Haw. Code R. § 18-231-36.8-01-6676
EXAMPLE: Taxpayer made a return for the 2008 taxable year claiming $10,000 in refundable credit on its 2008 tax return. All of Taxpayer's income was offset by allowable operating losses for the same taxable year, which resulted in a credit refund claim calculation of $10,000. Upon audit, it was determined that Taxpayer was entitled to a $6,000 credit and $4,000 in claimed credit was disallowed. The department further assessed the erroneous refund penalty under section 231-36.8, HRS. The "excessive amount" for purposes of the penalty under section 231-36.8, HRS, is $4,000, which is the difference between the amount of credit that was claimed and the amount of credit allowable. The twenty per cent penalty will be applicable to the $4,000 base amount, which results in a penalty of $800.
EXAMPLE: Assume the same facts as the Example in subsection (d), except that upon audit it was determined that the taxpayer was entitled to $9,000 in credit and was disallowed $1,000 in claimed credit. Assume further that there was no reasonable basis for the excessive $1,000 credit claim. In this case, the "excessive amount" for purposes of calculating the penalty under section 231-36.8, HRS, is $1,000. Applying the twenty per cent penalty to the $1,000 excessive base amount results in a penalty of $200. Pursuant to the express terms of section 231-36.8, HRS, no penalty will be assessed under these facts because the penalty is less than $400.
The reasonable basis standard is higher than frivolous or not patently improper. The reasonable basis standard is considered a one-in-four, or greater, likelihood of success on the merits of the claim after a person knowledgeable in the tax law makes a reasonable analysis. The director may prescribe a list of positions that the director believes do not meet the reasonable basis standard. Such list (and any revisions thereof) shall be published and made public pursuant to Tax Information Release.
Reasonable basis expressly includes innocent mistakes related to the refund or credit claim, which are errors on a return due to inadvertence or mathematical mistakes.
EXAMPLE 1: XYZ Corporation conducted qualified research in Hawaii and further incurred qualified research expenses that generated a credit claim under section 235-110.91, HRS. In making its credit calculation, XYZ Corporation inadvertently added a line item invoice for research expenses twice, thus creating a larger base amount for determining its credit. Upon audit, the double calculation was discovered and the second claim for the same cost was disallowed. Under the facts of this example, XYZ Corporation's excessive amount for purposes of the penalty under section 231-36.8, HRS, was due to an inadvertent calculation error and therefore had a reasonable basis in making its excessive claim. The claim for the excessive amount is rightfully disallowed; however, no penalty under section 231-36.8, HRS, should be assessed in this circumstance.
EXAMPLE 2: Assume the same facts as in Example 1; however rather than an inadvertent calculating error, XYZ Corporation knowingly included travel expenses unrelated to the qualified research activity, which were charged to a particular research project journal account for accounting' purposes and knowingly included in the research tax credit claim. Rather than remove the disqualified expenditure from the credit claim, XYZ Corporation made the claim for the whole project account knowing the travel costs did not qualify. Upon audit, the claim for the travel expenses unrelated to qualified research activity was disallowed. Upon inquiry, XYZ Corporation said the disqualified travel was included out of convenience in its accounting practice. Under the facts of this example, XYZ Corporation's excessive amount included a claim for credit for which there was no basis. XYZ Corporation knowingly included the amount, which was unrelated to qualified research. Such claims are not allowed pursuant to a plain reading off section 231-110.91, HRS, which eliminates any reasonable basis for making the claim. Because XYZ Corporation's excessive amount had no reasonable basis under these facts, a penalty under section 231-36.8, HRS, would be warranted and is assessable in the discretion of the auditor; provided the director approves of the assessment pursuant to sections 231-36.8 and 18-231-10.6-01(h).
Haw. Code R. § 18-231-36.8-01-6676