Interest and Penalties Archives

Interest and Penalties

New York Budget Legislation Contains Significant Tax Provisions

by Richard C. Call, Michael J. Hilkin and David Jasphy | May 2, 2023 | False Claims Act, Franchise Tax, Income Tax, Interest and Penalties, New York, Procedure

New York Governor Kathy Hochul and the New York State Legislature have reached an agreement on the state’s fiscal year 2024 budget legislation. Most surprisingly, the legislation grants the New York State Department of Taxation and Finance the right to petition for judicial review of New York State Tax Appeals Tribunal decisions that are “premised on interpretation of the state or federal constitution, international law, federal law, the law of other states, or other legal matters that are beyond the purview of the state legislature.” If the Department appeals a Tribunal decision, any interest and penalties that would otherwise accrue on the underlying tax liability would be stayed until 15 days after the issuance of a final judicial decision. This represents a significant change in law as currently, only taxpayers (and not the Department) may appeal Tribunal decisions.

Other notable provisions in the budget legislation include the following:

The False Claims Act will now apply to a person who is alleged to have knowingly or improperly failed to file a tax return.

The top metropolitan commuter transportation mobility tax rate on employers in New York City has been increased from 0.34% to 0.6% of payroll expense.

The “temporary” top corporate franchise tax rate for taxpayers with a business income base of more than $5 million will stay at 7.25% through 2026 (rather than expiring in 2024), and the scheduled expiration of the franchise tax business capital base has been delayed from 2024 to 2027.

The budget legislation containing these changes in law passed both houses of the New York State Legislature on May 1, 2023, and is expected to be signed by Governor Hochul.

“Voluntary” in Name Only? New Jersey Introduces Transfer Pricing Initiative

by Stephen P. Kranz, Diann Smith and Michael J. Hilkin | Jun 16, 2022 | Audits, Income Tax, Interest and Penalties, New Jersey, Transfer Pricing

The New Jersey Division of Taxation (Division) has announced a “voluntary” transfer pricing initiative beginning June 15, 2022, and continuing through March 2, 2023. According to the Division, the initiative is targeted toward companies that have intercompany transactions that would be subject to transfer pricing adjustment.

The initiative is broadly available to taxpayers with related party intercompany pricing, even if those taxpayers are currently under audit or have a case pending before the Division’s Conference and Appeals Branch. However, the initiative does not apply to matters in litigation.

Taxpayers must agree in writing to participate in the initiative by September 15, 2022, and comply with Division deadlines thereafter (including by providing “all required transfer pricing, tax, and financial information and documentation” to the Division by October 31, 2022). As part of any agreement reached with a taxpayer, the Division will agree to waive all applicable penalties and all rights to assess any additional tax, interest or penalties except for adjustments relating to federal corrections.

Notably, the Division is warning taxpayers that do not reach an agreement through the initiative that in the future it will: (1) “assess all applicable penalties;” (2) “not waive any penalties;” and (3) audit according to the Division’s “regular audit schedule” without agreeing “to a methodology or settlement for any unaudited open tax years.”

Evidently, the Division has hired Dr. Ednaldo Silva, Founder & Director of RoyaltyStat, to assist with the initiative. Sources familiar with the initiative report that the Division will consider prospective-only settlement agreements under the initiative, under the right circumstances.

Governor Newsom Announces New Relief for Remitting California Sales Tax

by Charles Moll, III, Troy M. Van Dongen, Marcy Jo Mandel and Elle Kaiser | Dec 1, 2020 | California, Interest and Penalties, Nationwide Importance, Sales Tax

On Monday, November 30, 2020, Governor Gavin Newsom announced that California will provide temporary tax relief for eligible businesses impacted by restrictions imposed to control the COVID-19 pandemic.

The announcement indicates that the Governor will direct the California Department of Tax and Fee Administration (CDTFA) to:

Provide an automatic three-month extension for taxpayers filing less than $1 million in sales tax on the return and extend the availability of existing interest- and penalty-free payment agreements to companies with up to $5 million in taxable sales;
Broaden opportunities for more businesses to enter into interest-free payment arrangements; and
Expand interest-free payment options for larger businesses particularly affected by significant restrictions on operations based on COVID-19 transmissions.

No information was provided as to how the CDTFA will expand interest-free payment options for larger businesses, or what constitutes “significant restrictions” on a business’ operations for purposes of this temporary tax relief. Nevertheless, we applaud the governor’s move to initiate this relief for California’s taxpayers, and we will keep readers up to date as additional details are revealed for this program.

