SB3172

SECTION 1. The legislature finds that the State's cost of living is exacerbated when taxpayers face avoidable, long-running tax burdens that can unnecessarily strip household resources and home equity. The legislature further finds that taxpayers may remain subject to outdated tax enforcement because tax liens may continue to encumber real property even after the intended fifteen-year collection limitation, taxpayers may be audited for non-filed returns over very long periods when records are no longer reasonably available, and the State's offer in compromise program is underutilized, leaving financially distressed taxpayers trapped in liabilities that continue to grow with interest.

Accordingly, the purpose of this Act is to improve affordability by aligning tax administration with reasonable limitation periods, ensuring tax liens do not linger beyond enforceability, limiting excessively old non-filer audit lookback periods, and requiring meaningful consideration of offers in compromise so that uncollectible or hardship cases can be resolved efficiently.

SECTION 2. Section 231-3, Hawaii Revised Statutes, is amended to read as follows:

"§231-3 Department, general duties and powers. The department of taxation shall have the following duties and powers, in addition to any others prescribed or granted by this chapter:

(1) Assessment: To make any assessment by law required to be made by the department;

(2) Collections: To be responsible for the collection of all taxes imposed under title 14, except those which by law are to be collected by county treasurers, and for such other duties as are provided by law;

(3) Construction of revenue laws: To construe the tax and revenue laws, the administration of which is within the scope of the department's duties, whenever requested by any officer acting under those laws, or by an interested person;

(4) Enforcement of penalties: To see that penalties are enforced when prescribed by any tax or revenue law of the State (the administration of which is within the scope of the department's duties) for disobedience or evading of its provisions, and to see that complaint is made against persons violating any such law; in the execution of these powers and duties the department may call upon the attorney general or any of the attorney general's deputies, including the county attorneys or public prosecutors, whose duties it shall be to assist in the institution and conduct of all proceedings or prosecutions for penalties and forfeitures, liabilities, and punishments for violation of the laws administered by the department;

(5) Forms: To prescribe forms to be used in or in connection with any assessment, including forms to be used in the making of returns by taxpayers or in any other proceedings connected with the assessment, and to change the same from time to time as deemed necessary;

(6) Inspection, examination of records: To inspect and examine the records of all public officers without charge, and to examine the books and papers of account of any person for the purpose of enabling the department to obtain all information that could in any manner aid the department in discharging its duties under any tax law;

(7) Recommendations for legislation: To recommend to the governor any amendments, changes, or modifications of the laws as may seem proper or necessary to remedy injustice or irregularity in taxation or to facilitate the assessment of taxes;

(8) Report to governor: To report to the governor annually, and at such other times and in such manner as the governor may require, concerning the acts and doings and the administration of the department, and any other matters of information concerning taxation as may be deemed of general interest;

(9) Rules: To adopt such rules as the department may deem proper effectually to carry out the purposes for which the department is constituted and to regulate matters of procedure by or before the department;

(10) Compromises: With the approval of the governor, to compromise any claim where the tax exceeds $50,000 (exclusive of penalties and interest) arising under any tax law the administration of which is within the scope of the department's duties, and to compromise any tax claim where the tax is $50,000 or less (exclusive of penalties and interest) without seeking the approval of the governor; provided that the director shall have the discretion to seek the approval of the governor to compromise any tax claim where the director deems it appropriate; and in each case the department shall post each proposed compromise, as set forth in subparagraphs (A) to (D), on the department's internet website for five calendar days before the director signs the compromise, and there shall be placed on file in the department's office a statement of:

(A) The name of the taxpayer and the amount and type of tax assessed, or proposed to be assessed;

(B) The amount of penalties and interest imposed or which could have been imposed by law with respect to the amount of tax assessed, as computed by the department;

(C) The total amount of liability as determined by the terms of the compromise, and the actual payments made thereon with the dates thereof; and

(D) The reasons for the compromise.

