Alabama Department of Revenue Announces New Amnesty Program

By Matthew S. Houser and Bruce P. Ely
Bradley Arant Boult Cummings, LLP

Alabama Governor Bob Riley and Department of Revenue Commissioner Tim Russell on January 15 announced a temporary amnesty program for many Alabama taxpayers. For a limited time, taxpayers may avoid penalties and criminal prosecution if they voluntarily pay certain delinquent taxes due in the previous three years.

The “Operation Clean Slate” program begins February 1 and ends May 15. Governor Riley emphasized that this is a limited-time-only offer. “This is a brief window of opportunity for those who aren’t paying their taxes to get right with the law,” said Governor Riley. “Take advantage of this offer because it won’t last long.” The state’s current and projected budgetary shortfalls are likely the prime reason for the roll-out of this new program.

While the state may not impose penalties for incorrect filings, we do not expect them to blindly accept every tax return submitted. According to recently-appointed Tax Policy Director Curtis Stewart, “[T]axpayers will be expected to pay the proper amount of tax and interest, so the returns and payments received as part of Operation Clean Slate could be subject to audit, and adjustments may be made to the tax amount reported.”

When the program ends, the Alabama Department of Revenue (ADOR) announced that it will activate the Discovery Module of its new integrated tax system; this module will assist them in identifying unfiled returns and unpaid taxes as well as underreported taxes. The new $26 million computer system replaces a system installed in the 1980s. Reportedly, it is also designed to pick up Alabama filers who were audited by the Internal Revenue Service and paid additional federal income tax, but who failed to notify ADOR of the audit changes. “[I]t is about to get a lot easier to catch [delinquent taxpayers],” stated Governor Riley. “The likelihood they will get caught is about to increase tremendously.”

In addition to the initial press release announcing Operation Clean Slate, ADOR has also released a helpful Q&A document on its website (http://www.ador.state.al.us/ cleanslate.html) outlining the general parameters of the program. Members of our firm have also conferred with ADOR officials to answer some additional questions. The guidelines of the program are discussed below.  

What types of taxes are eligible? Operation Clean Slate will apply to “virtually all” taxes administered by ADOR. ADOR has specifically stated that individual and corporate income, business privilege, excise, severance, tobacco, gasoline, and consumer use tax will be covered. The program will also apply to withholding, sales, seller’s use, and motor fuels taxes, but only for taxpayers who aren’t currently registered for those taxes. ADOR officials say that the program “is not limited to” these taxes; for example, rental taxes reportedly will also be eligible. If you have questions about other Alabama taxes, you or your tax adviser should contact the Taxpayer Advocate Office at (334) 242-1055 or email cleanslate@revenue.alabama.gov.  

Does the program apply only to taxpayers who have not previously filed returns? No. Unlike ADOR’s Voluntary Disclosure Program, Operation Clean Slate is available to taxpayers who have previously filed returns – with the exceptions mentioned above. Taxpayers who have previously filed withholding, sales, seller’s use, or motor fuel tax returns are not eligible for the program (for that specific tax; they would be eligible for other taxes). Amended returns for other taxes are encouraged under Operation Clean Slate.  

Does the program apply to taxpayers currently under audit or being investigated by ADOR? The program does not apply to taxpayers who are “already under investigation” or “have been contacted by ADOR as to their proper liability.” ADOR has not further defined these terms, although ADOR officials have indicated to us that the mere receipt of a nexus questionnaire will not disqualify a taxpayer. Taxpayers with outstanding debts on ADOR’s records (e.g., a bill, assessment, collection action) or that have been scheduled for audit are not eligible.  

What are the benefits of participating in Operation Clean Slate? ADOR will waive all applicable civil and criminal penalties, including penalties for fraud and negligence. ADOR will also not seek criminal prosecution for matters disclosed. In addition, the look-back period will be limited to three years in most cases. Although ADOR has not specifically taken a position on the matter yet, we are concerned that the penalty for underpayment of an estimated tax (see, e.g., Ala. Code §§ 40-18-80, ‑80.1) will not be waived, because ADOR has previously treated this penalty as an interest charge—and not a penalty—under its Voluntary Disclosure Program.  

What about interest? Interest will not be waived. By statute, only the Taxpayer Advocate can waive interest and only in situations involving “undue delay” by ADOR personnel (following concurrence by either the Commissioner or Assistant Commissioner of Revenue). It is not necessary to calculate and pay interest when filing returns under Operation Clean Slate. ADOR will presumably contact the participant with a bill for interest, and interest must be paid to ADOR within 90days of this bill or penalties and taxes for prior years may be imposed.  

How should interested taxpayers proceed? Taxpayers must file delinquent and amended returns, with payment of the tax, by May 15. The returns and payment can be mailed to the Alabama Department of Revenue, Operation Clean Slate, P.O. Box 327010, Montgomery, Alabama 36132-7010. However, an informal contact with ADOR personnel, to confirm the applicability of this amnesty program to the particular taxpayer, may be advisable. In addition, “Operation Clean Slate” must be clearly labeled on the front page of every form. Do not send the forms to the address listed on the forms; they must be sent to the Operation Clean Slate P.O. Box.  

How does the three-year look-back period work? For most taxes, ADOR will only require disclosure of past due liabilities for the most recent 3 years (or 36 months) that are past due as of February 1, 2009. For example, a taxpayer would need to file income tax returns for 2005, 2006, and 2007 (the 2008 return is not yet past due). For monthly returns (commonly due on the 20th of the following month), taxpayers would need to disclose for the period beginning January 2006 and forward. ADOR states that they will not seek to collect tax, penalties or interest for prior tax periods. For all “trust fund” taxes (e.g., sales, seller’s use, motor fuels, withholding taxes), however, any tax that has been withheld from employees or collected from the customer must be disclosed and remitted, regardless of when collected or withheld.  

How is Operation Clean Slate different from their Voluntary Disclosure Program? The ADOR has for several years offered a Voluntary Disclosure Program, and they assure us that it remains active. The primary differences between the two programs are summarized as follows: 

1. Operation Clean Slate will apply to more types of state-level and ADOR-administered local taxes. Only corporate income, business privilege, withholding, and sales and use taxes are eligible for voluntary disclosure.

2. Operation Clean Slate will apply to taxpayers who have previously registered or filed returns with ADOR (except sales, seller’s use, motor fuels, and withholding taxes). Conversely, voluntary disclosure guidelines require the taxpayer not to have filed a return with the ADOR in the last seven years and do not allow amended returns.

3. Voluntary Disclosure is anonymous. A taxpayer’s representative typically obtains a signed Voluntary Disclosure Agreement from ADOR before the taxpayer is identified. While this agreement is invalid if ADOR later discovers that the taxpayer was not eligible for the Voluntary Disclosure Program as defined in the agreement (and thus probably would not be eligible for Operation Clean Slate, either), some taxpayers may receive more comfort from relying on a signed VDA instead of a press release and a Q&A on the ADOR’s website, which is all ADOR has issued so far for Operation Clean Slate.

The authors have requested an official pronouncement from ADOR on some of these issues, and we will update our readers as more details are provided. Please contact any member of our SALT Practice Group if we can assist you or your client.