Alert: California False Claims Expansion Bill Advances to the Senate

by Stephen P. Kranz, Charles Moll, III, Troy M. Van Dongen and Elle Kaiser | Jun 16, 2020 | California, False Claims Act, Illinois, Interest and Penalties, Nationwide Importance, New York, Procedure

Like the days of the Old West, last week a masked gang held up local businesses demanding their wallets. Unlike the days of the Old West, this was not the hole-in-the-wall gang, but the California State Assembly who, on June 10, 2020, approved AB 2570, a bill that authorizes tax-based false claims actions. If passed, AB 2570 would expand the California False Claims Act (CFCA) to allow private, profit-motivated parties to bring punitive civil enforcement tax-based lawsuits. The bill now heads to the California Senate where its predecessor bill, AB 1270, failed last year.

According to the bill’s author, Assembly Member Mark Stone, there are two key differences between AB 2570 and last year’s AB 1270. First, AB 2570’s definition of “prosecuting authority” has been revised to remove the term “counsel retained by a political subdivision to act on its behalf.” In his comments on the Assembly floor, Stone explained that this amendment was “sought by the bill’s opponents” as it prevents local governments from contracting with private attorneys to bring tax CFCA lawsuits.

Second, AB 2570 mandates that a plaintiff’s complaint must be kept under seal for 60 days and can only be served on a defendant by court order. According to Stone, this second amendment will prevent qui tam attorneys from bringing suit if they send demand letters to the taxpayer before the expiration of this 60-day period.

Although these amendments are minor improvements upon last year’s bill, they are not enough to prevent the rampant abuse that will certainly accompany an expansion of the CFCA. Moreover, as Stone has acknowledged AB 2570 rests on the faulty premise that insider information is generally required to establish a “successful” tax enforcement claim. In his comments to the assembly, Stone stated:

No one questions the ability of the Franchise Tax Board and the California Department of Tax and Fee Administration (CDTFA) to skillfully administer the tax law within their respective jurisdictions. This bill, rather, rests on the premise that there are individuals—often current or former employees of a company—who have access to information establishing that tax authorities have been misled as to the amounts owed by the company. These cases are difficult to uncover without the cooperation of an insider because there is no other way to bring the relevant documents and information to light if a company is determined to commit fraud.

However, as evidenced by the states where an FCA has been expanded to tax cases, such as Illinois and New York, very few FCA tax cases involve internal whistleblowers, actual fraud or reckless disregard of clear law. Instead, they typically involve inadvertent errors or good-faith interpretations of murky tax law. As a result, expanding the CFCA to tax claims will only serve to hurt good-faith taxpayers who are already struggling to survive and recover from the economic impacts of COVID-19. Such legislation could force taxpayers to incur enormous costs or pressure them into settlements to make the case go away to avoid the [...]

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Iowa Responds to McDermott’s Call to Drop Unnecessary or Dangerous Tax Administration Requirements

by Stephen P. Kranz and McDermott Will & Emery | Apr 14, 2020 | Federal Tax, Income Tax, Interest and Penalties, Iowa, Nationwide Importance, Property Tax, Sales Tax

In late March, we wrote an open letter to state tax administrators requesting that they take steps to relieve undue tax administration burdens in the wake of the COVID-19 situation. We gave five suggestions, including postponing deadlines for tax filing and payment, waiving requirements to use hard-copy documents or checks, suspending accrual of interest on assessments during mandatory closures, directing revenue agencies to resolve outstanding controversies, and disregarding remote work for tax purposes.

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Tax Commissioners: Please Drop Unnecessary or Dangerous Tax Administration Requirements

by Stephen P. Kranz and McDermott Will & Emery | Mar 27, 2020 | Federal Tax, Income Tax, Interest and Penalties, Local Tax, Nationwide Importance, Sales Tax

This week we wrote a letter to state tax administrators, sharing five key suggestions for relieving undue tax administration burdens in the wake of this difficult COVID-19 situation. As explained, “at a time when many people are working from home and should not or cannot go to post offices or banks, a business-as-usual attitude for tax administration would be inexcusable.” The five suggestions:

Postpone deadlines for tax filing and payment. The federal government and many states have already taken this needed step. When many Americans, including business tax professionals and tax administrators and their staffs, are fearing for their own health and unable, prohibited or unadvised to leave their own house, this is not the time for pulling records and preparing tax filings.

