Unpaid Hawaii Taxes? Tax Relief Options and Consequences of Back Taxes

In the Aloha state, the Hawaii Department of Taxation (DOTAX) administers and collects taxes. This includes state income tax, withholding tax, and general excise tax. You can pay Hawaii state taxes online, through the mail, or in person with cash. If you don't pay or file your return, you will deal with the Tax Collection Services division. 

The DOTAX can take strong actions against individuals and businesses who don't pay or file their taxes, but luckily, if you get behind, the agency has several options to help you. Keep reading to learn more, or use TaxCure to find a Hawaii tax pro to help you today.

How to Resolve Delinquent Taxes in Hawaii

It's easy to get behind on your taxes. Maybe you forget to file, didn't withhold enough from your paycheck, or forgot to set aside taxes for your business. Regardless of why you got behind, the DOTAX has several programs that can help you get caught up and back in compliance. 

The best option varies based on your situation, and in some cases, you may be able to use more than one of these options. To ensure that you're selecting the optimal path, consult a tax pro with experience working with the HI DOTAX.

Payment Plan

DOTAX may let you make monthly payments if you can't afford to pay your tax bill in full. If you owe less than $10,000, you can apply online or by faxing Form D-100 to the Department of Taxation. You must contact the department directly if you want to make payments on more than $10,000 in tax debt. 

If you can pay off the tax liability in 36 months or less, the state generally will not issue a tax lien, but there are exceptions if the tax collection is in jeopardy. Once you're on a payment plan, you must stay current with future tax filing and payment obligations, or your plan will go into default. If you earn any tax refunds, they will be applied to your balance until it is paid in full. 

Offer in Compromise

Hawaii state law allows qualifying taxpayers to pay off their taxes for less than they owe through an offer in compromise (OIC). The state's OIC program is very similar to the IRS's, and you can apply based on the following:

• Doubt as to collectibility — You cannot afford to pay the full tax bill, and you prove that your offer is the most the state would likely be able to collect. 
• Doubt as to liability — There is a legitimate doubt that you owe the tax. Note that you cannot use this option if you ignored an audit request, and your doubt of liability is based on details that you should have submitted during the audit. 
• Effective tax administration — This is when exceptional circumstances make it unfair for the state to collect the tax debt from you. 

To apply, submit Form CM-1 (Office in Compromise) as well as Form CM-2 (Statement of Financial Condition and Other Information for Individuals) and/or Form CM-2B (Statement of Financial Condition and Other Information for Corporations, Partnerships, etc.). 

You must make a downpayment with your offer. Submit 20% if you're applying for a lump sum offer, or submit the first monthly payment if you're applying to make payments on a settlement. 

Penalty Abatement

Generally, the department will waive penalties if you can show that they were incurred due to reasonable cause. This applies when circumstances out of your control caused you to pay or file late. You cannot get penalty abatement for reasonable cause if you paid or filed late due to negligence or carelessness. 

Hardship Status

You may be able to get relief if the department's collection actions are causing financial hardship. The department will stop trying to collect the debt if you prove that you cannot afford to pay the tax or if you prove that a collection action (such as wage garnishment) is causing you financial hardship. 

The state of Hawaii generally takes a very narrow view of financial hardship. You may only be able to get relief if the tax bill is preventing you from covering your basic living expenses. 

What Happens If You Don't Pay Taxes in Hawaii?

If you don't pay your state taxes, you will incur penalties and interest on your balance. Additionally, if you don't pay your taxes voluntarily, the state can enforce collections by issuing tax liens, garnishing your wages, or seizing your assets. Here are more details on what happens if you don't pay your state taxes. 

Penalties and Interest

Failure to file a Hawaii state tax return leads to a penalty of 5% of the tax due. The department assesses this penalty monthly, and it can get up to 25% of your balance. For instance, if you owe $10,000, your penalty will be $500 per month until you file or until the penalty reaches $2,500. 

Additionally, interest will accrue on your account from the date that the payment is due until you pay. The interest is ⅔ of 1% per month. 

Hawaii state tax returns aren't due until April 20th. This is five days after the federal return due date. However, if you request an extension on your federal return, you don't get an automatic extension on your Hawaiian return. You must request a state extension separately. Also, note that the extension only gives you more time to file. Your payment is still due on the original due date. 

Tax Liens

Hawaii can issue a tax lien if you have unpaid taxes. Tax liens secure the state's interest in your debt, and they attach to all of your assets. Once a lien is in place, the state can claim the proceeds of any assets you sell. 

