Hawaii State Tax Audit Response

HAWAII DOTAX AUDIT — TAXPAYER RESPONSE PACKAGE

TABLE OF CONTENTS

1. Cover Letter to Examining Agent
2. Power of Attorney / Authorization
3. Response to Initial Information Document Request
4. Privilege and Confidentiality Log
5. Position Statement on Preliminary Audit Findings
6. Penalty Abatement Request
7. Hawaii Taxpayer Bill of Rights Invocation
8. Settlement / Closing-Agreement Proposal
9. Reservation of Rights
10. Signature and Service Block
11. Hawaii Practice Notes
12. Sources and References

1. COVER LETTER TO EXAMINING AGENT

[LAW FIRM / CPA FIRM LETTERHEAD]

[DATE]

VIA [CERTIFIED MAIL — RETURN RECEIPT REQUESTED / ELECTRONIC FILING / HAND DELIVERY]

State of Hawaii, Department of Taxation

Attn: [AUDITOR NAME], [TITLE]

[BRANCH — Field Audit / Office Audit / Tax Compliance]

830 Punchbowl Street

Honolulu, HI 96813-5094

Re: Audit of [TAXPAYER NAME] — Hawaii Tax I.D. No. [________________]

DOTAX Audit/Case No. [________________]

Tax Type(s): ☐ Income (Ch. 235) ☐ GET (Ch. 237) ☐ Use (Ch. 238) ☐ TAT (Ch. 237D) ☐ Other: [________]

Period(s) Under Audit: [__/__/____] through [__/__/____]

Dear [AUDITOR NAME]:

This firm represents [TAXPAYER NAME] ("Taxpayer") with respect to the above-referenced audit. Enclosed is an executed Hawaii Form [N-848 / authorization letter] designating the undersigned as Taxpayer's authorized representative under Haw. Rev. Stat. § 231-18.

This letter and the enclosures respond to the [Audit Opening Letter / Information Document Request No. ____] dated [__/__/____]. Taxpayer is committed to a cooperative, good-faith audit consistent with the Hawaii Taxpayer Bill of Rights (DOTAX Tax Facts 2001-1) and respectfully requests that all further communication be directed to undersigned counsel/representative at the address below.

Please confirm receipt of this response and advise of any additional questions.

Respectfully,

[________________________________]

[REPRESENTATIVE NAME], [Hawaii Bar No. / Hawaii CPA License No.] [####]

Counsel/Authorized Representative for [TAXPAYER NAME]

Enclosures: [List]

2. POWER OF ATTORNEY / AUTHORIZATION

2.1. Taxpayer has executed Hawaii Form N-848 (Power of Attorney) designating the undersigned as authorized representative for the tax type(s) and period(s) identified above.

2.2. Pursuant to Haw. Rev. Stat. § 231-18, all return information is confidential. DOTAX is requested to direct all correspondence, telephone contacts, and document requests through the authorized representative and to refrain from contacting Taxpayer directly without notice to counsel/representative.

3. RESPONSE TO INITIAL INFORMATION DOCUMENT REQUEST

3.1. General Objections. Taxpayer responds to each IDR item below subject to and without waiver of the following general objections:

• (a) Taxpayer objects to any request seeking information protected by the attorney-client privilege, the attorney work-product doctrine, the federally recognized tax-practitioner privilege (I.R.C. § 7525) as adopted by Hawaii law, the accountant-client privilege under Haw. Rev. Stat. § 466-12, or any other applicable privilege.
• (b) Taxpayer objects to any request that exceeds the scope of Haw. Rev. Stat. § 231-7 or seeks information not relevant to the periods under audit.
• (c) Taxpayer objects to any request that would require creation of records not maintained in the ordinary course of business.
• (d) Taxpayer objects to any request that seeks information beyond Hawaii's three-year records-retention obligation under Haw. Admin. R. § 18-231-3-14.22 and Haw. Rev. Stat. § 237-41.

3.2. Item-by-Item Responses.

3.3. Records Retention Limitation. Pursuant to Haw. Admin. R. § 18-231-3-14.22 and Haw. Rev. Stat. § 237-41, Taxpayer is required to retain records for three (3) years. To the extent the IDR requests records older than three years, such records are no longer in Taxpayer's possession, custody, or control, and the IDR is objected to as overbroad and unduly burdensome.

3.4. Format and Production. Documents are produced in [paper / electronic PDF / native format] and Bates-stamped [PREFIX-000001] through [PREFIX-XXXXXX].

