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Cash-strapped states turn to tax amnesties

Revenue problems for states could be a blessing to some taxpayers. State tax collectors, looking to bring in as much money as possible with the least possible effort, are turning to tax amnesties. Amnesties enable delinquent citizens to come clean about their tax transgressions, pay the due amount and receive exoneration for penalties and interest.

In 2009, amnesties were offered in Alabama, Arizona, Connecticut, Delaware, Maryland, Louisiana, Maine, Massachusetts, New Jersey, Oregon, Virginia and Wisconsin.

In 2010, a couple more state amnesties will soon be under way.

New York's Penalty and Interest Discount, or PAID, will allow some taxpayers to save up to 80 percent of the penalty and interest on Empire State tax debts. The program begins Jan. 15 (the state will send letters to eligible taxpayers) and runs through March 15.

Pennsylvania will hold an amnesty from April 26 to June 18, during which Keystone State collectors will waive 100 percent of penalties and half of the interest for tax delinquents who come forward.

And Maine's governor, fresh off a successful fall amnesty program, wants to conduct two more tax forgiveness programs.

Even if there's no official amnesty program in your state, you still might be able to pay off your old debt with minimal penalty. Many states allow delinquent filers to set things right with state tax collectors via ongoing voluntary compliance programs.

However, it's the official state and, in some cases, lower-level government tax amnesty programs that attract the most attention.

What's covered?

The Federation of Tax Administrators has tracked these programs since 1982. In that time, 42 states, the District of Columbia, New York City and the U.S. commonwealth of the Northern Marianas Islands have offered their residents the chance to pay back taxes.

The various amnesties vary widely in length and scope, but almost every type of overdue tax has at one point in some state been eligible for settlement.

The common thread among amnesties is the opportunity for participants to avoid some or all associated penalties and interest. The possibility of civil or criminal prosecution also is usually waived when delinquent filers fess up during an amnesty period.

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Plus, tax amnesties limit the tax examination look-back period, says Kathleen Thies, an analyst with the tax software and publishing company CCH.

"If you're audited under normal circumstances, the auditors could look back at 10 years or more of returns," says Thies. "But if you come forward in an amnesty program, the look-back would be much shorter. You don't have to worry about a tax examiner looking back over your taxes until the end of time. You won't be on the hook for taxes not paid many, many years ago."

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