e are a little over the halfway point of the Connecticut Tax Amnesty program that expires on June 25, 2009. The Connecticut Department of Revenue Services (DRS) has been marketing it tax amnesty program fairly aggressively on the web and radio. So… how is it going so far?
When we first heard about tax amnesty program in last December, we were anticipating an influx of tax amnesty clients. So far, that has not happened. And I have a couple reasons why this is the case
#1. To take advantage of Tax Amnesty, a taxpayer must pay in full within 10 days of filing their return.
The majority of people who could take advantage of tax amnesty are the self-employed. Wage earners have already likely filed as they had returns coming –they had no incentive not to file. Those who are self-employed tend to have several years of unfiled returns eligible. They ran up a huge IRS bills while they ran up a significant DRS taxes. There is simply no way they can pay in full.
While they may have entered into a payment plan with the IRS, or settled their back taxes with an Offer in Compromise, they see no reason to come clean with the DRS. In the best case (at least in their mind), all they will do is alert the DRS to the fact that they owe money that they cannot pay. And if they keep quiet, the DRS may forget completely about them. The statute of limitations for the DRS to assess may expires, and a year's entire liability become extinguished.
To simplify, the reward for coming clean is not a reward those eligible to file for amnesty can take advantage of.
#2. Lack of fear of the DRS
The Governor's proposed budget for the DRS for fiscal year 2009-2010 is approximately $75 million. For this $75 million, the DRS brings in $14 billion dollars a year. That's a Return on Investment (ROI) of 1:186.67. For every dollar spent on the Department of Revenue Services, that's $186.67 brought in. This figure seems fairly impressive. However, in comparison, the IRS has an operating budget of around $11 billion (for last year I have handy — 2006) and collects $2.5 trillion — an ROI of 1:227.28.
So, why does the IRS have such a better return on money spent? Is the IRS really that much more effective? Or is the DRS that much more ineffective?
My experience tells me that the reason for the disparity is that the IRS can do things that the DRS can not. For instance, the IRS can file a Notice of Federal Tax Lien and muck up someone's credit — all without a court order. Or, the IRS can file a levy or wage garnishment — again, without a court order.
These are two incredibly powerful collection tools that aren't available to the DRS. Unless, of course the DRS goes to Superior Court and gets a court order for either remedy. But such procedure is expensive and time-consuming. Because of the expnese involved, the DRS typically will only go after very large debts in court. And ultimately, a judge will have to agree to a wage execution.
For this reason, if the DRS gets a levy granted on a taxpayers wages, this levy becomes much harder to release than a levy issued by the IRS. The DRS will have a lot of sweat invested in in a levy, while the IRS has little energy invested. You see, the IRS, in most case, is able to issue a levy or lien simply because a taxpayer failed to sign and respond to a certified letter that would have given the taxpayer the right to contest the lien or levy through an action known as a Collection Due Process hearing.
Unfortunately for many taxpayers, they believe ignoring the IRS will help them (usually, this tactic does not work out so well).
So, without the same fearsome tools the IRS has, considering the job the DRS has to do, its lower ROI is rather respectable.
For Self-Employed individuals, the anxiety over the DRS is not nearly as high as it is with the IRS — as ignoring certified letters from the DRS has no terribly adverse consequences. Yet this may be a dangerous belief. True, the DRS of the past had a serious impediment — as prior to 2005, the DRS had no way of sharing information wit the IRS (yes, it's true). Obviously, this would significantly impair its ability to collect.
But now, the DRS does share information. If the IRS happens to know about a 1099 reported to your social security number, you can bet that the DRS knows all about it as well.
So, coming clean may still be the best idea — not because there is a some significant benefit to Tax Amnesty, but because, at least if a tax payer owns up to the problem now, the tax problem will not be getting any bigger. If you need assistance with a tax matter, contact us. We can help.