Report Title:

Tax Administration

Description:

Allows the Department of Taxation to impose civil penalties and injunctions on income tax return preparers who support unrealistic positions on tax returns and on promoters of abusive tax shelters. (HB2514 HD1)

HOUSE OF REPRESENTATIVES

H.B. NO.

2514

TWENTY-SECOND LEGISLATURE, 2004

H.D. 1

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. The purpose of this Act is to conform to federal tax law and to provide the department of taxation with the authority to impose civil penalties and injunctions on individuals who promote abusive tax shelters and income tax return preparers who support unrealistic positions on tax returns.

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

"231- Understatement of taxpayer's liability by income tax return preparer. (a) Unless it is shown that there is reasonable cause for the understatement and the income tax preparer acted in good faith, an income tax return preparer shall pay a penalty of $250 with respect to a return or claim if:

(1) Any part of any understatement of liability with respect to any return or claim for refund is due to a position for which there was not a realistic possibility of being sustained on its merits;

(2) The income tax return preparer knew or reasonably should have known of such position; and

(3) Such position was not disclosed as provided in subsection (e)(2) or was frivolous.

(b) If any part of any understatement of liability with respect to any return or claim for refund is due to:

(1) A wilful attempt by an income tax preparer in any manner to understate the liability for tax with respect to such return or claim; or

(2) A reckless or intentional disregard of rules by an income tax preparer,

the income tax return preparer shall pay a penalty of $1,000 with respect to such return or claim. With respect to any return or claim, the amount of the penalty payable shall be reduced by the amount of the penalty paid by an income tax return preparer pursuant to subsection (a).

(c) Regarding an extension of the period of collection where an income tax return preparer pays fifteen per cent of the penalty:

(1) In general, if, within thirty days after the day on which notice and demand of any penalty under subsection (a) or (b) is made against an income tax return preparer, and the income tax return preparer pays an amount that is not less than fifteen per cent of the amount of such penalty and files a claim for refund of the amount so paid, no levy or proceeding in court for the collection of the remainder of such penalty shall be made, begun, or prosecuted until the final resolution of the proceeding begun as provided in paragraph (2). The beginning of such proceeding or levy during the time such prohibition is in force may be enjoined by a proceeding in the proper court. Nothing in this paragraph shall be construed to prohibit any counterclaim for the remainder of such penalty in a proceeding begun as provided in paragraph (2); and

(2) If, 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, if earlier, within thirty days after the expiration of six months after the day on which the claim for refund was filed, the income tax return preparer fails to begin a proceeding in the tax appeal court for the determination of the income tax return preparer's liability for such penalty, paragraph (1) shall cease to apply with respect to such penalty, effective on the day following the close of the applicable thirty-day period referred to in this paragraph.

(d) If at any time there is a final administrative determination or a final judicial decision that there was no understatement of liability in the case of any return or claim for refund with respect to which a penalty under subsection (a) or (b) has been assessed, such assessment shall be abated, and any portion of the penalty that was paid shall be refunded to the income 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.

(e) As used in this section, unless the context requires otherwise:

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

"Disclosed item" means any item where:

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

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

"Income tax return preparer" means any person who prepares for compensation, or who employs one or more persons to prepare for compensation, any return of tax or any claim for refund of tax. For purposes of the preceding sentence, the preparation of a substantial portion of a return or claim for refund shall be treated as if it were the preparation of such return or claim for refund.

(f) A civil action in the name of the State to enjoin any person who is an income tax return preparer from further engaging in any conduct described in subsection (a) or (b), or from further acting as an income tax return preparer may be commenced at the request of the director. Any action under this section shall be brought in the circuit court in which the income tax return preparer resides or has the principal place of business, or in which the taxpayer with respect to whose income tax return the action is brought resides. The court may exercise its jurisdiction over such action separate and apart from any other action brought by the State against such income tax return preparer or any taxpayer.

(g) In addition to subsection (f), if the court finds that an income tax return preparer has engaged in any conduct subject to penalty under subsection (a) or (b) and that injunctive relief is appropriate to prevent the recurrence of such conduct, the court may enjoin such person from further engaging in such conduct. If the court finds that an income tax return preparer has continually or repeatedly engaged in such conduct and that an injunction prohibiting such conduct would not be sufficient to prevent the person's interference with the proper administration of this chapter, the court may enjoin the person from acting as an income tax return preparer."

SECTION 3. Chapter 235, Hawaii Revised Statutes, is amended by adding a new section to be appropriately designated and to read as follows:

"235- Promoting abusive tax shelters. (a) A penalty shall be imposed on any person:

(1) Who:

(A) Organizes or assists in the organization of:

(i) A partnership or other entity;

(ii) Any investment plan or arrangement;

(iii) Any other plan or arrangement;

or

(B) Participates directly or indirectly in the sale of any interest in an entity or plan or arrangement referred to in subsection (1)(A);

and

(2) Who makes or furnishes or causes another person to make or furnish in connection with such organization or sale:

(A) A statement with respect to the allowability of any deduction or credit, the excludability of any income, or 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 as to any material matter; or

(B) A gross valuation overstatement as to any material matter.

(b) A person subject to a penalty under this section shall pay, with respect to each activity described in paragraph (1) or (2), the lesser of a penalty equal to the $1,000 or one hundred per cent of the gross income derived or to be derived by such person from such activity. For purposes of the preceding sentence, activities described in paragraph (1)(A) with respect to each entity or arrangement shall be treated as a separate activity and participation in each sale described in paragraph (1)(B) shall be so treated. The penalty imposed by this section shall be in addition to any other penalty provided by law.

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

(d) A civil action in the name of the State to enjoin any person described in subsection (a) from further engaging in any conduct described in subsection (a) may be commenced at the request of the director. Any action under this section shall be brought in the circuit court of the circuit in which the person described in subsection (a) resides or has the principal place of business. The court may exercise its jurisdiction over such action separate and apart from any other action brought by the State against such persons described in subsection (a).

(e) In addition to subsection (d), if the court finds that a person described in subsection (a) has engaged in any conduct subject to penalty under this section and that injunctive relief is appropriate to prevent the recurrence of such conduct, the court may enjoin such person from further engaging in such conduct.

(f) As used in this section unless the context requires otherwise:

(1) For purposes of this section, the term "gross valuation overstatement" means any statement as to the value of any property or services if:

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

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

SECTION 4. This Act does not affect rights and duties that matured, penalties that were incurred, and proceedings that were begun, before its effective date.

SECTION 5. New statutory material is underscored.

SECTION 6. This Act shall take effect upon its approval.