The Worst Case Scenario
When trying to chart a course of action and analyzing potential outcomes based on actions (or inactions), it's often useful to consider the worst case scenario. If I make a particular choice, what's the worst thing that can happen?
About a year ago, I had a client who had HARPTA withheld. They were mainland residents who owned a rental on Oahu, and wanted to file for an early refund. But they informed me that they had not filed Hawaii income taxes for about 10 years. This is really not that unusual a situation. On the average, about a third of our HARPTA clients who operated rentals will tell us that they didn't file general excise taxes, state income taxes, or both. I informed them that the State would continue to hold on to HARPTA until they were caught up with all of their Hawaii tax filings.
On occasion, we'll come across a client who has many years of tax returns to complete, and when faced with the daunting task of having to file a lot of past due returns, and possibly pay transient, general excise, and income tax, they sometimes wonder..."what would happen if I skip out on the past due tax returns, and just allow Hawaii to keep the HARPTA withholdings?" So if a home seller were to consider this choice, here are the likely outcomes:
The taxpayer has 3 years to claim their HARPTA funds with a tax return or other filing
If the taxpayer were to miss the 3 year filing window to claim a refund, the State is no longer obligated to refund any tax overpayments
So if a home seller were to sell a home in 2018 (due date of 2018 tax return in Hawaii is 4/20/19) and have HARPTA withheld, the refund must be claimed by 4/19/22.
If the home seller were to ignore demands from the State to file past due tax returns, and this went on for too long, the window to get a HARPTA refund may close.
There is no statute of limitations for unfiled tax returns. So even if the window to obtain a HARPTA refund closes, the home seller would still be required to file and pay all past due taxes.
So the State would continue to demand all past due taxes and payments, while at the same time, you could lose access to HARPTA being withheld, while also still being required to pay every penny (plus penalties and interest) on the past due tax returns.
I really can't think of any realistic situations where walking away from a scenario like this would be beneficial. Best to just get caught up with all taxes in order to collect HARPTA.