Waive requirements to file hard copy, notarized, and/or wet-signature documents. Waive requirements to mail documents by certified mail. Allow automated-clearing-house (ACH) electronic transfers of funds instead of requiring hard checks. In a time of social distancing and shelter-in-place orders, it is dangerous to require that business representatives go outside to banks or Post Offices, stand in line, and purchase services from one particular provider. While the US Postal Service (USPS) has valiantly endeavored to keep all post offices operating and mail delivery uninterrupted, new reports on the enormous financial difficulties of the USPS and the growing impact of the virus on the USPS’s public-facing workforce surely give all of us pause. Digital signatures and electronic document delivery, and electronic forms of payment, are widely adopted, affordable, secure, and instantaneous. It is time for tax authorities to dispense with – or suspend – the requirements of physical copies, wet signatures, notarization, physical checks and mailing. Furthermore, tax agencies and hearing tribunals should adopt temporary procedures to either automatically acknowledge receipt of electronic documents or waive stringent proof of delivery in situations in which missing a deadline would preclude a taxpayer from obtaining further review of agency action.

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COVID-19 State Tax Relief for Illinois | Quarterly Estimated State Income Tax Payments Still Due 4/15/20

by Mary Kay McCalla Martire | Mar 26, 2020 | Audits, Federal Tax, Illinois, Income Tax, Interest and Penalties, Sales Tax, Tax Base

Illinois has announced the following tax-related relief measures related to COVID-19. Taxpayers who file quarterly estimated returns should note that unlike the federal government, Illinois has not extended the April 15, 2020 due date for first quarter estimated tax payments.

I. Extension of Filing and Payment Deadlines for Illinois Income Tax Returns

The 2019 income tax filing and payment deadlines for all taxpayers who file and pay their Illinois income taxes on April 15, 2020, have been automatically extended until July 15, 2020. This relief applies to all individual returns, trusts and corporations. The relief is automatic; taxpayers do not need to file any additional forms or call the Illinois Department of Revenue (IDOR) to qualify. For additional details, click here for the guidance issued by IDOR on March 25, 2020.

Penalties and interest will begin to accrue on any remaining unpaid balances as of July 16, 2020.

Even though the deadline has been extended, IDOR has encouraged taxpayers expecting a refund to file as soon as they can. Taxpayers who have already filed a return can check the status of their return by using the Where’s My Refund? link located at mytax.illinois.gov

Note: This extension does NOT impact the first and second installments of estimated payments of 2020 taxes that are due on April 15 and June 15. Although the federal government has extended the date for the payment of first quarter estimated tax payments to June 15, 2020, Illinois has not followed this practice. Illinois taxpayers are still required to estimate their tax liability for 2020 and make four equal installment payments to IDOR, starting on April 15, 2020.

II. Sales Tax Deferral for Bars and Restaurants

To help alleviate some of the unprecedented challenges facing bars and restaurants due to COVID-19, Governor Pritzker has directed IDOR to defer sales tax payments for eating and drinking establishments that incurred less than $75,000 in sales tax liabilities last year. Qualifying businesses are still required to timely file their sales tax returns, but will not be charged penalties or interest on their late payments due in March, April or May 2020. The IDOR estimates this will give relief to nearly 80% of the bars and restaurants in Illinois.

Taxpayers taking advantage of this relief will be required to pay their sales tax liabilities due in March, April and May in four installments, starting on May 20 and extending through August 20. For more information, please view IDOR’s informational bulletin available at tax.illinois.gov.

III. Small Business Loans

The US Small Business Administration has approved the state’s eligibility for disaster assistance loans for small businesses facing financial hardship in all 102 Illinois counties due to COVID-19. Eligible businesses can apply for up to $2 million in low-interest loans here.

AB 2570: Déjà vu All over Again as California Attempts to Amend CFCA

by Charles Moll, III, Elle Kaiser and Troy M. Van Dongen | Feb 24, 2020 | California, False Claims Act, Interest and Penalties, Nationwide Importance, Procedure

California’s Attorney General, Xavier Becerra, and Assembly Member Mark Stone have again advanced legislation that would amend the California False Claims Act (CFCA) to enlist private bounty hunters to go after California taxpayers. Becerra described the latest bill, AB 2570, as an additional tool to combat against “corporate cheats” whom Becerra claimed cost the state billions in lost revenue in 2019. Of course, the state already possesses an arsenal of tools to combat any underreporting: currently, the power to investigate cases of suspected tax fraud rests with the California Franchise Tax Board (FTB) and the California Department of Tax and Fee Administration (CDTFA). Thus, as many of the predecessor bill’s critics have adeptly noted, AB 2570 is more appropriately characterized as a “solution in search of a problem.”