The department shall accept, evaluate, and make a written determination on an offer in compromise submitted in accordance with State law without categorically refusing to consider an offer solely because the tax exceeds $50,000. For an offer in compromise requiring the governor's approval, the department shall transmit the offer and the department's written recommendation to the governor within thirty calendar days after the offer is deemed complete by the department. The department shall provide the taxpayer written notice of acceptance, denial, or other disposition within one hundred eighty calendar days after the offer is deemed complete by the department, unless the taxpayer agrees in writing to an extension.

Notwithstanding the provisions of any law making unlawful the disclosure of tax returns or return information, statements on file and included in the department's internet website in respect of compromises shall be open to public inspection;

(11) Retroactivity of rulings: To prescribe the extent, if any, to which any ruling, rule, or construction of the tax laws, of general application, shall be applied without retroactive effect;

(12) Remission of delinquency penalties and interest: Except in cases of fraud or wilful violation of the laws or wilful refusal to make a return setting forth the information required by law (but inclusion in a return of a claim of nonliability for the tax shall not be deemed a refusal to make a return), the department may remit any amount of penalties or interest added, under any law administered by the department, to any tax that is delinquent, in a case of excusable failure to file a return or pay a tax within the time required by law, or in a case of uncollectibility of the whole amount due; and in that case there shall be placed on file in the department's office a statement showing the name of the person receiving the remission, the principal amount of the tax, and the year or period involved;

(13) Closing agreements: To enter into an agreement in writing with any taxpayer or other person relating to the liability of the taxpayer or other person, under any law the administration of which is within the scope of the department's duties, in respect of any taxable period, or in respect of one or more separate items affecting the liability for any taxable period; the agreement, signed by or on behalf of the taxpayer or other person concerned, and by or on behalf of the department, shall be final and conclusive, and except upon a showing of fraud or malfeasance, or misrepresentation of a material fact:

(A) The matters agreed upon shall not be reopened, and the agreement shall not be modified, by any officer or employee of the State; and

(B) In any suit, action, or proceeding, the agreement, or any determination, assessment, collection, payment, refund, or credit made in accordance therewith, shall not be annulled, modified, set aside, or disregarded;

(14) Other powers and duties: In addition to the powers and duties contained in this chapter, the powers and duties contained in other chapters of the law under title 14 administered by the department for levying, assessing, collecting, receiving, and enforcing payments of the tax imposed thereunder, and otherwise relating thereto, shall be severally and respectively conferred, granted, practiced, and exercised for levying, assessing, collecting, receiving, and enforcing payment of the taxes imposed under the authority of those chapters as far as the provisions are consistent with the express provisions of those chapters, as fully and effectually to all intents and purposes as if the same powers and authorities were repeated in those chapters, with reference to those taxes, and all of the provisions shall be applied, construed, deemed, and taken to refer to the taxes imposed under the authority of those chapters, in like manner."

SECTION 3. Section 231-33, Hawaii Revised Statutes, is amended to read as follows:

"§231-33 Tax debt due the State; lien. (a) Within the meaning of this section:

(1) The terms "mortgagee", "pledgee", and "purchaser" do not include any person to whom property or an interest in property is conveyed (A) as security for or in satisfaction of an antecedent or pre-existing debt of a debtor who is insolvent within the meaning of the Bankruptcy Act, or (B) as trustee, assignee, or agent for the benefit of one or more creditors, other than mortgage bondholders.

(2) The term "motor vehicle" means any self-propelled vehicle to be operated on the public highways.

(3) The interest of a party, if required to be recorded or entered of record in any public office in order to be valid against subsequent purchasers, does not arise prior to the time of such recording or entry of record.

(4) An employer or other person who is required by any tax law to withhold tax at the source, or to collect a tax, and who is made liable for the tax if the employer or other person does not fulfill the employer's or other person's duties in that regard, shall be deemed a person liable for the tax.

(5) The term "real property" includes leasehold or other interest in real property and also any personal property sold or mortgaged with real property if affixed to the real property and described in the instrument of sale or mortgage.

