As usual, this is not legal advice or intended for your particular situation and should not be relied upon as such. As noted below, this note is geared towards unfiled Hawaii GE and TA returns, not income omitted from income tax returns.
Background: AirBNB, PUA, and Rental Relief Program Landlords
Since 2019, the Department of Taxation (sometimes “DoTax”) enforced a subpoena and has since pursued vacation rental owners that conducted business through AirBNB and did not appear to have GE or TA licenses. In the early stages of PUA, the DoTax identified persons that appeared to be doing 1099 or “gig” work and did not have a GE license. Recently, the Rent Relief & Housing Assistance Program aka Rent Relief Program has been the subject of pronouncements by the Department of Taxation regarding enforcement against unlicensed landlords.
Persons operating without a license in the categories above are not eligible for “voluntary compliance” – because the DoTax is already on to them, at least in the sense of being on an actual or hypothetical list for later review.
In Hawaii news media, the Director of Taxation was quoted as saying: “Non-compliance in many areas…[a] lot of naughty taxpayers, and its our job to make sure they go and pay their fair share.”
A quick internet search should locate the video of the Director of the Department of Taxation. Worth a viewing, in my opinion, to get the flavor of his remarks.
The Issue: Should Non-Compliant Persons Take Corrective Action or Wait To Be Assessed?
Assume that you are ensnared in one of the situations mentioned above: AirBNB, PUA, Rent Relief Program. And, let’s clarify, you were not caught by accident as all of the programs were designed to expose persons that were unlicensed. Indeed, the PUA was administered by the Department of Taxation and the Rental Relief Program required specific information from landlords to receive payments. This was by design. You know you are on a list, and, in all likelihood, eventually you are going to be contacted by the DoTax.
You have (at least) two choices. Come forward on your own to get into tax compliance, or wait for the Department to come to you. There are many variations on each choice that can not effectively be evaluated in a short note like this, so only broad contours will be evaluated.
Overwhelmingly, the persons with PUA and Rent Relief Program issues will have GE problems. AirBNB participants will have GE and TA problems. Some portion of both groups will have income tax problems, and this note does not address that elaboration (which may be more serious.)
Three Major Differences Between Filing Your Own Returns and the Department Filing Assessments Against You.
Some definitions, first. Filing returns is exactly that: filing returns. An assessment is the Department of Taxation sending you a tax bill derived from their calculations. In the assessment process, you will first receive a Notice Of Proposed Assessment, then a Notice of Final Assessment. Absence an appeal or other action, thirty (30) days from the mail date of the Notice of Final Assessment, the assessment will be final and the matter referred to Collections.
Three likely ramifications of an assessment instead of filing. First, an assessment is more likely to be inaccurate as the DoTax will use its best information which might result in non-taxable items being included. Second, an assessment is likely to impose more penalty. Third, an assessment is unlikely to be dischargeable in a bankruptcy.
Assessments are filed on best available information. That could mean your federal or state income tax returns. That could mean federal wage and income data. That could mean specific information, possibly provided by you or a third. Or some combination of these items. Put simply, an examiner could include extra income, non-taxable items, or even double-count income.
Each dollar in income will have penalty and interest attached.
Imposition of Penalty
Late filing of tax returns will typically result in the late filing penalty, typically 25%.
Assessments typically feature late filing penalty 25%, plus a “substantial disregard” penalty of another 25%. Total: 50%. Other penalties relating to county surcharge, particularly for Oahu taxpayers, may also be imposed.
Please remember that interest (8% per year) is imposed on penalty.
In general, assessments are not treated similarly to filed returns for bankruptcy purposes. I am not a bankruptcy attorney and a definitive opinion would have to be sought from a bankruptcy practitioner as there are specific criteria and rules.
It may seem odd to mention that assessed taxes would not be subject to discharge in bankruptcy, perhaps as unnecessarily defeatist or pessimistic. “I’ll never file for bankruptcy.”
Hawaii’s tax statute of limitations is fifteen (15) years from assessment. Interest is imposed at 8% per year. For many persons, a substantial tax assessment will be extremely difficult or impossible to pay in a reasonable period of time, or, indeed, in any period of time. While Hawaii has various programs for paying less than the amount owed, the most generous, the Offer In Compromise, is difficult to quality for and offers have rarely been accepted in the last five years.
While bankruptcy might not be a consideration in the medium term, bankruptcy might indeed be appropriate or your only meaningful option years from now.
What Is Your First Step?
The first thing is to realize that, while the context is new, these problems are relatively common.
Depending on the problem, you should contact an attorney, CPA, or EA (Enrolled Agent) familiar with Hawaii’s tax laws and particularly tax issues relating to rental properties and self-employment income.