Delinquent taxpayers frequently learn about the Internal Revenue Service’s “offer in compromise” program. Advertising in the tax resolution industry frequently focuses on this program. Taxpayers with Hawaii taxes frequently wonder whether Hawaii has a similar program, and this post is designed to answer this question at least in part.
On April 5, 2013, Hawaii then-Governor Neil Abercrombie signed House Bill 425 into law as Act 6 of 2013. Act 6 significantly changes Hawaii’s Offer In Compromise (“OIC”) law for OICs based on doubt as to collectability. Act 6 is effective for OICs submitted after April 5, 2013.
While this note offers some description and analysis, two useful starting points (in my opinion) can be found on the Department of Taxation website, in particular:
Looking those items over in connection with this note might assist the development of a better perspective.
Hawaii Revised Statutes Section 231-3(10) authorizes the Department of Taxation to compromise tax. ‘Compromise’ in this context means to reduce or waive the requirement to pay past-due taxes along with penalties and interest.
Subsection (10) expressly requires the approval of the Governor when the amount of tax (excluding penalty and interest) exceeds $50,000; for amounts of tax under $50,000, the Director may compromise the tax without the Governor’s approval.
Under current law and unchanged by Act 6, accepted OICs are required to be posted on the Department of Taxation’s Website prior to acceptance. Normally, the accepted OICs are posted for sixty (60) days, not the five days required by statute.
Recent Changes to the Law
Act 6 of 2013 added a new section to Chapter 231, codified at HRS 231-9.2.
The new section required:
See, Act 6, Section (a); HRS 231-9.2.
In addition, rejected offers will not have payments returned. Act 6, Section (b).
The Department can waive the Section (a) payment requirements for individual taxpayers who meet IRS low income guidelines. Section (c).
Legislative History And Existing Administrative Rules
The Department of Taxation “strongly supported” this measure because, according to the Department, it would lead to “conformance with the IRS rules and regulations” and “reduce the number of frivolous OIC applications filed.” Conformance with the IRS rules was represented as providing clear guidance for the Department and “taxpayers do not have to be concerned with differing procedures for federal and state purposes.” The Department did not explain in its testimony why it sought to have the law changed, as opposed to modifying its administrative rules.
Under prior administrative rules, OICs had to be accompanied “with a remittance representing the amount of the compromise offer, or a substantial deposit, if the offer provides for installment payments.” HAR 18-231-3-10(d)(1). Payments for rejected OICs were returned to the taxpayer without interest. HAR 18-231-3-10(g). As noted above, Act 6 changed the law and these regulations are no longer applicable to OICs.
Hawaii practice has moved closer to the federal procedure with some potentially significant differences. As noted above, Act 6 did not change the requirement for the Governor to personally approve any compromise with more than $50,000 in tax. For administrative and political reasons, this requirement may be a barrier for taxpayers in getting offers approved. The IRS has no such limitations: for example, the President does not have to approve OICs above a certain dollar threshold.
Second, Hawaii will no longer allow the return of an offered amount that is withdrawn or rejected. This makes offers that might not be accepted considerably less attractive.
As a consequence, third parties such as relatives may no longer be willing to “front” money for an OIC, because if the liability is not compromised, they will not get their money back. For example, a relative might be willing to pay the Department $10,000 to have Junior released from his $25,000 tax debt, but only if Junior is released. Under prior law, the relative could make the $10,000 OIC amount. Under the new law, the relative will have to consider that if the OIC is rejected by the Department, the money will not be returned and will be applied to Junior’s tax debts (although not necessarily the debt that is the subject of the OIC.)
The Department does not state how long it was taking to process OIC proposals: this is a question that should be directed to any person suggesting submission of an OIC.
Under the new law, failure to make periodic payments “may be treated as a withdrawal of the offer in compromise.” If a proposal that contemplates $250 a month for 24 months is submitted, the taxpayer may have tendered all 24 payments before knowing whether the OIC is accepted. The term “periodic payments” is not defined in the law, other than being more than six payments. Does “periodic” suggest even or regular intervals? Or could the six payments be irregularly spread over three years? The dictionary suggests that “periodic” could mean regularly or could mean intermittently. Hawaii’s CM-1 form does not suggest more than six payments (initial plus five installments.)
“Low income taxpayer” may be more expansive than it initially appears. As of the writing of this note, the IRS considers gross income of approximately $2675 per month for an individual to be “low income.”
Taxpayers (and their funding sources) should carefully consider Act 6 of 2013 and applicable Administrative Rules (and any changes thereto) before submitting an Offer In Compromise. An Offer does not prevent collection by the Department, but does serve to extend the time period available for the collection of taxes.
Persons considering preparing an Offer In Compromise (“OIC”) should consult with appropriate tax professionals to meaningfully evaluate their situation. This article is only intended as an overview and should not be considered as, or relied upon, as legal advice.