Examining the Constitutionality of State Tax Amnesty in Federal Court

Abstract:     
A number of states have recently enacted tax ‘amnesty’ statutes pursuant to which taxpayers may avoid state tax penalties as a result of coming forward on items that are otherwise taxable, or as a result of voluntarily disclosing questionable tax items reported in previous tax years. However, many of the recently enacted state amnesty statutes also contain non-waivable interest and penalty provisions that apply to taxpayers who do not voluntarily disclose such tax items to the relevant state taxing authority within the specified amnesty time period. In the case of Illinois’ Tax Amnesty Program, the interest and penalties that apply as a result of a taxpayer’s failure to disclose questionable tax items during the amnesty period are in addition to the interest and penalties that would already apply to the taxpayer for the tax item at issue. As a result, taxpayers subject to such sanctions would in effect be subject to double interest and penalties for the same tax item. This article will analyze whether the foregoing type of amnesty penalties are constitutional. Specifically, this article will examine whether the double interest and penalty provisions in Illinois’ recent tax amnesty statute violate the U.S. Constitution.

As part of the examination of the constitutionality of Illinois’ Tax Amnesty Program, this article will consider the likelihood that a taxpayer subject to double penalties and interest under Illinois amnesty statute would prevail in obtaining relief in federal court. While federal constitutional challenges may be brought in state courts under our federalist form of government and dual judicial system allowing for concurrent state court jurisdiction over federal law issues, this article will focus exclusively on the potential federal constitutional infirmities in Illinois' Tax Amnesty Program that a taxpayer may raise in federal court. Such a focused critical analysis is important because the availability of federal court review of taxpayer challenges to state tax amnesty programs increases the likelihood of an objective judicial analysis of the federal constitutionality of the state’s tax amnesty statute and increases the likelihood that potential constitutional infirmities set forth in Illinois’ double-penalty provisions will be closely scrutinized. Accordingly, Part I of this article will analyze the likelihood that a taxpayer will prevail in obtaining federal court review of a challenge to a state amnesty program. Specifically, this article will examine whether a taxpayer would be able to overcome the jurisdictional barriers set forth in the Eleventh Amendment and in the Federal Tax Injunction Act. Part II of this article will examine some of the federal constitutional arguments taxpayers subject to state amnesty double tax penalties can make to challenge the legality and applicability of such provisions in federal court.

JEL Classification: H20, H25, H29, H70, H71, H77, H79, K34, K40, K41

Accepted Paper Series