New Michigan Tax Amnesty Law

A taxpayer is subject to penalties and interest for failing to file a Michigan tax return or pay Michigan tax on time.  The penalties are 5% of the amount of the tax properly reportable on the return for the first two months of the failure, and 5% for each succeeding month, up to a total of 25% of the tax.  A taxpayer who is at fault in failing to timely pay a Michigan tax is subject to an additional penalty of 10% of the tax if the failure is due negligence, without intent to defraud; an additional penalty of 25% of the tax if the failure is due to intentional disregard of the law, without intent to defraud; or an additional penalty of 100% of the tax if the failure is due to fraudulent intent to evade the tax.

When Michigan Treasury wishes to assess a penalty, it sends the taxpayer notice of its intent to do so.  The taxpayer then has 30 days to file a written protest of the proposed assessment.  If the taxpayer fails to file a written protest, the assessment becomes final.  If the taxpayer files a written protest, Michigan Treasury allows the taxpayer a hearing on his objection.  It is a good idea for the taxpayer to be represented by counsel at such a hearing.   If at the hearing the taxpayer fails to persuade Treasury  to grant relief from the penalties, the assessment becomes final.

Once an assessment of Michigan penalties becomes final, the taxpayer can sue Michigan Treasury in Circuit Court asserting that Treasury abused its discretion in refusing to grant relief from the penalties.  Such litigation holds little usually holds little promise, as the case is decided without a jury, by a judge who is an employee of the State of Michigan.

Governor Granholm recently signed into law a Michigan tax amnesty act, the first such law since 2002.  The new law provides that, from May 15, 2011 through June 30, 2011 (“Amnesty Period”), Michigan Treasury shall waive all criminal and civil penalties with respect to a taxpayer’s failure to file a Michigan tax return or pay Michigan tax on time, provided that, by the end of the Amnesty Period, the taxpayer (1) makes a written request for waiver on a form prescribed by Michigan Treasury,  (2) files any unfiled tax returns or an amended returns, pays all tax owing with respect to the return, and (3) makes full payment of the tax and interest due.  As of November 26, 2010, Treasury had not yet prescribed any procedures for applying for amnesty under the new law.  The new amnesty law does not apply to penalties on tax accruing after December 31, 2009.

The new amnesty law is an opportunity not to be missed by taxpayers owing Michigan tax penalties.  Taxpayers should take care to follow rules when they are issued by Michigan Treasury for seeking amnesty.

Generally it is advisable for taxpayers to allocate their payments to Michigan Treasury as first against tax and then against interest owing.  This is especially true for payments made before or during the upcoming Amnesty Period.  Payments applied to penalties leave less penalties to be abated, and more tax, which cannot be abated.  A taxpayer allocates a payment first to tax and then to interest by writing on the memo line of the check, “See binding allocation on reverse,” and then writing the following on the back of the check, above where the check will be endorse:

This check must be applied first against tax and then against interest owing to the State of Michigan by [name of taxpayer], Michigan Treasury Account No. [taxpayer’s Michigan Treasury account. no.].

Stephen J. Dunn litigates Federal and Michigan tax cases, counsels corporations and entrepreneurs, and plans estates.  He is Of Counsel to the Demorest Law Firm, PLLC.  Reach him at steve@demolaw.com.