4. PRIVILEGE AND CONFIDENTIALITY LOG

5. POSITION STATEMENT ON PRELIMINARY AUDIT FINDINGS

5.1. Identification of Disputed Adjustments. Taxpayer received the auditor's [Information Document Response Summary / Preliminary Audit Report / Notice of Proposed Assessment ("NOPA")] dated [__/__/____], proposing the following adjustments:

5.2. Argument I — [First Disputed Issue].

• Statute and rule: [Cite, e.g., Haw. Rev. Stat. § 235-21 (apportionment); Haw. Admin. R. § 18-235-21.]
• Facts: [Apply taxpayer's facts to the controlling rule.]
• Authority: [Cite Hawaii Tax Appeal Court / Supreme Court precedent; secondary DOTAX Tax Information Releases (TIRs).]
• Conclusion: Taxpayer respectfully submits that the proposed adjustment of $[________] is incorrect and should be withdrawn.

5.3. Argument II — [Second Disputed Issue].

• Statute and rule: [Citation.]
• Facts: [Application.]
• Authority: [Citation.]
• Conclusion: [Requested outcome.]

5.4. Argument III — [Third Disputed Issue]. [Same structure.]

5.5. Statute of Limitations. Pursuant to Haw. Rev. Stat. § 235-111, the limitations period for assessment is generally three (3) years from the later of the date the return was filed or the due date. Adjustments for tax year(s) [YYYY] are barred to the extent they exceed this period and are not within the substantial-omission (six-year) or fraud (unlimited) exceptions.

6. PENALTY ABATEMENT REQUEST

6.1. To the extent any adjustment is sustained, Taxpayer requests abatement of all penalties under Haw. Rev. Stat. § 231-39(b)(4) for reasonable cause and absence of willful neglect.

6.2. Reasonable Cause Factors:

• ☐ Reliance on professional advice from a qualified tax advisor;
• ☐ Reliance on prior DOTAX guidance, ruling, or audit history;
• ☐ Substantial authority for the position taken;
• ☐ Reasonable interpretation of an unsettled statutory provision;
• ☐ Records destruction or unavailability beyond Taxpayer's control;
• ☐ Serious illness or other extraordinary circumstance affecting Taxpayer or its principals;
• ☐ First-time abatement (clean compliance history for prior [3 / 5] years).

6.3. Supporting documentation is enclosed at [Tab __].

7. HAWAII TAXPAYER BILL OF RIGHTS INVOCATION

7.1. Taxpayer affirmatively invokes the rights set forth in DOTAX Tax Facts 2001-1 (Rev. May 2022) and Haw. Rev. Stat. Chapter 231, including:

• (a) The right to representation by an attorney, CPA, or enrolled agent at every stage of the audit;
• (b) The right to confidentiality of return information under Haw. Rev. Stat. § 231-18;
• (c) The right to a clear written explanation of any proposed liability, including the legal and factual basis;
• (d) The right to appeal proposed and final assessments to the Administrative Appeals Office (AAO), the Board of Review (BOR), and the Tax Appeal Court (TAC);
• (e) The right to consideration of installment-payment agreements;
• (f) The right to abatement of penalties for reasonable cause; and
• (g) The right to courteous, professional treatment by DOTAX personnel.

8. SETTLEMENT / CLOSING-AGREEMENT PROPOSAL

8.1. Without waiver of any defense and pursuant to Haw. Rev. Stat. § 231-19.5, Taxpayer proposes the following settlement of the audit:

• Adjustment Concessions: Taxpayer concedes Adjustment(s) [__] in the amount of $[________].
• Disputed Adjustments to Be Withdrawn: DOTAX agrees to withdraw Adjustment(s) [__].
• Penalty Treatment: All accuracy-related and failure-to-file/pay penalties under Haw. Rev. Stat. § 231-39 to be abated.
• Interest: Interest computed on the agreed principal only, at the statutory rate under Haw. Rev. Stat. § 231-39(b)(1).
• Payment Terms: ☐ Lump sum within [__] days ☐ Installment agreement under DOTAX guidance.
• Form: Settlement to be memorialized in a Closing Agreement under Haw. Rev. Stat. § 231-19.5.

8.2. This proposal is made expressly for purposes of compromise pursuant to Hawaii Rules of Evidence 408 and may not be used as evidence of liability if not accepted.

9. RESERVATION OF RIGHTS

9.1. Nothing in this audit response constitutes an admission of liability, a waiver of any defense, or a stipulation of fact except as expressly stated.

9.2. Taxpayer reserves the right to:

• (a) Supplement or amend any response;
• (b) Assert additional privileges or objections;
• (c) Demand a closing conference under DOTAX practice;
• (d) File a written protest and notice of appeal upon issuance of a Notice of Final Assessment under Haw. Rev. Stat. §§ 235-114, 232-7, and 232-16;
• (e) Pay under protest and sue for refund under Haw. Rev. Stat. § 40-35; and
• (f) Pursue judicial review through the Tax Appeal Court, the Hawaii Intermediate Court of Appeals, and the Hawaii Supreme Court.

