Bill Text: HI HB1155 | 2010 | Regular Session | Introduced

Hawaii House Bill 1155 (Prior Session Legislation)

Introduced

Bill Title: Tax Administration; Penalty and Enforcement Conformity

Spectrum: Partisan Bill (Democrat 1-0)

Status: (Introduced - Dead) 2009-05-11 - Carried over to 2010 Regular Session. [HB1155 Detail]

Download: Hawaii-2010-HB1155-Introduced.html

Report Title:

Tax Administration; Penalty and Enforcement Conformity

Description:

Deters tax fraud and promotes uniformity in the tax system by conforming Hawaii tax law to the Internal Revenue Code for preparer penalties and accuracy-related penalties.

HOUSE OF REPRESENTATIVES	H.B. NO.	1155
TWENTY-FIFTH LEGISLATURE, 2009
STATE OF HAWAII

A BILL FOR AN ACT

RELATING TO TAX ADMINISTRATION.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

SECTION 1. As a self-reporting system that relies upon the honesty and integrity of taxpayers, enforcement of Hawaii's tax laws is only as effective as the compliance tools that exist to deter dishonest conduct. Hawaii lacks a vast majority of the tools used by the Internal Revenue Service to ensure optimal compliance and deter tax frauds.

The purpose of this Act is to amend title 14, Hawaii Revised Statutes, to conform Hawaii tax administration provisions to the Internal Revenue Code.

PART I. TAX ADMINISTRATION ENFORCEMENT

SECTION 2. Chapter 231, Hawaii Revised Statutes, is amended by adding a new section to be appropriately designated and to read as follows:

"§231-A Understatement of taxpayer's liability by tax return preparer. (a) Any tax return preparer making understatements of liability based upon unreasonable positions on a tax return or claim for tax refund shall pay a penalty of $500, with respect to each such tax return or claim for tax refund, unless there is reasonable cause for the understatement and the tax return preparer acted in good faith. For the purposes of this section, any position is not unreasonable unless the position is contrary to or not supported by substantial authority for the position.

(b) A tax return preparer wilfully or recklessly makes an understatement of liability based upon unreasonable positions on a tax return or claim for tax refund if the tax return preparer:

(1) Wilfully attempts to understate a person's tax liability; or

(2) Recklessly disregards any tax law or rule.

Any tax return preparer who violates this subsection shall pay a penalty of $1,000, with respect to each such tax return or claim. Penalties assessed under this subsection shall be reduced by any penalties assessed under subsection (a).

(1) Any part of a tax return or claim for tax refund is based on a position that does not have substantial authority;

(2) Any tax return preparer who prepares a tax return or claim for tax refund knew or reasonably should have known of such an unreasonable position; and

(3) The unreasonable position was not a disclosed item as provided in subsection (h) or was frivolous.

(d) If within thirty days after the notice and demand of any penalty under subsection (a) or (b) is made, the tax return preparer:

(1) Pays an amount that is not less than fifteen per cent of the penalty amount; and

(2) Files a claim for refund of the amount so paid, no action to levy or file a proceeding in court to collect the remainder of the penalty shall be commenced except in accordance with subsection (e).

(e) An action that is stayed pursuant to subsection (d) may be brought thirty days after either of the following events, whichever occurs first:

(1) The tax return preparer fails to file an appeal to the tax appeal court within thirty days after the day on which the claim for refund of any partial payment of any penalty under subsection (a) or (b) is denied; or

(2) The tax return preparer fails to file an appeal to the tax appeal court for the determination of the tax return preparer's liability for the penalty assessed under subsection (a) or (b) within six months after the day on which the claim for refund was filed.

Nothing in this subsection shall be construed to prohibit any counterclaim for the remainder of the penalty in any proceeding.

(f) If there is a final administrative determination or a final judicial decision that the penalty assessed under subsection (a) or (b) should not apply, then that portion of the penalty assessed shall be voided. Any portion of the penalty that has been paid shall be refunded to the tax return preparer as an overpayment of tax without regard to any period of limitations which, but for this subsection, would apply to the making of the refund.

