Getting into Tax Court

by Tom Yamachika, President, Tax Foundation Hawaii

Here in Hawaii, it’s a big deal for the state to have a stable source of revenue. Tax lawsuits have the potential to tie that revenue up, so here, as well as in many other states, there are quirky rules that could turn out to be real traps that could cost you your money even though the government’s action might be illegal or unconstitutional.

There are three ways to get into Tax Appeal Court: assessment and appeal, payment under protest, and refund claim denial.

In the first, the Tax Department sends a “Notice of Assessment” saying that you owe tax, and you file an appeal in court. You only have 30 days to file the appeal AND send a copy of your appeal to the Director of Taxation.

Complicating matters is that the 30 days starts from when the Department mails the letter to the taxpayer’s last known address. What if the taxpayer is on the mainland or in a foreign country and gets the notice a couple of weeks later? Then the taxpayer has two fewer weeks to get that appeal in. What if the taxpayer has since moved but the Department doesn’t know the taxpayer’s current address and the mailed notice comes back undelivered? Too bad, so sad. The Department will tell you that it’s the taxpayer’s responsibility to keep a current address on file with the Department.

This route is the only way to get into court without paying the tax first.

Payment under protest means that you have a disagreement with the Department, you pay the tax in dispute with a letter explaining the dispute, and you then have 30 days to sue for a refund in Tax Appeal Court.

The good news is that this avenue of appeal is independent from assessment and appeal, so you can do this even if you have been assessed and the 30 days after the notice of assessment has come and gone. The bad news — which the statute itself doesn’t explicitly tell you — is that there has to be some kind of official determination from the Department. If you are being audited and the auditor says that there is no way in a hundred years that she will accept the taxpayer’s position, that isn’t good enough. There needs to be an official ruling or at least a proposed notice of assessment. If there isn’t, the court appeal is dismissed, and the Department keeps the money that you paid without a fight.

Finally, there is refund claim denial. You, after paying tax to the Department, write them a letter saying that you want your money back. Filing an amended return claiming a refund counts for this purpose. If the Department writes you a letter saying that the refund claim is denied, you then have 30 days to file an appeal in Tax Appeal Court. If the Department instead ignores you, you can treat their silence as a denial once six months have passed from the time your refund claim was filed.

Here again, there is a catch. If the refund claim is barred by the statute of limitations, you lose. The statute of limitations is generally three years from the due date of the return, but there are exceptions and qualifications depending on the kind of tax that is involved.

The moral of the story is this. If you have, or think you may have, a dispute with the Department over taxes, get yourself a good tax practitioner who knows the rules and traps so you can skirt the edges and avoid falling into the pitfalls. The Department’s lawyers are very familiar with the rules because they work tax cases every day. Most normal people and even some tax lawyers are not as up on the nuances.

And then, of course, lawmakers need to take a look at these rules and change them to get rid of the unfairness. We at the Foundation will try to help legislators understand the traps and get rid of them.