Tuesday, April 24, 2001

State of Hawaii

State has
1 officer to track
tax scofflaws

While penalties have stiffened
since 1995, enforcement
remains a steep uphill battle

Tax crime stats

By Debra Barayuga

If state tax investigator Stephen Hironaka hears someone say, "Who do I make the check out to?" -- many times, it's too late.

By the time Hironaka is involved, he is there to put the person in jail, not take their money.

As the state's sole tax investigator since 1995 and the first since statehood, Hironaka has been aggressively going after tax cheats and trying to impress on the public that scofflaws face serious penalties, including jail.

One of the biggest hurdles he faces is changing the public's mind-set that the state is lenient on tax scofflaws.

He likens the public's view of the state's tax laws to a dog with rubber teeth. "The dog bites but it doesn't hurt, so we'll just take our chances -- and that's what's happening," he said.

The state and even the IRS do not have a reliable handle on the number of people who should be filing and are not, said Marie Okamura, state tax director.

"It's difficult to quantify, and with most states, we address it the best way we can with resources available."

What the state does know is that about 565,000 individuals and 28,000 corporations filed net income returns in 1999, the most recent numbers available.

And there are 443,000 people licensed to do business in the state.

The state Tax Department last year began sending notices to those who have not been filing for some time.

But even those numbers are offset by individuals who did respond and have been filing or filing under wrong identification numbers, Okamura said.

Deputy Attorney General Rick Damerville, who has prosecuted tax crimes since 1996, speaks from experience when he says the problem of people willfully avoiding tax laws is "epidemic."

"If the state could just collect a reasonable portion of taxes that are supposed to be paid and get reasonable compliance with our tax laws, a lot of our financial problems in this state would take care of themselves."

Tax fraud reportedly costs the federal government $300 billion a year, about one-third of what taxpayers paid last year, Damerville said.

With the state grossing about $3 billion for the fiscal year ending June 30 and with zero enforcement of tax crimes before 1996, "It's reasonable to assume we're leaving about $1 billion annually that's not being collected effectively."

Everyone suffers when people avoid paying taxes, he said. "If existing tax laws don't generate enough revenue, and government has to provide services, then government's going to say, 'We have no choice but raise taxes on those remaining people who are paying,'"

Since Hironaka began in 1995, 12 corporations and 49 individuals have been prosecuted either for tax evasion, theft, failing to file their general excise or withholding tax or subscribing to false returns.

The list includes doctors, attorneys, tax preparers, Realtors, even welfare recipients.

The prosecutions have resulted in more than $560,000 in fines, more than $8.2 million in taxes, penalties and interest, and jail time ranging from 15 days to six months.

Tax attorney Stephen Pingree feels the state is using criminal prosecution to generate publicity and scare taxpayers into complying.

While he has no sympathy for people who flout the laws, "the reality is, people don't really know it's a crime not to file state tax returns."

Pingree noted that before 1995 the state never prosecuted anyone for tax offenses. "The state Tax Department always negotiated with people, made deals, cut or waived penalties, interest or reduced the general excise tax."

That changed in 1995 after the Legislature increased penalties for tax crimes and upped the statute of limitations to seven years from two years.

In the past three years, the state has begun prosecuting individuals and corporations for failure to file withholding taxes and charging them with theft, Pingree said.

Business owners know they need to file their general excise taxes, but those in business for seven or eight years see the tax as oppressive and do not rank it in importance as income or payroll taxes, he said. "Given the lax enforcement by the state, I can see why."

Pingree blames the state for failing to properly educate the public about the state's tax laws and the criminal penalties they face for failure to file.

He said the state should set a one-year amnesty period combined with a concentrated publicity campaign to inform the public about the tax laws and what they are required to do.

At the end of one year, if people have not filed their returns and made arrangements with the state to repay, then they are subject to criminal prosecution, he said.

Okamura said the department has made more of an effort to get the word out since criminal penalties increased.