(g) At the request of the director of taxation, a civil action may be brought to enjoin a tax return preparer from further acting as a tax return preparer or from engaging in conduct prohibited under subsection (a) or (b) as follows:

(1) Any action under this subsection may be brought in the circuit court of the circuit in which the tax return preparer resides or has a principal place of business, or in which the taxpayer with respect to whose tax return the action is brought resides;

(2) The court may exercise its jurisdiction over the action separate and apart from any other action brought by the State against the tax return preparer or taxpayer;

(3) If the court finds that a tax return preparer has engaged in conduct subject to penalty under subsection (a) or (b) and that injunctive relief is appropriate to prevent the recurrence of that conduct, the court may enjoin the preparer accordingly; and

(4) If the court finds that a tax return preparer has continually or repeatedly engaged in conduct prohibited under subsection (a) or (b) and that an injunction prohibiting that conduct would not be sufficient to prevent the preparer's interference with the proper administration of this chapter, the court may enjoin the preparer from acting as a tax return preparer.

(h) For purposes of this section:

"Disclosed item" means any item where:

(1) The relevant facts affecting the item's tax treatment are adequately disclosed in a tax return or in a statement attached to a tax return; and

(2) There is a reasonable basis for the tax treatment of the item by the taxpayer.

"Substantial authority" means, in addition to any definition of substantial authority incorporated by subsection (j), only the following authority for purposes of determining whether there is substantial authority for the tax treatment of an item:

(1) Statutory provisions;

(2) Proposed or final administrative rules;

(3) Tax information releases or procedures;

(4) Department of taxation announcements or official explanations;

(5) Court cases;

(6) Legislative intent reflected in committee reports and floor statements;

(7) Private letter rulings, comfort letters, technical or advice letters, and written determinations to the extent such are valid and not overruled by other authority;

(8) Department of taxation press releases;

(9) Notices or other official pronouncements of the department of taxation.

"Tax return preparer" means any person who prepares, employs, or supervises one or more persons who prepare a tax return or a claim for tax refund. Preparation of a substantial portion of a tax return or claim for tax refund shall be treated as if it were the preparation of a tax return or claim for tax refund.

"Understatement of liability" means any understatement of the net amount payable for any tax imposed or any overstatement of the net amount creditable or refundable for any tax. Except as otherwise provided in subsection (f), the determination of whether there is an understatement of liability shall be made without regard to any administrative or judicial action involving the taxpayer.

(i) The penalty imposed by this section shall be in addition to any other penalty provided by law.

(j) This section shall be construed in accordance with regulations and judicial interpretations given to similar provisions of the Internal Revenue Code."

SECTION 3. Chapter 231, Hawaii Revised Statutes, is amended by adding a new section to be appropriately designated and to read as follows:

"§231-B Promoting abusive tax shelters. (a) A person promotes an abusive tax shelter by:

(1) Organizing or assisting in the organization of, or participating directly or indirectly in the sale of an interest in:

(A) A partnership or other entity;

(B) Any investment plan or arrangement; or

(2) In connection with any activity described under paragraph (1), making, furnishing, or causing another person to make or furnish a statement with respect to:

(A) Whether any deduction or credit is allowed;

(B) Whether any income may be excluded; or

(C) The securing of any other tax benefit by reason of holding an interest in the entity or participating in the plan or arrangement,

which the person knows or has reason to know is false or fraudulent or is a gross valuation overstatement as to any material matter.

(b) A person found promoting an abusive tax shelter shall pay, with respect to each activity described in subsection (a), a penalty of $1,000 or, if the person establishes that it is less than $1,000, one hundred per cent of the gross income derived or to be derived by the person from the activity. For purposes of this section, activities described in subsection (a)(1) shall be treated as a separate activity for each entity or arrangement. Participation in each sale described in subsection (a)(2) shall be treated as a separate activity for each entity or arrangement.

(c) At the request of the director, a civil action may be brought to enjoin any person described in subsection (a) from engaging in any conduct described in subsection (a). Any action under this section shall be brought in the circuit court of the circuit where the person in subsection (a) resides or where the person's principal place of business is located. The court may exercise its jurisdiction over the action separate and apart from any other action brought by the State against those persons described in subsection (a). If the court finds that a person described in subsection (a) has engaged in any conduct subject to penalty under subsection (b) and that injunctive relief is appropriate to prevent the recurrence of that conduct, the court may enjoin the person accordingly.

(d) For purposes of this section, "gross valuation overstatement" means any statement of value for any property or services if:

(1) The value so stated exceeds two hundred per cent of the amount determined to be the correct valuation; and

(2) The value of the property or services is directly related to the amount of any deduction or credit allowable to any participant.

(e) The director may waive all or any part of the penalty provided by subsection (b) with respect to any gross valuation overstatement on a showing that there was a reasonable basis for the valuation and that the valuation was made in good faith.

(f) The penalty imposed by this section shall be in addition to any other penalty provided by law.

