Hawaii Administrative Rules › Title 18 - DEPARTMENT OF TAXATION › Chapter 231 - ADMINISTRATION OF TAXES › ADMINISTRATIVE GUIDANCE APPLICABLE TO CERTAIN PENALTIES AND FINES › Section 18-231-36.8-01-6676 - Guidance, erroneous claim for refund or credit; conformity to treasury regulations related Internal Revenue Code section 6676

Current through June, 2024
(a) In administering the penalty set forth
				under section
				231-36.8,
				HRS, relating to imposition of a penalty for erroneous claims for refund or
				credit, any proposed, temporary, or final treasury regulations providing
				guidance in application of section 6676 of the Internal Revenue Code shall be
				operative.
(b) The director may
				provide additional administrative guidance pursuant to Tax Information
				Release.
(c) Excessive amount.
				Section
				231-36.8,
				HRS, assesses a penalty equal to twenty per cent of the claimed refund or
				credit amount found to be erroneous, which is called the "excessive amount."
				The excessive amount is the difference between the amount of refund or credit
				claimed for any taxable year and the amount of refund or credit allowable for
				the same taxable year.
(d) Section
				18-231-36.8-01-6676(c), HAR, is illustrated as follows:
EXAMPLE:
Taxpayer made a return for the 2008
				  taxable year claiming $10,000 in refundable credit on its 2008 tax return. All
				  of Taxpayer's income was offset by allowable operating losses for the same
				  taxable year, which resulted in a credit refund claim calculation of $10,000.
				  Upon audit, it was determined that Taxpayer was entitled to a $6,000 credit and
				  $4,000 in claimed credit was disallowed. The department further assessed the
				  erroneous refund penalty under section
				  231-36.8,
				  HRS. The "excessive amount" for purposes of the penalty under section
				  231-36.8,
				  HRS, is $4,000, which is the difference between the amount of credit that was
				  claimed and the amount of credit allowable. The twenty per cent penalty will be
				  applicable to the $4,000 base amount, which results in a penalty of
				  $800.
(e) $400 minimum
				penalty. Section
				231-36.8,
				HRS, provides an exclusion from the twenty per cent penalty where the penalty
				calculation results in an amount of less than $400. Therefore, where the
				excessive amount, which serves as the base for the credit calculation, results
				in a penalty of less than $400, no penalty will be assessed. In dollar figures,
				where the excessive amount is less than $2,000 in claimed refund or credit, no
				penalty will be assessed pursuant to section
				231-3
				6.8, HRS. The $400 minimum penalty calculation does not take into account any
				interest accruable on the disallowed amount.
(f) Section 18-231-36.8-01-6676(e) is
				illustrated as follows:
EXAMPLE:
Assume the same facts as the Example
				  in subsection (d), except that upon audit it was determined that the taxpayer
				  was entitled to $9,000 in credit and was disallowed $1,000 in claimed credit.
				  Assume further that there was no reasonable basis for the excessive $1,000
				  credit claim. In this case, the "excessive amount" for purposes of calculating
				  the penalty under section
				  231-36.8,
				  HRS, is $1,000. Applying the twenty per cent penalty to the $1,000 excessive
				  base amount results in a penalty of $200. Pursuant to the express terms of
				  section
				  231-36.8,
				  HRS, no penalty will be assessed under these facts because the penalty is less
				  than $400.
(g) Reasonable
				basis defense. Section
				231-36.8;
				HRS, provides for a defense against the erroneous refund penalty where the
				taxpayer has a reasonable basis for claiming the credit or refund. The burden
				of proof is on the person claiming the position taken on the return had a
				reasonable basis.
The reasonable basis standard is higher than frivolous or
				  not patently improper. The reasonable basis standard is considered a
				  one-in-four, or greater, likelihood of success on the merits of the claim after
				  a person knowledgeable in the tax law makes a reasonable analysis. The director
				  may prescribe a list of positions that the director believes do not meet the
				  reasonable basis standard. Such list (and any revisions thereof) shall be
				  published and made public pursuant to Tax Information Release.
Reasonable basis expressly includes innocent mistakes
				  related to the refund or credit claim, which are errors on a return due to
				  inadvertence or mathematical mistakes.
(h) Section 18-231-36.8-01-6676(g) is
				illustrated as follows:
EXAMPLE 1:
XYZ Corporation conducted qualified
				  research in Hawaii and further incurred qualified research expenses that
				  generated a credit claim under section
				  235-110.91,
				  HRS. In making its credit calculation, XYZ Corporation inadvertently added a
				  line item invoice for research expenses twice, thus creating a larger base
				  amount for determining its credit. Upon audit, the double calculation was
				  discovered and the second claim for the same cost was disallowed. Under the
				  facts of this example, XYZ Corporation's excessive amount for purposes of the
				  penalty under section
				  231-36.8,
				  HRS, was due to an inadvertent calculation error and therefore had a reasonable
				  basis in making its excessive claim. The claim for the excessive amount is
				  rightfully disallowed; however, no penalty under section
				  231-36.8,
				  HRS, should be assessed in this circumstance.
EXAMPLE 2:
Assume the same facts as in Example
				  1; however rather than an inadvertent calculating error, XYZ Corporation
				  knowingly included travel expenses unrelated to the qualified research
				  activity, which were charged to a particular research project journal account
				  for accounting' purposes and knowingly included in the research tax credit
				  claim. Rather than remove the disqualified expenditure from the credit claim,
				  XYZ Corporation made the claim for the whole project account knowing the travel
				  costs did not qualify. Upon audit, the claim for the travel expenses unrelated
				  to qualified research activity was disallowed. Upon inquiry, XYZ Corporation
				  said the disqualified travel was included out of convenience in its accounting
				  practice. Under the facts of this example, XYZ Corporation's excessive amount
				  included a claim for credit for which there was no basis. XYZ Corporation
				  knowingly included the amount, which was unrelated to qualified research. Such
				  claims are not allowed pursuant to a plain reading off section 231-110.91, HRS,
				  which eliminates any reasonable basis for making the claim. Because XYZ
				  Corporation's excessive amount had no reasonable basis under these facts, a
				  penalty under section
				  231-36.8,
				  HRS, would be warranted and is assessable in the discretion of the auditor;
				  provided the director approves of the assessment pursuant to sections
				  231-36.8
				  and 18-231-10.6-01(h).