(b) Any state tax that is due and unpaid is a debt due the State and constitutes a lien in favor of the State upon all property and rights to property, whether real or personal, belonging to any person liable for the tax. The lien for the tax, including penalties and interest thereon, arises at the time the tax is assessed, or at the time a return thereof is filed, or at the time of filing by the department of taxation of the certificate provided for by subsection (f) whichever first occurs. From and after the time the lien arises it is a paramount lien upon the property and rights to property against all parties, whether their interest arose before or after that time, except as otherwise provided in this section.

(1) A mortgagee or purchaser of real property, or the lien of a judgment creditor upon real property, whose interest arose prior to the recording by the department of the certificate provided for by subsection (f); or

(2) A mortgagee or purchaser of a motor vehicle who becomes the legal owner or owner at a time when the tax lien and encumbrance record provided for by section 286-46 does not show the lien.

(d) As to tangible personal property, possession of which is held by a person liable for tax for the purpose of sale to the public in the ordinary course of the person's business, the lien imposed by subsection (b) is extinguished as to any such property sold in the ordinary course of the business by or under the direction of the person to any purchaser for valuable consideration. As to securities, negotiable instruments, and money, the lien imposed by subsection (b):

(1) Is extinguished as to such property upon passage of title to a person without notice or knowledge of the existence of the lien, for an adequate and full consideration in money or money's worth; and

(2) Is not valid as against a mortgagee or pledgee for an adequate and full consideration in money or money's worth, who is located outside the State and takes possession of the property, if at the time of taking possession of the property the mortgagee or pledgee is without notice or knowledge of the existence of the lien. The mere recording or filing of the certificate provided for by subsection (f) does not constitute notice for the purposes of this subsection.

(e) Subject to the provisions of this subsection, the lien imposed by subsection (b) is not valid as against a mortgagee, pledgee, or purchaser who gives notice to the department on a form prescribed by it of the mortgage, pledge, or purchase made or about to be made, with a description of the property encumbered or conveyed or proposed to be encumbered or conveyed thereby, and whose interest in the property arises prior to the recording or filing by the department of the certificate provided for by subsection (f) or within ten days after the filing. If the notice is given the lien imposed by subsection (b) is valid against the party giving the notice, as to any taxes set forth in a certificate filed as provided in subsection (f) within the period of fifteen days after the notice. The department may waive all or any part of the period herein allowed.

(f) The department may record in the bureau of conveyances at Honolulu, or in respect of a lien on a motor vehicle, file with the county director of finance, a certificate setting forth the amount of taxes due and unpaid, which have been returned, assessed, or as to which a notice of proposed assessment has issued. The certificate shall identify the taxpayer, the taxpayer's last known address, the tax or taxes involved, and the date on which the liability for the tax or taxes was assessed. The recording or filing of the certificate has the effect set forth in this section, but nothing in this section shall be deemed to require that a certificate recorded or filed by the department must include the amount of any penalty or interest, in order to protect the lien therefor. The certificate, if recorded or filed with the county director of finance, shall be entered of record as provided by law. Recordation of the certificate in the bureau of conveyances shall be deemed, at such time, for all purposes and without any further action, to procure a lien on land registered in the land court under chapter 501. Any cost incurred in the filing of the certificate shall be a part of the lien for the tax therein set forth.

(g) The department may issue a certificate of discharge of any part of the property subject to the lien imposed by this section, upon payment in partial satisfaction of such lien, of an amount not less than the value as determined by the department of the lien on the part to be so discharged, or if the department determines that the lien on the part to be discharged has no value. The department shall issue a certificate of discharge as to any liability that has been satisfied or that has become unenforceable under section 235‑111, 237-40, 237D-9, 238-7, 243-14, 247-6.5, or 251-8. Any discharge so issued shall be conclusive evidence of the discharge of the lien as therein provided.

(h) The lien imposed by subsection (b) may be foreclosed in a court proceeding or by distraint under section 231-25.

(i) This section shall not apply to a tax levied by a chapter that contains a specific provision for a lien for the tax levied by the chapter, any provision in this section to the contrary notwithstanding.