(g) This section shall be construed in accordance with regulations and judicial interpretations given to similar provisions of the Internal Revenue Code."

SECTION 4. Chapter 231, Hawaii Revised Statutes, is amended by adding a new section to be appropriately designated and to read as follows:

"§231-C Erroneous claim for refund or credit. (a) If a claim for refund or credit with respect to tax is made for an excessive amount, the person making such claim shall be liable for a penalty in an amount equal to twenty per cent of the excessive amount; provided that there shall be no penalty assessed where the penalty calculation under this section results in an amount of less than $400.

(b) It shall be a defense to the penalty under this section that the claim for refund or credit had a reasonable basis. A person claiming the reasonable basis defense shall have the burden of proof to demonstrate the reasonableness of the claim.

"Excessive amount" means the amount by which the amount of the claim for refund or credit for any taxable year exceeds the amount of such claim allowable for such taxable year.

"Reasonable basis" means a standard of care utilized in tax reporting that is significantly higher than not frivolous or not patently improper. A reasonable basis position will be more than arguable and based on at least one or more authorities of either state or federal tax administration. A position is considered to have a reasonable basis if a reasonable and well-informed analysis by a person knowledgeable in tax law would lead that person to conclude that the position has approximately a one-in-four, or greater, likelihood of being sustained on the merits. A reasonable basis includes innocent mistakes where the excessive amount is the result of inadvertence, mathematical error, or where otherwise defined as innocent by the director pursuant to a formal pronouncement issued without regard to chapter 91.

(d) This section shall be construed in accordance with regulations and judicial interpretations given to similar provisions of the Internal Revenue Code."

SECTION 5. Chapter 231, Hawaii Revised Statutes, is amended by adding a new section to be appropriately designated and to read as follows:

"§231-D Substantial understatements or misstatements of amounts; penalty. (a) There shall be added to the tax an amount equal to twenty per cent of the portion of any underpayment that is attributable to any substantial understatement of any tax. The penalty under this section shall be in addition to any other penalty assessable by law.

(b) Except as provided under subsection (c), there is a substantial understatement of tax for any taxable year if the amount of the understatement for the taxable years exceeds the greater of:

(1) Ten per cent of the tax required to be shown on the return for the taxable year, or

(2) $1,500.

(c) In the case of a corporation other than a corporation taxable under subchapter S of the Internal Revenue Code, there is a substantial understatement of tax for any taxable year if the amount of the understatement for the taxable year exceeds the greater of:

(1) Ten per cent of the tax required to be shown on the return for the taxable year; or

(2) $30,000.

(d) For purposes of this section, "understatement" means the excess of:

(1) The amount of tax required to be shown on the return for the taxable year; over

(2) The amount of tax imposed that is shown on the return, reduced by any rebate as that term is defined by section 6211(b)(2) of the Internal Revenue Code.

(e) The amount of any understatement shall be reduced by that portion of the understatement that is attributable to:

(1) The tax treatment of any item by the taxpayer if there is or was substantial authority for such treatment; or

(2) Any item if the relevant facts affecting the item's tax treatment are adequately disclosed in the return or in a statement attached to the return and there is a reasonable basis, as defined under section 231-C, for the tax treatment by the taxpayer.

The reduction in this subsection shall not apply to any item attributable to a tax shelter as described in section 231-B.

(f) This section shall be construed in accordance with regulations and judicial interpretations given to similar provisions of the Internal Revenue Code."

SECTION 6. Chapter 231, Hawaii Revised Statutes, is amended by adding a new section to be appropriately designated and to read as follows:

"§231-E Statute of limitations; extension for substantial omissions. (a) Notwithstanding any other law to the contrary limiting the time for assessment of any tax, if a taxpayer omits any amount of:

(1) Gross income or gross proceeds of sale;

(2) Gross rental or gross rental proceeds;

(3) Price, value, or consideration paid or received for any property;

(4) Gross receipts;

(5) Gallonage, tonnage, cigarette count, day, or other weight or measure applicable to any tax;

properly includible therein that is in excess of twenty-five per cent of the amount stated in the return, the tax may be assessed or a proceeding in court with respect to such tax without assessment may be begun without assessment, at any time within six years after the return was filed.

(b) In determining any amount omitted, there shall not be taken into account any amount that is stated in the return if such amount is disclosed in the return or in a statement attached to the return in a manner adequate to apprise the department of the nature and amount of such item.

(c) This section shall be construed in accordance with regulations and judicial interpretations given to similar provisions of the Internal Revenue Code."