The text of AB 2570 is almost identical to its predecessor, AB 1270, which failed to make it out of the legislature last year, and has likely given California’s business-savvy taxpayers a sense of dread-filled déjà vu. AB 1270 came under intense opposition last summer because, as seen in other states, allowing qui tam plaintiffs to initiate civil suits for state and local tax issues leads to abusive practices and undermines the goal of voluntary compliance in tax administration.

Like AB 1270, AB 2570 is replete with problematic provisions, including: (1) the imposition of a separate statute of limitations that will arguably trump any shorter limitations periods imposed by the Revenue & Taxation Code (See Cal. Gov’t Code § 12654(a) which permits claims under the CFCA to be pursued for up to 10 years after the date the violation was committed, compared to standard three or four years for tax audits); (2) a more lenient burden of proof for elements of an alleged violation; and, (3) extremely punitive damages—violators are subject to treble damages (i.e., three times the amount of the underreported tax, interest and penalties), an additional civil penalty of $5,500 to $11,000 for each violation, plus the costs of the civil action to recover the damages and penalties including attorney’s fees.

Unfortunately, private enforcement of state tax code violations has erupted over the past few years after whistleblowers in New York and Illinois purportedly have racked up multimillion dollar settlements as the result of such claims. If enacted, AB 2570 will open the floodgates to a slew of financially incentivized plaintiffs’ attorneys who are eager to enter the litigation lottery in hopes of winning a jackpot settlement payout from California’s taxpayers.

As discussed in our blog post from August 26, 2019, Vultures Circling as Bill to Expand California FCA to Tax Looms in Legislature, regarding AB 1270, when a false claims suit is filed by a private plaintiff (or relator) in a qui tam action, the recovered damages or settlement proceeds are divided between the state and the relator, with the relator permitted to recover up to 50% of the proceeds. See Cal. Gov’t Code § 12652(g)(3). Thus, this practice can be very lucrative for aggressive plaintiff’s attorneys.

Even [...]

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Illinois Amnesty Programs Now Underway

by Mary Kay McCalla Martire and McDermott Will & Emery | Oct 1, 2019 | Franchise Tax, Illinois, Income Tax, Interest and Penalties, Procedure, Sales Tax

As previously announced, the Illinois Department of Revenue has begun a new amnesty program, running October 1 through November 15, 2019. All taxes paid to the Illinois Department of Revenue for taxable periods ending after June 30, 2011, and prior to July 1, 2018, are eligible for amnesty with relief from penalties and interest. Unlike prior Illinois programs, taxpayers who do not participate in amnesty will not be subject to double interest or penalty charges on subsequent audit assessments for taxes that were eligible for amnesty. A link to the Illinois Department of Revenue forms for its amnesty program is attached here.

The Illinois Secretary of State also offers an amnesty program running from October 1 through November 15, 2019, for corporate franchise taxes related to periods ending after March 15, 2008, and on or before June 30, 2019. In light of the phase-out of the corporate franchise tax by January 1, 2024 (enacted by Public Act 101-9), participants in the amnesty program should proceed with extreme caution. For more information, the Secretary of State has published a Fact Sheet and form of Petition on its website: https://www.cyberdriveillinois.com/departments/business_services/home.html.

Vultures Circling as Bill to Expand California FCA to Tax Looms in Legislature

by Charles Moll, III, Diann Smith, Stephen P. Kranz and Troy M. Van Dongen | Aug 26, 2019 | California, False Claims Act, Interest and Penalties, Nationwide Importance, Procedure

Legislators in Sacramento are mulling over one of the most (if not the most) troubling state and local tax bills of the past decade. AB 1270, introduced earlier this year and passed by the Assembly in late May, would amend the California False Claims Act (CFCA) to remove the “tax bar,” a prohibition that exists in the federal False Claims Act and the vast majority of states with similar laws.

If enacted, this bill will open the door for a cottage industry of financially driven plaintiffs’ lawyers to act as bounty hunters in the state and local tax arena. California taxpayers would be forced to defend themselves in high-stakes civil investigations and/or litigation—even when the Attorney General’s Office (AG) declines to intervene. As seen in other states, this racket leads to abusive practices and undermines the goal of voluntary compliance in tax administration. (more…)

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