The Hawaii Department of Taxation (DOTAX) recently launched the pilot phase of its new Administrative Appeals and Dispute Resolution (AADR) program (Announcement No. 2016-03), offering a streamlined method to resolve, without litigation, any kind of tax dispute involving audit assessments. Program benefits include a simple application process, fair and neutral evaluation of tax disputes, timely resolution (completion of process within six-12 months upon acceptance) and lower costs than litigation.

The AADR program is an informal appeals process that uses the Administrative Appeals Office (AAO) as a neutral intermediary to resolve tax disputes between the DOTAX and a taxpayer or return preparer that involves a proposed or final tax assessment, or return preparer penalty assessment. Taxpayers can represent themselves or be represented by a CPA, attorney or other tax professional.

Any settlement reached must resolve the entire case, and the AAO generally will not raise new issues or examine issues on which the parties agree. The AAO will only accept cases where the issues and facts are fully developed and documented; there are a limited number of issues in dispute; and the parties are willing to resolve all of the disputed issues and act in good faith to find a resolution.

The AADR program is not available for issues designated for litigation by the Hawaii Attorney General; issues for which there is no legal precedent; industry specialization issues; disputing an adjustment letter or billing notice that is unrelated to an audit; collection issues; and jeopardy assessments.

Taxpayers audited by the DOTAX and receiving a Proposed Notice of Assessment, Final Notice of Assessment, or a Notice and Demand of Penalty are eligible to apply. A taxpayer can apply to the AADR program for either a proposed assessment or final assessment, but not both. Once an application is reviewed, the AAO informs the taxpayer and the assigned auditor or examiner whether the case is accepted. A decision to not accept a case into the AADR program is not appealable.

Either party can withdraw its case from AADR program via written notification to AAO. If AAO determines that meaningful progress toward resolution has stopped, it may terminate the case with the AADR program via written notification to the auditor/examiner and taxpayer/return preparer. If the time to file an appeal has not expired, taxpayers and return preparers retain all applicable appeal rights as provided under the law.

Implications

The AAO will provide a written decision to the parties in a case accepted into the AADR program; however, that decision applies only to the applicant and it cannot be used or cited as precedent or as the basis for new or alternative applications of the law by either the taxpayer, the DOTAX or any other party. The decisions do not change or modify DOTAX policies and practices.

Taxpayers seeking prompt resolution of a disputed tax matter might benefit from participation in the AADR program. To protect other appeal rights, taxpayers may need to file an appeal with the Hawaii Board of Review or Hawaii Tax Appeal Court in addition to the AADR program application. Also, some tax appeal paths might be foregone if a taxpayer is accepted into the AADR program. Taxpayers should consider the impact of the AADR program on their overall procedural options.

This pilot program is one more option taxpayers can consider when they are determining the proper course of action to dispute a Hawaii tax assessment, and taxpayers can seek advice regarding which option is best for them. Comments on the AADR pilot program can be submitted via email at tax.appeals@hawaii.gov. No deadline for comments has been issued.

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