SECTION 7. Section 231-7, Hawaii Revised Statutes, is amended to read as follows:

"§231-7 Hearings and subpoenas. (a) The director of taxation, and any representative of the director duly authorized by the director, may conduct any inquiry, investigation, or hearing, relating to any assessment, or the amount of any tax, or the collection of any delinquent tax, including any inquiry or investigation into the financial resources of any delinquent taxpayer or the [~~collectibility~~] collectability of any delinquent tax.

(b) The director or other person conducting [~~such hearing~~] hearings may administer oaths and take testimony under oath relating to the matter of inquiry or investigation, and subpoena witnesses and require the production of books, papers, documents, and records pertinent to such inquiry.

(c) If any person disobeys [~~such process,~~] any process or, having appeared in obedience thereto, refuses to answer pertinent questions put to the person by the director or other person conducting such hearing, or to produce any books, papers, documents, or records pursuant thereto, the director or other person conducting such hearing may apply to the circuit court of the circuit wherein the inquiry or investigation is being conducted, or to any judge of such court, setting forth such disobedience to process or refusal to answer, and such court or judge shall cite such person to appear before such court or judge to answer such questions or to produce such books, papers, documents, or records, and upon the person's refusal so to do commit such person to jail until the person testifies but not for a longer period than sixty days. Notwithstanding the serving of the term of commitment by any person, the director may proceed in all respects as if the witness had not previously been called upon to testify. Witnesses (other than the taxpayer or the taxpayer's or its officers, directors, agents, and employees) shall be allowed their fees and mileage as in cases in the circuit courts, to be paid on vouchers of the department of taxation, from any moneys available for expenses of the department.

(d) Any subpoena issued under this section that does not identify the person with respect to whose liability or investigation the subpoena is issued may be served on any person only after a court proceeding in which the director or other person establishes that:

(1) The subpoena relates to the investigation of a particular person or ascertainable group or class of persons;

(2) There is a reasonable basis for believing that such person or group or class of persons may fail or may have failed to comply with any provision of title 14; and

(3) The information sought to be obtained from the examination of records or testimony and the identity of the person or persons with respect to whose liability the subpoena is issued is not readily available from other sources.

(e) The provisions of this section are in addition to all other provisions of law, and apply to any tax within the jurisdiction of the department."

PART II. CRIMINAL TAX ENFORCEMENT

SECTION 8. Chapter 231, Hawaii Revised Statutes, is amended by adding a new section to be appropriately designated and to read as follows:

"§231-F Wilful failure to collect and pay over tax. Any person required to collect, account for, and pay over any tax imposed by title 14, who wilfully fails to collect or truthfully account for and pay over such tax shall, in addition to other penalties provided by law, be guilty of a class C felony and, upon conviction, shall be subject to one or any combination of the following:

(1) A fine of not more than $100,000;

(2) Imprisonment of not more than five years; or

(3) Probation;

provided that a corporation shall be fined not more than $500,000."

SECTION 9. Section 231-40, Hawaii Revised Statutes, is amended to read as follows:

"[[]§231-40[]] Interpretation. Sections 231-34, 231-35, [~~and~~] 231-36, and 231-F shall be construed in accordance with judicial interpretations given to similar provisions of Title 26 of the United States Code; consistent therewith, the term "wilfully" shall mean a voluntary, intentional violation of a known legal duty."

SECTION 10. Section 231-41, Hawaii Revised Statutes, is amended to read as follows:

"[[]§231-41[]] Statute of limitation for criminal penalties. Notwithstanding any laws to the contrary, prosecutions under sections 231-34, 231-35, [~~and~~] 231-36, and 231-F shall be commenced within seven years after the commission of the offense."

PART III. TAX FRAUD PROCEEDINGS

SECTION 11. Chapter 231, Hawaii Revised Statutes, is amended by adding a new section to be appropriately designated and to read as follows:

"§231-G Signature presumed authentic. The fact that an individual's name is signed on a return, statement, or other document shall be prima facie evidence for all purposes that the return, statement, or other document was actually signed by the individual."

