A tax amnesty program being implemented in Massachusetts in 2025 is expected to provide the state with a one-time revenue boost of $100 million. But the rare penalty-remission program also raises fundamental questions about tax fairness and compliance.

Gov. Maura Healey (D-CA) signed a budget bill last month directing the Department of Revenue to grant a 60-day amnesty allowing personal and business taxpayers to pay their outstanding tax debts without penalty. The campaign is intended to get thousands of delinquent taxpayers to comply with their taxes and boost state tax revenues.

“We’re excited about this. It’s a good opportunity for taxpayers to pay their tax debt while saving on penalties and fees,” said Molly Sullivan, vice president of government affairs at the Massachusetts Society of CPAs. “We don’t see any concerns at this time. We just want to make sure citizens are aware of the program.”

However, many tax officials and analysts fear that broad initiatives to waive tax penalties send the wrong message.

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

Three common characteristics

Traditionally, tax amnesties are offered at the national and subnational levels to temporarily increase revenue, meet a specific compliance goal, or narrow the “tax gap” – the gap between the amount of revenue voluntarily paid to a tax authority and the amount owed. Programs can be structured differently depending on a jurisdiction’s policy goals, 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 impose periods of increased enforcement and penalties after the amnesty ends to encourage participation.

According to an analysis by the Federation of Tax Administrators, states have offered 41 comprehensive amnesties since 2010, but only three since 2019 – in Connecticut, Illinois and Nevada. Those numbers do not include a handful of targeted initiatives, such as the transfer pricing programs for large multistate companies offered by North Carolina in 2020 and New Jersey in 2023. The number of comprehensive tax amnesties has declined largely because states and localities have received strong support from the federal government during the pandemic, says Alexis Morrison-Howe, managing director of the Multistate Tax Group at Deloitte Tax LLP.

“Most state governments are flush with money,” she said. “Usually the reason is to raise revenue without raising taxes.”

Connecticut’s sweeping tax amnesty, which ended Jan. 31, 2022, collected $186 million from 20,500 taxpayers in 60 days, said Tiffany Thiele, communications director for the Department of Revenue Services.

In 2023, the Kentucky and Ohio legislatures passed bills providing for amnesty, but neither state launched programs. Ohio pulled the plug on funding because it didn’t need the revenue, and Kentucky’s efforts fizzled amid a political battle over the funds needed to implement it.

DOR has great discretion

The Massachusetts budget gives the Department of Revenue broad discretion to grant a 60-day amnesty before June 30, 2025, waiving all penalties if taxpayers remit their unpaid taxes with interest.

The program is open to individual and business taxpayers who either failed to file a tax return or failed to properly report the tax due on a previous return on or before December 31, 2024. Most taxpayers are eligible unless the agency determines the party acted fraudulently. The amnesty will cover most of the state’s tax programs, including income tax, corporate tax, and sales and use tax programs.

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

The ministry has not yet issued any guidelines on the 2025 amnesty. In a message to taxpayers on August 14, it simply said: “More information, including the dates of the program, will follow shortly.”

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

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

Test effectiveness

Narratives of tax amnesties are as old as the Rosetta Stone, but Zentner says scientists still don’t have a clear understanding of their effectiveness. States may enjoy increased revenues in the short term, but the amnesty periods are often criticized as unfair to taxpayers who dutifully obey the law. Even more worrying, tax amnesties raise the specter of moral hazard by inducing taxpayers to forego tax compliance in anticipation of tax forgiveness later.

Zentner and other researchers recently tested strategies to maximize the effectiveness of amnesty programs through messaging to taxpayers. The team coordinated with the Dominican Republic’s tax authorities in October 2020 and tested various messaging options aimed at improving compliance.

The study found that 18 percent of eligible debtors took advantage of the amnesty and paid $263 million – 5 percent of the total debt. Sending a message to delinquent taxpayers increased the likelihood that the debt would be paid. However, of the four messages tested, only one, which threatened a possible prison sentence, increased the average amount of debt paid.

The study also refuted criticism that tax amnesties merely accelerate tax payments and encourage future tax avoidance. The authors concluded: “When examining tax payments after the amnesty, we find no evidence that the amnesty led to a reduction in tax payments in the following two years.”

The study also found that corporate participation was greater than that of private individuals.

“These results are consistent with our previous work in which we found that corporations, particularly larger ones, respond more strongly to perceived penalties than individuals and small businesses,” Zentner said.