Report Title:

Tax Administration

 

Description:

Conforms Hawaii tax law to federal tax law relating to tax administration and criminal tax enforcement. (SD2)

 


THE SENATE

S.B. NO.

1499

TWENTY-FOURTH LEGISLATURE, 2007

S.D. 2

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. A self-reporting system that relies upon the honesty and integrity of taxpayers and 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 and its Criminal Investigations Division to investigate, prosecute, and deter criminal tax frauds.

This Act will assist the department of taxation's criminal enforcement unit, as well as the department of the attorney general and the prosecuting attorney offices of the respective counties, by providing these essential compliance tools.

The purpose of this Act is to amend title 14, Hawaii Revised Statutes, to conform Hawaii criminal tax administration provisions to the Internal Revenue Code, by including provisions relating to tax administration enforcement, criminal tax penalties, and tax fraud proceedings.

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-   Understatement of taxpayer's liability by tax return preparer. (a) Any tax return preparer making understatements of liability based upon unrealistic positions on a tax return or claim for tax refund shall pay a penalty of $250, with respect to each such tax return or claim, unless there is reasonable cause for the understatement and the tax return preparer acted in good faith.

(b) A tax return preparer wilfully or recklessly makes an understatement of liability based upon unrealistic 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).

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

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

(2) Any tax return preparer who prepares a tax return or claim for tax refund who 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 (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 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 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). 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.

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. 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. 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.

"Tax return preparer" means a professional who prepares a tax return or a claim for a tax refund or employs or supervises one or more persons who prepare a tax return or a claim for a tax refund, for payment. A professional includes an enrolled agent, certified public accountant, attorney, or other person paid for preparation of a tax return or 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."

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

"231-   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

(C) Any other plan or arrangement; and

(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, 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 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."

PART II. CRIMINAL TAX ENFORCEMENT

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

"231-   Wilful failure to collect and pay over tax. In addition to other penalties provided by law, 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 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."

PART III. TAX FRAUD PROCEEDINGS

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

"231-   Signature presumed authentic. An individual's signature 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 6. 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 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 7. 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[; 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 8. 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[; 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 9. 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 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 10. 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[; 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 11. 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 12. Statutory material to be repealed is bracketed and stricken. New statutory material is underscored.

SECTION 13. This Act shall take effect on July 1, 2007.