She defended the department's educational program, which includes distributing brochures as widely as possible and issuing news releases frequently whenever there is a conviction to encourage people to come forward voluntarily. The department also features its criminal investigation division in workshops, has a Web site and sends a quarterly newsletter to tax practitioners.

"I don't know how else we can do it other than by prosecuting those that have not been in compliance and by publicizing it," Okamura said. "It appears as though unless people are aware of the consequences, they're not going to comply."

While the idea of an amnesty program has come up in the past, "It's really not fair to those who have been in compliance throughout and have been filing and paying taxes like they're supposed to," Okamura said.

Offering amnesty to those not in compliance sends a wrong message and may actually encourage noncompliance, she said.

What the state does not consider is the emotional toll tax-crime prosecution has on individuals and business owners, Pingree said. "The state Department of Taxation doesn't understand what it does to people's lives -- it's not just about money."

Many go broke after paying the fines and attorney fees. It puts a tremendous amount of stress on their family members and employees. "I don't think the state of Hawaii wants to be that way with its citizens," Pingree said.

Okamura said most of the cases she reviews before prosecution is pursued involve taxpayers who have been filing before but, for some reason or hardship, decided to stop. But hardships should not prevent persons from coming forward and notifying the department about their situations, she said.

The taxpaying community is basically honest, Hironaka said. Without honest taxpayers the voluntary tax system would fall apart.

Most of the 100 people or so he has come into contact with in his investigations have been very professional, he said.

He sympathizes with some of them, many who are on the verge of bankruptcy, "because once you get behind in taxes, it's hard to catch up.

"But at the same time, I didn't create their situations -- they created their own situation, and if they took care of business as they should have, then I wouldn't be there," he said.

Damerville said he sees an increasing trend by the courts to be as tough as necessary to get the public's attention on how big a problem tax avoidance is.

It is now fairly common to get penalties of $4,000 to $5,000 per count or more in plea negotiations, particularly from professionals who are not filing returns.

But before the state can go after more scofflaws, there need to be more investigators, he said.

Picture this: There are 20 criminal investigators statewide who oversee 26,737 families on welfare, but only one state tax investigator to oversee over a half-million individuals, 28,000 corporations and 443,000 licensed to do business in the state.

"We need increased presence to let them know we are out there criminally prosecuting people," Damerville said. "We need more investigators."

A tax investigator needs not just a background in accounting, but skills in interviewing, developing informants and confronting people. "You're trying to put people in jail, and a lot don't like that," Hironaka said.

Hironaka encourages people to report nonfilers.

Some people might say it is none of their business, as long as they themselves file their taxes, Hironaka said.

"But how does that make you feel when you see someone who isn't paying taxes, and you're struggling to pay your taxes? Do you think it's fair that nothing is being done to those people?"

Trends in Hawaii
tax enforcement


Before 1995:

>> Tax crimes were misdemeanors, punishable by a $1,000 fine and/or a year in jail.

After 1995:

>> Tax evasion (Class C felony): Five years in jail and/or $100,000 fine for individuals for each year of nonpayment. Corporations face a $500,000 fine.

>> Failure to file returns (misdemeanor): One year in jail and/or fines of $25,000 for individuals and $100,000 for corporations.

>> Willfully subscribing to a false return or assisting someone in the preparation of a false return (Class C felonies): Three years in jail and/or $100,000 for individuals, $500,000 for corporations.


>> Before 1995: 0
>> Fiscal Year 1996: 3 corporations, 4 individuals
>> FY 97: 2 corporations, 9 individuals
>> FY 98: 2 corporations, 10 individuals
>> FY 99: 3 corporations, 9 individuals
>> FY 00: 12 individuals
>> FY 01: 2 corporations, 5 individuals
>> Total: 12 corporations, 49 individuals

(Only two cases, Barbara Price and Michael Kahapea, went to trial and were convicted; everyone else pleaded guilty or no contest.)

Cases pending trial: 7

Number of cases awaiting complaint or indictment: 11

Data from state Tax Department

State of Hawaii

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