10. SIGNATURE AND SERVICE BLOCK

Date: [__/__/____]

Respectfully submitted,

[LAW FIRM / CPA FIRM NAME]

By: [________________________________]

[REPRESENTATIVE NAME], [Hawaii Bar No. / Hawaii CPA License No.] [####]

Counsel / Authorized Representative for Taxpayer

[STREET ADDRESS]

[CITY, HI ZIP]

Telephone: [NUMBER]

Email: [EMAIL]

cc: [Taxpayer (client copy)]

[Co-counsel / accountant]

11. HAWAII PRACTICE NOTES

• Audit authority. DOTAX's audit power flows from Haw. Rev. Stat. § 231-7, which authorizes examination of books, records, bank statements, federal returns, and other documents relevant to determining tax liability. Subpoenas may issue under § 231-7(d).
• Records retention. Three years is the baseline under Haw. Admin. R. § 18-231-3-14.22 (issued under Haw. Rev. Stat. § 231-9.7) and Haw. Rev. Stat. § 237-41 (GET). Records must be kept in English and within Hawaii. Retention extends through any agreed extension of the limitations period under § 235-111.
• Confidentiality. Haw. Rev. Stat. § 231-18 broadly protects return information; unauthorized disclosure is a crime. DOTAX may share information with the IRS and other state agencies only as authorized by statute.
• Closing agreements. Haw. Rev. Stat. § 231-19.5 permits closing agreements that are final and conclusive absent fraud, malfeasance, or material misrepresentation.
• AADR program. Haw. Rev. Stat. § 231-7.5 authorizes the AAO and the AADR Program — an alternative-dispute-resolution forum independent of the audit branch. Available pre- and post-assessment.
• Letter rulings. Taxpayers may seek letter rulings under DOTAX TIR No. 2009-01 (and successors) for prospective transactions; these are confidential and bind DOTAX as to the requesting taxpayer.
• Limitations on assessment. General three-year period under Haw. Rev. Stat. § 235-111(a); six years for omissions exceeding 25% of gross income; unlimited for fraud or no return.
• Refund-claim window. Under Haw. Rev. Stat. § 235-111(b) and § 231-23, refund claims must be filed within three years of return filing or two years of tax payment, whichever is later.
• Honolulu address for filings. DOTAX, 830 Punchbowl Street, Honolulu, HI 96813-5094. AAO is in Room 221.

12. SOURCES AND REFERENCES

• Haw. Rev. Stat. Ch. 231 (Administration of Taxes) — https://www.capitol.hawaii.gov/hrscurrent/Vol04_Ch0201-0257/HRS0231/HRS_0231-.HTM
• Haw. Rev. Stat. § 231-7 (Audits) — https://www.capitol.hawaii.gov/hrscurrent/Vol04_Ch0201-0257/HRS0231/HRS_0231-0007.htm
• Haw. Rev. Stat. § 231-7.5 (AAO / AADR) — https://www.capitol.hawaii.gov/hrscurrent/Vol04_Ch0201-0257/HRS0231/
• Haw. Rev. Stat. § 231-9.7 (Mandatory e-filing; record-keeping) — https://files.hawaii.gov/tax/legal/hrs/hrs_231.pdf
• Haw. Rev. Stat. § 231-18 (Confidentiality) — https://files.hawaii.gov/tax/legal/hrs/hrs_231.pdf
• Haw. Rev. Stat. § 231-19.5 (Closing agreements) — https://files.hawaii.gov/tax/legal/hrs/hrs_231.pdf
• Haw. Rev. Stat. § 231-23 (Adjustments and refunds) — https://www.capitol.hawaii.gov/hrscurrent/vol04_Ch0201-0257/HRS0231/HRS_0231-0023.htm
• Haw. Rev. Stat. § 235-111 (Limitations period) — https://law.justia.com/codes/hawaii/title-14/chapter-235/section-235-111/
• DOTAX Administrative Appeals Office — https://tax.hawaii.gov/appeals/
• DOTAX Tax Facts 2001-1 (Hawaii Taxpayer Bill of Rights, Rev. May 2022) — https://files.hawaii.gov/tax/legal/taxfacts/tf2001-1.pdf
• Form N-848 (Power of Attorney) — https://tax.hawaii.gov/forms/a1_1alphalist/
• Form AA-1 (Rev. 2024), AADR Application — https://files.hawaii.gov/tax/forms/2024/aa1.pdf

Disclaimer: This template is provided for informational purposes only and does not constitute legal advice. A licensed Hawaii attorney or CPA must review and customize this document before transmission to DOTAX. Statements made during a tax audit may be used as admissions; review every factual representation with counsel before signing.