More Contingent Fee Hawaii DOTAX Audits to Come?

Is the Hawaii Department of Taxation (DOTAX) planning on bringing in more outside firms to help increase collection and compliance?  Recently enacted SB 1206, proposed and advanced by DOTAX, clarifies that the Director of Taxation has responsibility over the collection of all taxes including delinquent taxes.  While this is of no surprise, this change is made in Section 231-13, HRS, which allows the Director to enter into contracts with third parties such as lawyers and accountants for the collection of taxes.  The law allows DOTAX to pay for these lawyers and accountants with a fixed fee, on an hourly basis, or using a contingent fee arrangement.

Why would DOTAX propose and lobby for the amendment to the obscure Section 231-13?  The change made by SB 1206, while perhaps not highly substantive, will provide added cover for DOTAX to pursue all taxes with contingent fee arrangements with lawyers and accountants.  In essence, DOTAX may pursue collections of all taxes without up-front cost.   Certainly, this indicates to me that DOTAX intends on expanding its use of third parties to improve and expand its tax collection efforts.  With the recent success in the OTC GET case prosecuted on a contingency fee basis with a mainland attorney, it seems that SB 1206 is an effort by DOTAX to solidify its legal right to use outside firms to pursue tax collections.

GET Treatment of Living Social or Groupon deals

I know a service provider who recently completed (and sold out) a Living Social deal.  In that deal, Living Social, via its website, for $50 sells a voucher for a service valued at $100 at retail.  Living Social then, after the offering period for the deal ends, remits the $50 to the service provider with the agreement that the service provider will pay back half of that amount ($25) to Living Social for their marketing services.  A credit card processing fee of $1 per voucher was also charged to the service provider.  In the end, the service provider took in a net of around $24 and Living Social took in a net of $26.  The service provider asked me how much GET he needs to pay. 

At first, I thought the right outcome to be that the service provider should pay the 4% GET on the $24 he actually received from the transaction.  However, a quick email to the DOTAX rules office showed that DOTAX would likely view the entire $50 received by the service provider as taxable gross receipts even though $26 of the $50 was to be immediately paid to Living Social which collected the $50 in the first place through its website.  Perhaps Living Social has some clever tax lawyers on their side because they managed to pass on the brunt of the GET to the service provider. 

I am not sure I agree with the opinion of the DOTAX rules office.  Although the service provider comes into temporary possession of the $50, the service provider is contractually obligated to pay mroe than half of that to Living Social which collected the funds via its website.  Perhaps deeper analysis would have led to a diferent answer from DOTAX but right now that email is our best indicator of how DOTAX would view this transaction.

Make Sure Your State Of Hawaii Return Was Filed On-Time

I have seen several instances of taxpayers with their federal return filed on time, but their Hawaii return not filed. The explanation is that the taxpayer thought the return preparer e-filed both returns…but the return preparer had only e-filed the federal return.  The original Hawaii return was in the “Client Records” packet. 

Return preparer and CPA colleagues have told me that, for individuals, 5-15% of all Hawaii income tax returns cannot be e-filed, because something needs to be attached that cannot be e-filed. 

I believe this sort of “miscommunication” scenario between a return preparer and taxpayer would warrant penalty relief from the State despite late filing not being a productive area for penalty abatement in most cases.   The State might not be sympathetic several years from now, as taxes returns either result in a tax owed or a refund, and a follow-up from a taxpayer might be anticipated.

The best course of action now (May 2013) is to verify your 2012 Hawaii return was filed.

Hawaii Leg. Clarifies Civil Unions Recognized As Marriages Under Hawaii’s Estate Tax

Although civil unions were likely already recognized as marriages for Hawaii tax law purposes (see Haw. AG Op. 11-2), Act 60 (2013) makes it clear that such unions should be recognized as marriages under Hawaii’s new estate tax law under Chapter 236E, HRS.  The relevant portion of Section 5 of Act 60 amends Section 236E-7, HRS, as follows (changes underlined):

Amounts set forth on a duly filed and accepted federal return for valuations of property, the gross estate, federal taxable estate, and applicable exclusion amount shall be conclusive for purposes of this chapter, and the return required under this chapter shall use the same amounts as the corresponding amounts on the federal return[.]; provided that with regard to a decedent who was in a valid civil union or recognized equivalent under the laws of the State, but that is not recognized by the Internal Revenue Code as a marriage for federal tax purposes, computations of the valuations of property, the gross estate, federal taxable estate, and applicable exclusion amount shall be made as if the civil union or recognized equivalent under the laws of the State were recognized as a marriage.