SECTION 12. Section 235-111, Hawaii Revised Statutes, is amended by amending subsection (c) to read as follows:

"(c) Exceptions; fraudulent return or no return. In the case of a false or fraudulent return with intent to evade tax or liability, or of a failure to file return, the tax or liability may be assessed or levied at any time; provided that the burden of proof with respect to the issue of falsity or fraud shall be upon the government[; provided that in the case of a return claimed to be false or fraudulent with intent to evade tax or liability, the determination as to the claim shall first be made by a judge of the circuit court for or in the circuit within which the taxpayer or employer has the taxpayer's or employer's residence or principal place of business, or if none in the State then in the first circuit, upon petition filed by the department of taxation. The petition and other pleadings and proceedings in the matter shall be governed and conducted in accordance with statutory and other requirements relating to proceedings in equity, including all rights to appeal allowed in the proceedings. No assessment or levy of the tax or liability after the expiration of the three-year period shall be made unless so provided in the final decree entered in the proceedings]."

SECTION 13. Section 237-40, Hawaii Revised Statutes, is amended by amending subsection (b) to read as follows:

"(b) Exceptions. In the case of a false or fraudulent return with intent to evade tax, or of a failure to file the annual return, the tax may be assessed or levied at any time; provided that the burden of proof with respect to the issue of falsity or fraud shall be upon the government [; however, in the case of a return claimed to be false or fraudulent with intent to evade tax, the determination as to the claim shall first be made by a judge of the circuit court as provided in section 235-111(c) which shall apply to the tax imposed by this chapter]."

SECTION 14. Section 237D-9, Hawaii Revised Statutes, is amended by amending subsection (d) to read as follows:

"(d) In the case of a false or fraudulent return with intent to evade tax, or of a failure to file the annual return, the tax may be assessed or levied at any time; provided that the burden of proof with respect to the issue of falsity or fraud shall be upon the government [; however, in the case of a return claimed to be false or fraudulent with intent to evade tax, the determination as to the claim shall first be made by a judge of the circuit court as provided in section 235-111(c) which shall apply to the tax imposed by this chapter]."

SECTION 15. Section 243-14, Hawaii Revised Statutes, is amended by amending subsection (c) to read as follows:

"(c) In the case of a false or fraudulent statement with intent to evade tax or liability, or of a failure to file a statement, the tax or liability may be assessed or levied at any time; provided that the burden of proof with respect to the issue of falsity or fraud shall be upon the government [; provided that in the case of a statement claimed to be false or fraudulent with intent to evade tax or liability, the determination as to the claim shall first be made by a judge of the circuit court as provided in section 235-111(c) which shall apply to the tax imposed by this chapter]."

SECTION 16. Section 251-8, Hawaii Revised Statutes, is amended by amending subsection (d) to read as follows:

"(d) In the case of a false or fraudulent return with intent to evade the surcharge tax, or of a failure to file the annual return, the surcharge tax may be assessed or levied at any time; provided that the burden of proof with respect to the issue of falsity or fraud shall be upon the government [; however, in the case of a return claimed to be false or fraudulent with intent to evade the surcharge tax, the determination as to the claim shall first be made by a judge of the circuit court as provided in section 235-111(c) which shall apply to the surcharge tax imposed by this chapter]."

SECTION 17. Except as provided in section 20, this Act does not affect returns prepared and transactions promoted, rights and duties that matured, penalties that were incurred, and proceedings that were begun, before its effective date.

SECTION 18. In codifying the new sections created by section 2 through 6, section 8, and section 11 of this Act, the revisor of statutes shall insert appropriate section numbers for the letters used in designating and referring to the new sections in this Act.

SECTION 19. Statutory material to be repealed is bracketed and stricken. New statutory material is underscored.

SECTION 20. This Act shall take effect upon approval; provided:

(1) Section 2 (relating to penalties for preparing returns with unreasonable positions), section 4 (relating to erroneous refund claims), section 5 (relating to substantial understatements), section 6 (relating to the statute of limitations on substantial omissions), section 11 (relating to fraud assessments), section 12 (relating to fraud assessments), section 13 (relating to fraud assessments), section 14 (relating to fraud assessments), and section 15 (relating to fraud assessments), shall apply to any return prepared, refund claim, understatement, omission, or fraud contained in any return where the statute of limitations on assessment has not expired; provided that this Act shall not apply to any return prepared, refund claim, understatement, omission, or fraud in any return where an amended return is filed by October 1, 2009, to the extent the amended return cures, corrects, or eliminates any item constituting an unreasonable position, erroneous refund claim, substantial understatement, substantial omission, or fraud as provided in this Act; and

(2) Section 3 (relating to promoting abusive tax shelters) and section 8 (relating to failure to withhold and pay tax), section 9 (relating to failure to withhold and pay tax), section 10 (relating to failure to withhold and pay tax), shall take effect on July 1, 2009.

INTRODUCED BY:

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BY REQUEST