(j) If a lien imposed by subsection (b) is properly recorded as authorized under subsection (f), and three hundred sixty-five days have elapsed from the date of recording with no response or action by the taxpayer against whom the lien was recorded, the director may apply to the circuit court to have the lien converted into a civil judgment. The circuit court shall issue a civil judgment for an amount equivalent to the value of the lien. If a lien is converted to a civil judgment under this subsection, interest under section 231-39(b)(4) shall cease to accrue after the period to collect the unpaid amount has expired under the applicable statute of limitations or agreement.

(k) Notwithstanding any other law to the contrary, any lien arising under this section shall not be enforceable after the underlying tax liability becomes unenforceable by reason of lapse of time under the applicable statute of limitations for collection. Upon the expiration of the period for lawful collection of the underlying tax liability, the lien shall be deemed released by operation of law, and the department shall record, as applicable, a certificate of release of lien no later than thirty days after the expiration date. The department shall ensure that any notice of state tax lien filed or recorded pursuant to this section identifies a self-release date that is not later than the last date on which lawful collection may occur."

SECTION 4. Section 235-111, Hawaii Revised Statutes, is amended by amending subsection (c) to read as follows:

"(c) Exceptions; fraudulent return or no return. In the case of a false or fraudulent return with intent to evade tax or liability, or of a failure to file return, the tax or liability may be assessed or levied at any time; provided that the burden of proof with respect to the issues of falsity or fraud and intent to evade tax shall be upon the State[.]; provided further that, except in the case of a false or fraudulent return or with intent to evade tax, the tax shall be assessed, or a proceeding in a court of competent jurisdiction to collect the tax shall be commenced, without assessment, no later than six years after the date prescribed for filing the return."

SECTION 5. Section 237-40, Hawaii Revised Statutes, is amended by amending subsection (a) to read as follows:

"(a) General rule. The amount of excise taxes imposed by this chapter shall be assessed or levied within three years after the annual return was filed, or within three years of the due date prescribed for the filing of the return, whichever is later, and no proceeding in court without assessment for the collection of any of the taxes shall be begun after the expiration of the period. Where the assessment of the tax imposed by this chapter has been made within the period of limitation applicable thereto, the tax may be collected by levy or by a proceeding in court under chapter 231; provided that the levy is made or the proceeding was [~~begun~~] commenced within fifteen years after the assessment of the tax[.]; provided further that, in the case of failure to file an annual return, except in the case of a false or fraudulent return or with intent to evade tax, the tax shall be assessed or levied, and any proceeding in a court of competent jurisdiction without assessment for the collection of any of the taxes shall be commenced no later than six years after the due date prescribed for the filing of the return. For any tax that has been assessed before July 1, 2009, the levy or proceeding shall be barred after June 30, 2024.

Notwithstanding any other provision to the contrary in this section, the limitation on collection after assessment in this section shall be suspended for the period:

(1) The taxpayer agrees to suspend the period;

(2) The assets of the taxpayer are in control or custody of a court in any proceeding before any court of the United States or any state, and for six months thereafter;

(3) An offer in compromise under section 231-3(10) is pending;

(4) During which the taxpayer is outside the State if the period of absence is for a continuous period of at least six months; provided that if at the time of the taxpayer's return to the State the period of limitations on collection after assessment would expire before the expiration of six months from the date of the taxpayer's return, the period shall not expire before the expiration of the six months; and

(5) An appeal of the assessment is pending before the taxation board of review or the tax appeal court, beginning on the date the notice of appeal is filed and concluding on the date a final decision is issued or the case is withdrawn or dismissed."

SECTION 6. This Act does not affect rights and duties that matured, penalties that were incurred, and proceedings that were begun before its effective date.

SECTION 7. Statutory material to be repealed is bracketed and stricken. New statutory material is underscored.

SECTION 8. This Act shall take effect on January 1, 2027, and shall apply to taxable years beginning after December 31, 2026.

INTRODUCED BY:	_____________________________

THE SENATE	S.B. NO.	3172
THIRTY-THIRD LEGISLATURE, 2026
STATE OF HAWAII