New Law Alert: Act 33 of 2013, Permits Hawaii Dep’t of Tax’n to Move Certain Accounts off Active Tax Collection Rolls

Aloha Readers of TheTaxTable!  Richard McClellan is a tax lawyer in Honolulu who helps clients with challenging tax problems, including criminal investigations, unfiled returns, offshore accounts, and substantial unpaid tax balances.  He is the contributing author of this post.

Signed into law on April 22, 2013, Act 33 of 2013 amends HRS Section 231-32. The Department of Taxation may now remove “uncollectible” delinquent tax accounts from the “complete records of the amounts of taxes…that have become delinquent.” For accounts so removed, the DoTax “shall be released from any further duty to collect those taxes.” Previously, the DoTax had to wait two years to remove an “uncollectible” account from the delinquent tax roll. Removal from the record of delinquent accounts does not necessarily mean the taxes will never be pursued or collected, only that the DoTax will not take any active review of the accounts.

Pursuant to the new law, the DoTax must find “reasonable cause” to remove the account, considering factors “such as”:

• Financial condition of taxpayer;
• Inability to locate the taxpayer;
• Costs of collection against the amount of tax owed;
• Health of the taxpayer; and,
• The future income prospects of the taxpayer.

The Legislature specifically mentioned “health or other insurmountable financial problems.” See, Act 33, Section 1. The Department of Taxation in its testimony mentioned bankruptcy, catastrophic loss of health or property, and the inability to locate the taxpayer.

Accounts can be transferred back to the delinquent tax roll if “the alleged facts as previously presented to it were not true or that the items are in fact collectible.” Act 33 is effective January 1, 2013.

The DoTax testified that this measure was for the administrative convenience of the DoTax, as prior law required a two-year wait. The Senate reported this measure would allow the DoTax to avoid incurring collection costs that will exceed the expected recovery. Testimony and reports indicate specific concerns were employees’ time and collection costs, which presumably would include dunning letters. If dunning letters are eliminated, this would be a contrast to federal law. The IRS is required to send a written notice to each taxpayer with a delinquent account stating the amount of the tax delinquency as of the date of the notice, there is no exception for “uncollectible” accounts. See, 26 U.S.C. Section 7524.

Delinquent tax accounts are open to public inspection. The revisions to HRS 231-32 do not make it clear whether delinquent tax accounts considered “uncollectible” are open to public inspection.

Act 33 does not appear to confer any benefit upon (most) delinquent taxpayers, unless the Department stops filing tax liens as a cost-cutting measure. The presence of a tax lien effectively protects the Department’s rights over the statutory collection period. For accounts wherein a tax lien has been filed, the non-collectible “special” list is a sort of false haven if there is any prospect for an improvement in economic circumstances. If there is any prospect of a financial recovery (within the statute of limitations) and a tax lien has been filed, taxpayers who can clearly establish some of the factors on the “reasonable cause” list should consider measures to clear up the tax debt, including an offer in compromise or waiver proposal.

Tax Analysts Reports on Gov. Abercrombie’s Comments on New Tax Proposals in His State of the State Address

Hawaii Gov. Neil Abercrombie (D) in his State of the State address 2013 STT 15-6: State Announcements and News Releases January 22 called for some new revenue initiatives, including a 10-cent fee on single-use checkout bags and an increase in the conveyance tax rate on all transfers of property with a value of $2 million or more.

The governor estimates that the 10-cent fee would generate more than $15 million, and he would direct the collections to the state’s natural area reserve fund.

The fee on bags was discussed last year but was killed as nearly all the counties have adopted ordinances banning the use of plastic bags.

The governor believes raising the conveyance tax would bring in another $10 million for watershed protection.

Abercrombie urged lawmakers to return the proceeds of the state’s barrel tax (which is imposed on each barrel of imported petroleum) to programs that will ensure energy sustainability and food security. Lawmakers raised the barrel tax by a dollar a few years ago and designated only a portion of the proceeds for energy sustainability and food security programs, taking the rest into the state general fund to help with a budget shortfall.

The governor asked lawmakers to work with the Department of Taxation to find a reasonable accommodation on the state’s energy tax credits. He also asked lawmakers to use general funds and bond proceeds to acquire new technology for the state’s information system and to modernize the department’s system for pursuing delinquent taxpayers.

Citing the improving economic and fiscal health of the state, Abercrombie called on lawmakers to begin paying down the state’s unfunded liabilities for the public employees’ pension and health systems — estimated to top more than $22 billion.

The rosier financial picture also allowed the governor to call on lawmakers to restore the funds that had been taken from the state’s hurricane relief fund and the state rainy day fund in past years to help balance the state general fund budget.

Lowell L. Kalapa, Honolulu