The influence of economic distress on themes at the 2009 Georgetown Advanced State and Local Tax Institute was palpable. Difficulties in balancing the compelling need to generate revenue with the waning ability of taxpayers to carry the burden were evident in most, if not all, seminars and workshops. Public and private sector tensions were a bit sharper than usual as moderators addressed a host of topics, including:
Ethics in Civil Tax Penalties and Amnesty Programs: Amnesty programs and civil penalties were originally conceived to encourage voluntary compliance, deter fraudulent taxpayers, and impose punishment for non-compliance. In broad terms, a "carrot and stick" approach has been utilized to promote compliance. Penalties have customarily been imposed for failure to file, failure to pay, and accuracy-related matters in filing. Exceptions in the penalty phase have customarily been related to taxpayer best efforts, where the taxpayer has demonstrated reasonable cause for discrepancies, cited substantial authority, or provided adequate disclosure to taxing authorities.
But the "carrot and stick" environment changed more to a "hammer" approach with the emergence of Illinois' Tax Delinquency Amnesty Act of 2003, which introduced a 20 percent underpayment penalty, added to interest. This was followed by California's 2005 Tax Amnesty Program, which waived penalties, but also increased penalties by 20% to 40% and increased interest on delinquent taxes by 50%. The state collected $4.8 billion from this program, much of it coming in under protected refund claims.
Most recently, California Senate Bill SBX! 28 sailed through both houses of the state legislature and was signed by the Governor in a space of 12 days. Under the change affecting Rev. & Tax Code Sec. 19138, corporate taxpayers that have underpaid by over $1 million must file an amended return no later than May 31, 2009 to avoid a new underpayment penalty of 20 percent. The $1 million underpayment plateau qualifying taxpayers for this penalty applies to the combined group, not just individual entities. Delinquent taxpayers can escape this penalty only because of:
It is worth noting that under this regime, each tax year stands on its own. This means that refunds outstanding from different tax years do not mitigate the underpayment year and related penalty provision.
Also, under this regime, what constitutes an amended return? Under FTB Notice 2009-3, returns must purport to be a return; be signed under penalty of perjury; contain sufficient data to allow calculation; and represent an honest and reasonable attempt to safisfy tax law requirements. These indicia imply that taxpayers are exposed to possible criminal prosecution, even pursuant to honest errors or where the taxpayer's ultimate liability is ambiguous and not readily determinable. Moreover, tax deposits are not satisfactory; the law requires a payment of tax.
The California Taxpayers Association casts the underpayment penalty as a tax increase - not a penalty. Accordingly, the CTA alleges that the the law is unconstitutional, since tax increasse require a two-thirds majority vote in both houses of the legislature. A due process argument , based on pre-deprivation and post-deprivation, is also advanced in view of the law's retroactive effectiveness to 2005.
It is worth noting also that one of the stated objectives of the bill was to improve on accuracy in return filing. If this is so, why did the state legislature predict that two-thirds of receipts generated from enactment of this law would be returned ultimately to the taxpayers?
GAAP to IFRS Trends: The states need to decide if their tax regimes will follow the federal approach to International Financial Reporting Standards. Although the projected timeline for changing to IFRS is 2014 to 2016, only three individuals in attendance had yet explored possible implications for their businesses or clients in any meaningful way. There are serious concerns about training needs in academic curricula, as well as in corporate tax departments, which are not equipped to tackle a conversion of this magnitude in the anticipated time frame.
Aside from maintenance of legacy systems, substantive differences between GAAP and IFRS will require significant adjustments. LIFO is a specific difference, which IFRS does not allow. Apportionment factors will be affected by changing to IFRS, especially with respect to the revenue component. The property factor will also be affected, as fair market value applies under IFRS and different depreciation methods may apply. Separately, IFRS conversion may impact equity accounts used to compute capital-based taxes, and changes may also emerge in financial statement values for property, plant, and equipment for property tax purposes.
In broad terms, GAAP is a rules-based system and IFRS is principles-based. So a "cultural" change will accompany the move to IFRS. The global trend to IFRS is palpable. The U.S. and Japan stand virtually alone in the GAAP universe. The International Accounting Standards Board (IASB) is the governing body for IFRS. One question outstanding is what role the FASB will play during the conversion process and after conversion is completed. The SEC has proposed a roadmap for IFRS conversion.