Report Title:

Tax Administration

Description:

Allows the department of taxation to impose civil penalties and injunctions on tax return preparers who support unrealistic positions on tax returns and on promoters of abusive tax shelters. (SD1)

THE SENATE

S.B. NO.

2989

TWENTY-SECOND LEGISLATURE, 2004

S.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) Any income tax return preparer making understatements of liability on a return or claim for refund shall pay a penalty of $250 unless there is reasonable cause for the understatement, and the income tax return preparer acted in good faith.

(b) A person wilfully or recklessly makes an understatement of liability on a return or claim for refund if a person:

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

(2) Recklessly or intentionally disregards any tax rules.

Any income tax return preparer willfully or recklessly making understatements of liability on a return or claim for refund shall pay a penalty of $1,000. Penalties assessed under this subsection shall be reduced by any penalties assessed under subsection (a).

(c) For purposes of subsections (a) and (b), understatements of liability using unrealistic positions occur when:

(1) Any part of a return or claim for refund is based on a position that does not have a realistic possibility of being sustained on its merits;

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

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

(d) The beginning of a proceeding or levy may be enjoined if within thirty days after the notice and demand of any penalty under subsection (a) or (b) is made, the income 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.

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

No levy or proceeding in court for the collection of any penalty assessed under subsection (a) or (b) shall be initiated or prosecuted until the final resolution of a proceeding begun under this subsection.

(e) A proceeding or levy enjoined under subsection (d) shall cease to apply if:

(1) 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) 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.

The proceeding or levy enjoined under subsection (c) shall cease to apply starting on the day following the close of the applicable thirty-day period referred to in this subsection.

(f) If at any time there is a final administrative determination or a final judicial decision that no understatement of liability exists in the return or claim for refund for a penalty assessed under subsection (a) or (b), the determination shall be abated. Any portion of the penalty that has been paid shall be refunded as an overpayment of tax without regard to any period of limitations which, but for this subsection, would apply to the making of such refund.

(g) In a civil action, the State may enjoin any income tax return preparer from:

(1) Preparing any income tax returns following a request by the director to cease. 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 or against the State by such income tax return preparer or any taxpayer; and

(2) 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 such person's interference with the proper administration of this chapter, the court may enjoin such person from acting as an income 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 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 or employs one or more persons who prepares a return of tax or a claim for refund of tax for compensation. 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.

"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 (d), the determination of whether or not there is an understatement of liability shall be made without regard to any administrative or judicial action involving the taxpayer."

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 person promotes an abusive tax shelter by:

(1) Organizing or assisting in the organization of:

(A) A partnership or other entity;

(B) Any investment plan or arrangement; or

(C) Any other plan or arrangement;

(2) Directly or indirectly participating in the sale of any interest in an entity; or

(3) Making or furnishing or causing another person to make or furnish in connection with an 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 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 lesser, 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) In a civil action, the State may enjoin any person described in subsection (a) from engaging in any conduct described in subsection (a) by the request of the director. Any action under this section shall be brought in the circuit court where the person 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 or against the State by such 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 such conduct the court may enjoin the person from further engaging in described conduct.

(d) For purposes of this section:

(1) "Gross valuation overstatement" means any statement of value for 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.

(2) 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.

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

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 on July 1, 2004.