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.