“I just might have a problem that you’ll understand,” goes the song by Bill Withers. “We all need somebody to…” lien on?
A lien is a nasty little device used by tax agencies. It is a public document that records taxpayers’ names and how much they owe the government. Although a tax lien no longer affects credit scores (it used to), it does pop up when folks are trying to sell real estate that they own (clear title can’t be conveyed unless the debt is paid off) or are trying to get a loan (lenders do check public records for other debts).
Before 2009, there was no statute of limitations on tax debts. That meant that an unpaid tax lien lasted forever until paid. But in 2009, Act 166 adopted, among other things, a 15-year statute of limitations on collecting previously assessed taxes. It used language similar to the federal 10-year statute of limitations on collection. The bill also said that any previous debts would stay alive until July 1, 2024, 15 years after Act 166 took effect.
Well, July 1, 2024, came and went. Some taxpayers went to the Department of Taxation and asked to have their ancient tax liens removed. After some thought, the Department refused. They said the 2009 law prohibited “a levy or a proceeding in court” after the 15-year period expired but didn’t say it should take a good tax debt off the books. They said they were justified in refusing to remove the lien or denying a tax clearance to the taxpayer because the law didn’t prohibit “passive methods of collection.”
However, the federal law on which the 2009 statute is based says otherwise. A U.S. Supreme Court decision, Bowers v. New York &Albany Lighterage Co., 273 U.S. 346 (1927), held that once the statutory limit on collections has expired, the government can’t keep any of the taxpayer’s money that it then comes into possession of. The Internal Revenue Code also states that if the statute of limitations has expired on a tax debt, any federal tax lien to enforce the debt has to be released.
This, of course, does not leave the Department without a remedy. If the Department wanted to put the screws on a taxpayer with a large debt, it could file suit before the 15-year period expires and then recover a judgment. Judgments have their own limitations periods. Generally, they last for ten years from entry and can be renewed for another ten years under section 657-5, HRS. Or, under HRS section 231-33(j) that Act 78, SLH 2022, gave us, the Department can apply to the court to convert its lien into a civil judgment if it hasn’t heard from the taxpayer for a year. That judgment would last for ten years from entry and could be renewed for another ten years after that.
House Bill 1173 (YAMASHITA), which the Foundation drafted to address concerns expressed by tax professionals, would clarify that our state 15-year statute of limitations on collection works the same way as the federal statute does and that liens to enforce expired tax debts need to come off. That bill cleared the House and is starting its journey through the Senate. If enacted, it would make clear that once the 15-year period expires, the taxpayer gets a fresh start and doesn’t have to keep wearing the albatross of its old tax debts.
“Sometimes in our lives, We all have pain, We all have sorrow,” the song goes, “But if we are wise, We know that there’s always tomorrow.” And don’t you dare lien on me tomorrow!
•••
Tom Yamachika is president of the Tax Foundation of Hawai‘i.
