Finally, if governmental legislative bodies notice that too many kindred folks like Taxpayer A are participating in an amnesty program, they could always institute a general anti-abuse rule to curb such practices.
While taxpayers could participate in amnesties offered in different tax jurisdictions, they would not have this same latitude for amnesties offered in the same jurisdiction. Instead, if they elected to participate in an amnesty program, the proposed legislation would preclude their revisiting their choice. The rationale for this limitation is simple: to forgive one transgression constitutes an implicit acknowledgment of our human foibles; however, to forgive such behavior that occurs on a regular and repeated basis recognizes and even legitimizes this behavior as acceptable. Such legitimization is intolerable for a society that wishes to maintain compliance with its laws, tax and otherwise.
Like any policy reform measure, limiting tax amnesty program availability would have both advantages and disadvantages. In this case, the former greatly outweigh the latter.
From a tax policy perspective, the proposed reform would send important dual messages. It would signal that a temporary lapse of judgment is forgivable, which would inject a sense of humanity into what otherwise might be perceived as a callous and unforgiving tax system. By the same token, it would also simultaneously indicate to members of the larger tax-compliant community that their efforts are not being overlooked, unappreciated, or taken for granted.
In terms of revenue collections, implementation of this proposal would likely result in a moderate influx of additional revenue. Beyond the amounts raised directly from participants’ amnesty program filings, participating taxpayers would be better moored to the tax system going forward and more likely to comply, knowing that there will be no future opportunities to exploit another tax amnesty program. However, if a tax amnesty program participant who had previously failed to file tax returns decided to once again become noncompliant, the tax authorities would have a far better chance of detecting this dereliction of duty. At the same time, propelled in part by the proposed restriction on tax amnesty use, generally compliant taxpayers would be more likely to stay the course and be attentive to fulfilling their civic filing duties.
Still another virtue of the proposed reform is that it places a premium on equity and fairness. People make mistakes and, when confronted with complex tax codes and the challenges of tax compliance, errors abound. In such a context, sound public policy should encourage citizens to learn from their mistakes, while making clear that if an individual does not learn from past mistakes, the consequences may be austere. Instituting a tax amnesty program and limiting its availability accounts for human fallibility, while at the same time recognizing our capacity to educate ourselves. A one-time tax amnesty thus acknowledges our common humanity, both its bad and its good aspects.
The proposed reform restricting tax amnesty availability offers one final advantage: it places important responsibilities upon taxpayers to be civic-minded. Bear in mind that civil society only functions if taxpayers, together, pay their equitable share of taxes. If taxpayers fall short of fulfilling their obligations, they must be encouraged to comply or be reprimanded, or else the fiscal needs of those basic institutions (e.g., the justice system, fire and police departments, national parks, and roadways and other infrastructure) that our society requires would collapse. As previously pointed out, the word amnesty denotes a pardon or forgiveness for wrongdoing, and those participating in such programs are essentially acknowledging their guilt. This acknowledgment, coupled with the one-time restriction, should both repair and strengthen the broken bonds between these taxpayers and society.
Furthermore, there is little sound policy basis (and none supported by the literature) for rejecting the proposal of limited amnesty. Indeed, the only viable complaint would seem to be that preventing repeat amnesty participation would reduce the short-term revenue generation opportunity that amnesties represent. However, there is strong evidence that repeat offenders generate only a fraction of the already modest revenues that amnesties raise. As our analysis suggests, such minimal potential revenue gains from repeat offenders are more than offset by the benefits of a policy that will reduce (or at least not promote) such recidivist behavior in the first place, while at the same time fostering a perception of fairness that will encourage greater long-term compliance among the broader populace at large.
While our analysis supports the conclusion that a one-time amnesty is preferable from a policy perspective, there are three possible variations of the proposed one-time reform measure that merit consideration, the details of which are amplified in the sections that follow.
The first variation pertains to taxing society’s so-called “tax incorrigibles”—those taxpayers who can never seem to put their tax affairs in order or who are regularly tardy or careless in their submissions. Rather than outright precluding these taxpayers from participating in a tax amnesty program once they have done so in the past, state legislatures could, as a modification to the one-time proposal, institute a steep penalty scale for habitual derelicts.
