State Tax Amnesties Boost Revenue and Future Compliance Concerns

A tax amnesty program coming to Massachusetts in 2025 is expected to provide the state with a one-time, $100 million revenue booster shot. But the rare penalty forgiveness program also raises fundamental questions about tax fairness and compliance.

Gov. Maura Healey (D) signed a budget bill last month that directs the Department of Revenue to administer a 60-day amnesty permitting individual and business taxpayers to pay off their lingering tax liabilities without penalty. The campaign is expected to pull thousands of delinquent taxpayers into compliance and jolt state tax collections.

“We’re excited about it. It’s a good opportunity for taxpayers to pay what they owe while getting a break on penalties and fees,” said Molly Sullivan, vice president of government affairs at the Massachusetts Society of CPAs. “We don’t see any concerns right now. We just want to make sure residents are aware of the program.”

But many tax administrators and analysts say they worry broad-based penalty forgiveness initiatives send the wrong message.

“Amnesties can undermine tax morale among taxpayers who feel that amnesties reward tax evasion,” said Alejandro Zentner, a professor of finance at the University of Texas-Dallas who has researched tax amnesties. “These factors can lead amnesties to take in a little revenue today, and further reduce compliance.”

Three Common Features

Traditionally, tax amnesties have been offered at the national and subnational levels to temporarily boost collections, achieve a specific compliance goal or shrink the “tax gap,” the space between revenue voluntarily remitted to a tax agency and the amount owed. The programs can be structured differently, depending on a jurisdiction’s policy objectives, but Zentner pointed to three common features: Participation is voluntary; financial and criminal penalties for noncompliance are waived; and there is a short-term window for participation.

In some cases, jurisdictions also engage in periods of enhanced enforcement and penalties after the amnesty ends to encourage participation.

The states have offered 41 broad amnesties since 2010, according to an analysis by the Federation of Tax Administrators, and just three—in Connecticut, Illinois, and Nevada—since 2019. Those numbers don’t include a handful of targeted initiatives, such as the transfer pricing programs for large multistate corporations offered by North Carolina in 2020 and New Jersey in 2023. Broad tax amnesties are down primarily because of high levels of federal support to state and local governments during the pandemic, said Alexis Morrison-Howe, principal in the multistate tax group at Deloitte Tax LLP.

“Most state governments have been flush with cash,” she said. “Usually, the reason you do this is to get a bunch of revenue without raising taxes.”

Connecticut’s blanket tax amnesty, which closed on Jan. 31, 2022, collected $186 million from 20,500 taxpayers over 60 days, said Tiffany Thiele, communications director of the Department of Revenue Services.

In 2023 legislatures in Kentucky and Ohio passed bills offering amnesties, but neither state launched programs. Ohio pulled the plug because it didn’t need the revenue, and Kentucky’s effort fizzled amid a political fight over the appropriations needed for implementation.

DOR Has Wide Discretion

Massachusetts’ budget gives the Department of Revenue wide discretion to administer a 60-day amnesty before June 30, 2025, and to waive all penalties if taxpayers remit their unpaid taxes with interest.

The program will be open to individual and business taxpayers who either failed to file a return or failed to report the proper tax due on a prior return due on or before Dec. 31, 2024. Most taxpayers will be eligible, unless the department determines that the party acted with fraudulent intent. The amnesty will cover most of the state’s tax programs, including personal income, corporate excise, and sales and use tax programs.

A similar Massachusetts program, conducted in April and May of 2016, collected $136.8 million in back taxes and waived $14 million in penalties. A total of 9,550 taxpayers participated.

The department hasn’t released guidance on the 2025 amnesty. In an Aug. 14 message to taxpayers the department said only, “more information, including the dates of the program, will be coming soon.”

Individuals and businesses planning to participate should examine Technical Information Release 16-4, which set guidelines for the 2016 tax amnesty, said Jason Zorfas, managing director for indirect tax at Ernst & Young LLP in Boston.

“My expectation would be the current amnesty would be the mirror image of the last one, other than the dates,” Zorfas said. “That’s up to the department ultimately, but their TIR for this upcoming amnesty would probably look almost like the last one.”

Testing Effectiveness

Narratives about tax amnesties are as ancient as the Rosetta Stone, but Zentner said scholars still don’t have a firm understanding of their effectiveness. States may enjoy short-term bursts of revenue, but the amnesty periods are often criticized as unfair to taxpayers who dutifully comply with the law. More troubling, tax amnesties raise the specter of moral hazard by creating incentives for taxpayers to forgo tax compliance in anticipation of future forgiveness.

Zentner and other academics recently tested strategies for maximizing the effectiveness of amnesty programs through messaging to taxpayers. The team coordinated with Dominican Republic tax authorities in October 2020 and tested various messaging options aimed at boosting compliance.

The study revealed 18% of eligible debtors took advantage of the amnesty and submitted $263 million—5% of the total liability owed. Sending a message to delinquent taxpayers increased the likelihood debts would be paid, though of the four messages tested, only one threatening a potential prison sentence increased the average amount of debt paid.

The research also disputed criticism that tax amnesties merely accelerate tax payments and nurture noncompliance in the future. The authors concluded, “examining tax payments after the amnesty, we do not find evidence that the amnesty caused a reduction in tax payments over the next two years.”

The study also found wider participation by businesses than individuals.

“These findings align with our prior work where we find that firms, especially larger ones, are more responsive to perceived punishments than individuals and small firms,” Zentner said.