Liens make it very hard to get loans against your assets because lenders cannot use your property as collateral if there's already an existing lien. Generally, if you owe less than $10,000 and you set up payments to pay off the balance in three years or less, the state will not issue a lien against you. However, there are exceptions to this rule. 

Wage Garnishment

You can face a wage garnishment (also called a wage levy) if you don't pay your delinquent taxes. The department will send a notice to your employer instructing them to withhold 25% of your paycheck and send it to the state. The garnishment will stay in place until your tax debt plus interest and penalties is paid in full. You can request relief if the garnishment prevents you from covering basic living expenses. 

Asset Seizure

The Department of Taxation has the right to seize your personal or business property for unpaid taxes. However, the department must send you the proper notices, and it cannot seize any of the following assets:

• Personal clothing
• School books
• Fuel provisions
• Furniture
• Personal effects
• Tools of the trade
• Unemployment benefits
• Undelivered mail

As you may have noticed, your primary residence is not on the above list. In other words, although it's rare, both the state and the IRS can seize your home due to unpaid taxes. 

What If You Owe Taxes in Hawaii Due to Your Spouse?

In cases where you believe the tax liability is due solely to your spouse or ex-spouse's actions, you may be able to get relief through Hawaii's innocent spouse program. For instance, this may happen if you receive a tax assessment due to income earned by your spouse that you didn't know about and that wasn't reported on your tax return. 

To apply for relief, file Form N-397 (Request for Innocent Spouse Relief and Separation of Liability and Equitable Relief). You must apply within two years of the time the department first started to collect the tax. 

Hawaii has very similar qualifying criteria as the IRS, and when you apply, you must include a copy of your application for IRS innocent spouse relief. Qualifying for this program requires a strong knowledge of the tax code. You may want to work with a tax professional. They know what the department wants to hear, and they can provide guidance to help you be successful with your claim.

Hawaii Taxpayer Advocate Service

If you can't resolve your tax issue through the usual channels, you may be able to get help from the state's Taxpayer Advocate Service. To request assistance, email [email protected] or call (808) 587-1791. 

You cannot use the advocates to sidestep established processes such as appealing your tax debt. Unfortunately, you also cannot get technical tax advice or determinations. If you want technical assistance, consider reaching out to a Hawaii tax pro. 

How to Appeal Tax Assessments in Hawaii

You have the right to appeal a tax assessment or a denial of a refund. You must appeal within 20 days of the mailing date of the Proposed Notice of Assessment or within 30 days of the mailing date of the Final Notice of Assessment. If you disagree with the appeals decision, you can appeal to the tax appeal court within 30 days of the decision. If you disagree with that decision, you can appeal to the Appellate Court, but again, you must do so within 30 days of getting a decision. 

If you miss the window to appeal a final assessment, you may pay the tax under protest, and then, you may file an action in tax appeal court to recover the payment. You must do this within 30 days of making the payment. 

The appeals process is very particular, with strict deadlines. For best results, consider working with a tax professional. CPAs, enrolled agents, and tax attorneys can represent you in front of the IRS and state tax agencies. 

Statute of Limitations on Tax Collection in Hawaii

There is a 15-year statute of limitations on tax collection in Hawaii. That means that once the tax is assessed, the state only has 15 years to collect it. However, in practice, the state can take longer to collect some tax debts. 

In particular, if the state issues a tax lien before the statute expires, the lien can survive the statute of limitations. This means that your unpaid tax bills can haunt you for much longer than 15 years.

Additionally, certain actions can toll (pause) the statute of limitations. For instance, if you apply for an offer in compromise, the clock will stop, and the time will be added on at the end. In some cases, you can also toll the statute of limitations by leaving the state for more than six months. 

Hawaii General Excise Taxes: What Are They?

One of the biggest reasons that businesses in Hawaii fall behind on their tax obligations is that they don’t fully understand Hawaii’s general excise tax system. This is especially true for businesses that are accustomed to sales tax structures that place the tax burden onto the customer’s shoulders while having the business tax care of filing and remittance. With an excise tax structure, the business pays the tax based on its gross income. It may be able to pass the tax onto the customer, but not always. 

Get Help With Hawaii Back Taxes

If you have unpaid taxes in Hawaii, you should reach out for help from a tax professional who has experience with the DOTAX. Using TaxCure, you can search for local tax pros, and you can filter the results based on the type of issue you're having or the resolution you want. To get help now, contact a tax professional today.