A simple example illustrates how this proposal variation would play out in practice. Suppose a taxpayer failed to submit California income tax returns for tax years 2015–2018. Suppose further that in 2021, California offered a tax amnesty program for delinquent filers and waives its normal maximum 25% tax delinquency penalty for late tax filing. If California were to offer another tax amnesty program at a later period of time, it might consider imposing a progressive, “repeat participant” penalty structure such as the one set forth below, rather than allowing a full waiver (and with interest charges applicable at the standard statutory rate):
| Number of Amnesties Participations | Penalty Rates |
| First | 0% |
| Second | 5% |
| Third | 10% |
| Fourth | 15% |
| Fifth | 20% |
From the perspective of the state legislature, utilization of this graduated penalty scale sends a dual message to the taxpaying public: we welcome noncompliant taxpayers back into the taxpaying fold, but there is an increasing cost associated with habitual derelictions. This variation to the suggested one-time proposal is not novel in nature. To the contrary, a number of academic commentators have endorsed proposals of a similar nature; furthermore, a number of states have instituted this sort of variation in the non-filing penalty provisions of their respective tax codes, and, to some extent, the federal government has done so as well.
A second variation to the one-time amnesty proposal pertains to business taxpayers (e.g., partnerships, limited liabilities, and corporations) that have sought to turn over a new ethical leaf. Over time, some business enterprises transform themselves from being proverbial “bad apples” to model citizens in terms of legal compliance. Often this is the result of some external event (e.g., revelations regarding a hazardous or unlawful product) or internal change (e.g., forced resignation of the existing board of directors). In recognition that business enterprises can undergo these transformative events and fundamentally reinvent themselves, state legislatures should be sensitive to these changes and consider taking this conversion factor into account. One way a state might acknowledge a business enterprise’s renewed commitment to tax compliance is restoring its eligibility for tax amnesty, even when prior corporate management has already benefited from a prior program.
However, as might be expected, being able to identify those business enterprises that have undergone fundamental and transformative change is a challenge. In the case of public companies, this might not be overly difficult to achieve through the use of certain default presumptions. For example, the definition of a potentially eligible company (i.e., one that was deemed not to have previously participated in a tax amnesty) could include those that have, say, appointed 70% or more new directors as compared to when the company previously secured tax amnesty. Also, in the public company realm, independent third parties often calibrate a business’s commitment to fulfill ethical responsibilities and mores. State legislatures could empower tax enforcement authorities to consult these third-party reports in deciding whether petitioning business enterprises had undergone transformative changes and thereby could qualify for amnesty participation.
Notwithstanding these proposed metrics to identify meaningful ethical changes, deciding when a business enterprise has undergone a fundamental transformation in compliance behavior would admittedly be difficult to discern, particularly as applied to non-publicly traded business enterprises. State legislatures could address this concern by crafting legislation that would permit a petitioning business enterprise that had already participated in one tax amnesty program to apply for a waiver to participate in a subsequent program, predicated upon the organization presenting evidence anonymously of its changed compliance profile to state tax authorities, who would be vested with absolute discretion to determine whether qualification for an additional amnesty participation would be warranted.
A final variation on the one-time amnesty proposal would be for state legislatures to institute permanent amnesty programs somewhat akin to the existing federal voluntary disclosure program. Permanent amnesty programs at the state level would permit taxpayers, prior to being investigated, to come forward, avoid criminal prosecution, and face reduced civil delinquency penalties.
Permanent amnesty programs have their advantages and disadvantages. On the positive side of the ledger, at least in the short term, they can result in making program participants tax compliant, enhancing revenue collections, and rendering the tax system less threatening to taxpayers who seek to make amends. On the negative side, some argue that they may undermine public confidence in the tax system, they may lead taxpayers who are not risk-adverse to cheat, and, in the long term, they may diminish revenue collections, all without generating significant amounts of revenues. In the realm of permanent amnesties, empirical evidence thus far is quite limited and mixed.
Still, the use of permanent amnesty programs warrants further exploration. State legislatures should consider carefully the merits associated with their implementation, so that taxpayers are not exposed again to the empty and all-too-familiar phrase that a particular tax amnesty program is a “one-time, never-to-be-seen-again opportunity.” If instituted, participation in a permanent amnesty program would be predicated upon meeting the following twofold criteria: first, the taxpayer would have to submit an application for tax amnesty prior to the taxing authority informing the taxpayer that he or she or it were under audit investigation; second, no taxpayer who participated in the permanent amnesty program would be eligible to participate in it again (unless, of course, the state legislature had instituted the program in conjunction with one of the other variations discussed above).
While the specific features of the various state amnesty programs differ, there have been some common aspects of each of them. In general, state tax amnesties have applied to both domiciled and nondomiciled residents and businesses, lasted two to three months, and applied to unpaid taxes of all types, including individual income taxes. Even so, there are also some notable differences across state tax amnesty programs: in some, known delinquents (with already identified tax amounts due) have not been allowed to participate; most states have waived some or all interest, penalties, or both that had accrued on back taxes; a few have increased the penalty for tax evasion following the grace period; finally, a number of states have provided for greater funding for post-amnesty enforcement. Even so, the short-term revenues generated by an amnesty are almost always small relative to overall government tax collections.
