HAR § 18-231-10.6-01 — Administrative guidance applicable to certain penalties and fines; general intent in application of provisions

(a) Section 231-10.6, HRS, requires the department to provide taxpayers and tax return preparers with guidance on the application of penalties or fines that may be imposed by the following provisions: (1) Understatement of tax liabilities by tax return preparers under section 231-36.5, HRS (Internal Revenue Code section 6694); (2) Substantial understatements or misstatements of tax under section 231-36.6 (Internal Revenue Code section 6662), HRS; (3) Promoting abusive tax shelters under section 231-36.7, HRS (Internal Revenue Code section 6700); (4) Erroneous claims for refund or credit under section 231-36.8, HRS (Internal Revenue Code section 6676). Each of the foregoing penalties references the federal statutory counterpart contained in the Internal Revenue Code and requires the construction of these penalties to be made in accordance with federal regulatory and judicial guidance. (b) Section 231-10.6, HRS, allows the department to utilize federal laws and administrative guidance in carrying out the purpose of that section. (c) In addition to the regulatory guidance requirement of section 231-10.6, HRS, section 235-2.5, HRS, authorizes the department to conform to any administrative provision of the Internal Revenue Code, title 26, United States Code (subtitle F, sections 6001 to 7873), not in conflict with or similar to provisions contained in chapters 231, 232, or 235, HRS. The department is authorized to adopt these provisions by reference or by setting them forth in full. (d) The purpose of this section and sections 18-231-36.5- 01 through 18-231-36.8-01, HAR, is to carry out the intent of sections 231-10.6 and 235-2.5, HRS, by providing relevant guidance in a manner that conforms to the greatest extent practicable under the circumstances to the administrative provisions of the Internal Revenue Code referenced in subsection (a). In order to ensure optimal conformance, the relevant similar provisions of the Internal Revenue Code will be interpreted and administered as provided by adopting the rules and regulations promulgated by the United States Secretary of Treasury, or a delegate of the Secretary, by reference. (e) For purposes of this section and sections 18-231-36.5- 01 through 18-231-36.8-01, HAR, the provisions of the rules and regulations promulgated by the United States Secretary of Treasury implementing provisions of the Internal Revenue Code, which are adopted by reference, shall be made operative as set forth in this chapter and be incorporated by reference, except where expressly inconsistent with the statutory provisions of title 14, HRS, in which case the statutory provision of the HRS shall control. The treasury rules and regulations shall be applied using changes in nomenclature and other language, including the omission of inapplicable or irrelevant language, where necessary to effectuate the intent of this section. (f) Where treasury regulations include references to temporary or proposed treasury regulations that are inconsistent with final treasury regulations, the treasury regulations most consistent with the statutory provisions of the relevant sections of the HRS set forth in subsection (a), whether proposed, temporary, or final treasury regulations, shall control. For example, the penalty set forth under section 231-36.5, HRS, which provides a penalty for understatements of tax liability by tax return preparers similar to section 6694 of the Internal Revenue Code, assesses a penalty for taking “unreasonable positions” that were not disclosed on a tax return. Prior to enactment of section 231-36.5, HRS, the federal counterpart (section 6694 of the Internal Revenue Code) assessed a penalty for taking “unrealistic positions” and also included treasury regulations interpreting this phrase. Congress subsequently amended this section to increase the standard required in taking an undisclosed position on a tax return. The Secretary of Treasury provided guidance on the increased standard through issuance of proposed regulations. Soon thereafter, Congress amended the standard again to which section 231-36.5, HRS, now conforms. As a result of repeated statutory changes by Congress, there are conflicting treasury regulations discussing the current standard. In application of the conflicting regulation standards, the final regulations will control to the extent not in conflict HRS §231-9.9 HRS §231-9.9 ADMINISTRATION OF TAXES §18-231-19.5-01 with section 231-36.5, HRS. Furthermore, proposed regulations will control to the extent the proposed regulations expand upon principles not discussed in the final regulations and which are not in conflict with section 231-36.5, HRS. (g) The director may clarify specific provisions of treasury regulations adopted by reference under sections 18-231-36.5-01 through 18-231-36.8-01, HAR, by Tax Information Release or other formal pronouncement. (h) With regard to the penalties set forth in subsection (a), the director shall approve assessed penalties prior to assessment, as required by section 231-10.6, HRS. (i) The purpose and intent of this section is applicable to sections 18-231-36.5-01 through 18-231-36.8- 01, HAR. (j) Nothing contained in this section shall limit the department’s ability to provide guidance, examples, and safe harbors in addition to those provided by treasury regulations.