Report Title:

Taxes; preparation of returns

Description:

Provides the DOTAX with the authority to impose civil penalties and seek court injunctions on persons who promote abusive tax shelters and tax preparers who support unrealistic positions on tax returns.

HOUSE OF REPRESENTATIVES

H.B. NO.

2417

TWENTY-THIRD LEGISLATURE, 2006

 

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 seek court injunctions on persons who promote abusive tax shelters and tax return preparers who take 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 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 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 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.

"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."

SECTION 2. 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:

(A) A partnership or other entity;

(B) Any investment plan or arrangement; or

(C) Any other plan or arrangement; and

(2) Directly or indirectly participating in the sale of any interest in an entity under paragraph (1),

to make or furnish or cause another person to make or furnish (in connection with an organization or sale) a statement with respect to: whether any deduction or credit is allowed, whether any income may be excluded, or the securing of any other tax benefit by reason of holding an interest in the entity or participating in the plan or arrangement that 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 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."

SECTION 3. This Act does not affect rights and duties that matured, penalties that were incurred, and proceedings that were begun, before its effective date.

SECTION 4. Statutory material to be repealed is bracketed and stricken. New statutory material is underscored.

SECTION 5. This Act shall take effect on July 1, 2006.

INTRODUCED BY:

_____________________________

BY REQUEST