It is natural to ask how these many variations in specific tax amnesty features have affected the performance of the state programs, both in terms of the short- and long-term benefits. Most available evidence relates to the short-term effects. Empirical estimates consistently demonstrate that, while still modest, short-term revenues are higher for an amnesty that: (1) allows past evaders to participate; (2) reduces interest payments on back taxes; (3) increases post-amnesty criminal penalties; and (4) escalates funding for post-amnesty tax enforcement. Empirical work also reveals that repeated amnesties generate progressively smaller amounts of short-term revenues.
The arguably more important, long-term effects of tax amnesty programs remain unclear. What evidence exists suggests the following outcomes:
Both the short- and long-term effects of tax amnesty programs suggest three general conclusions.
First, tax amnesties typically generate only a small amount of additional short-term tax revenue. As a practical matter, amnesty revenues tend to be overstated. This suggests that a tax amnesty should not be viewed as a fiscal panacea. Multiple amnesties are even less successful in generating additional revenues, and they have perverse effects on voluntary compliance as taxpayers incorporate the expectation that future grace periods will occur. Furthermore, most revenues collected in an amnesty generally come from those individuals with relatively small amounts of previously unreported taxes; hard-core evaders, or those who evaded large amounts of tax, typically do not exhibit high amnesty participation rates. Consequently, the ability of an amnesty to coax such evaders onto the tax rolls seems small, which is part of the reason that amnesties rarely generate significant amounts of additional revenue.
Second, individuals or firms are more likely to participate only if a tax amnesty is accompanied by a significant change in the post-amnesty tax system, especially its enforcement features. More specifically, empirical evidence indicates individuals will not voluntarily admit past tax evasion in a tax amnesty unless they believe that tax enforcement will be increased following the amnesty. Often, an individual or business with unpaid tax liabilities has made the decision that the benefits of evasion (e.g., reduced taxes) exceed the costs (e.g., the risk of detection and punishment). If it appeared rational for taxpayers to evade taxes in the past, then in an unchanged environment it will seem rational for them to continue to evade taxes, even if a tax amnesty is enacted; accordingly, they will only participate in an amnesty and report past evasion to the authorities if they believe that audit and penalty rates will be increased.
Third, and of most relevance for our main policy recommendation, citizens must believe that the amnesty is a one-time opportunity. To the extent that an amnesty is successful in raising revenues during and after the amnesty, citizens must believe the government when it states that the amnesty will not be repeated—the government must have credibility. This suggests that an amnesty should not be used as an emergency revenue-raising measure because this will only encourage further noncompliance in anticipation of the next revenue emergency. In addition, citizens must believe and must eventually see that the amnesty is accompanied by enhanced enforcement. At the very least, an amnesty should be part of a significant shift of the tax system and a reorganization of tax administration aimed at efficient and effective tax enforcement. In fact, if increased enforcement and reorganization are already planned by the tax authorities, then a tax amnesty can be an effective tool for easing the transition to a new, tougher tax regime. Such an amnesty offers several advantages: the amnesty generates some immediate tax revenue; individuals with past evasion are not locked into continued evasion; and the government both clears its ledgers of accounts receivables and adds the names of past evaders to its records. Importantly, however, individuals must believe that improved enforcement will occur and accept as “True” (with a capital “T”) that the amnesty is a one-time opportunity to report previously unpaid taxes.
Tax amnesties are popular both in the United States and abroad. When carefully implemented, their virtues often are believed to outweigh their shortcomings, which makes them a regular feature in the tax compliance arsenal of many government officials. However, tax amnesty programs have proven infectious: once governments tap into them, they crave repeat performances. This exacerbates the problem of taxpayer recidivism, often sapping tax amnesty programs of their virtues.
Rather than downplay or ignore the problem of taxpayer recidivism, legislative bodies should tackle it head-on. A central feature of all tax amnesty programs should thus be that program participants have one—and only one—opportunity to tap into society’s magnanimity and return to the realm of being tax compliant. Once taxpayers have availed themselves of a program’s opportunities, they would thereafter be estopped from doing likewise in any amnesty program offered by the same governmental body, at least for the same type of tax. While adopting this proposed reform would not alleviate all of the concerns voiced by tax amnesty program detractors, the central problem of recurring tax amnesty opportunities would be put to rest.
The authors thank Matthew Schaefer, Esq., for his insightful and thoughtful suggestions.
