Sun | May 31, 2020

Tax audit - A presumption of guilt

Published:Friday | October 3, 2014 | 12:00 AM

Dentists and tax agents have similar roles in life - they both make extractions.

But many taxpayers would rather make a trip to the dentist than suffer a tax investigation or audit, because the tax agent's extractions are likely to be more expensive, prolonged and painful.

However, tax and customs audits, just like dental check-ups, are set to become a normal part of everyday life for business over the next few years.

No one who experiences a tax audit will disagree that they are costly, disruptive and stressful no matter how innocent the parties involved.

On being served notice that you have been selected for audit, to ask yourself "Why me?" is getting off on the wrong foot because the Tax Administration Jamaica (TAJ) refuses to offer true reasons for selecting a particular case.

In some of the cases I have seen, there is a strong suspicion that the particular taxpayer has been targeted - such as cases where an audit was carried out arising from claim for a tax refund. In another, there was a claim for loss relief over many years, and no doubt this is an abnormality.

The TAJ notice will request a vast quantity of paperwork: accounting records, invoices, receipts, bank statements, cancelled cheques, but not the kitchen sink yet - though we might need it later.

A taxpayer will have the impression, misguided though it may be, that the agent has nothing better to do, due to the mountain of information and paperwork requested, half of which seems unnecessary and will take days to ferret out and produce.

Powers of Taj

The TAJ has power to call for documents or information within a time limit, in most instances not less than 30 days and on pain of penalty for failure to comply.

A month in which to produce a vast quantity of paperwork is a tight schedule. Nevertheless, this is life as we are seeing it and I would strongly recommend that as soon as a notice is received contact be made with the agent to work out a realistic time frame for collecting the data, some of which can be of five years' vintage.

There will be an initial interview, at which you have the right to have anything you said used against you, so I would advise that you have your accountant as company in that interview, or better yet, a tax adviser. And be quiet!

Your case is selected for audit because something is known or suspected to be wrong with the tax return and, by and large, the agents have already made up their minds deciding that you are in the wrong.

The truth is that reconnaissance work and background checks were already carried out and, unknown to you, someone had visited your business place.

The agents, of course, cannot now be truly objective once they have convincing evidence that the tax return is not correct.

How does this manifest itself? Well, the obvious example is the problem arising where there is differences between the GCT and the income tax returns. Or another troublesome item in the total lodgement far exceeds the taxpayer's total sales. This then establishes that something is wrong and the onus of proving otherwise rests on the taxpayer.

Proving your case

The result is that it must be proved to the agent's satisfaction, that the monies lodged are non-taxable sources. Easier said than done, considering some of these are your own savings that was pumped into the business and loans obtained from families and friends going back a number of years.

The TAJ's approach in such situation is to assume that these are lodgements from an undisclosed taxable source, that is, unreported or diverted business takings.

Unless proven not to be, then it is guilty until proven innocent. This regularly comes as a shock to the unsuspecting taxpayer whether forewarned by his adviser.

This is the culture within TAJ - an assumption of guilt where transactions are not explained to the agent's satisfaction.

I must stress that this is not trying to paint an unfavourable picture of the TAJ which operates by a code of practice that says: 'We want you to pay your right amount of taxes: no more, no less'. But there is no escaping the 'guilty until proven innocent' ethos.

Many may be thinking that under our justice system the opposite prevails - you are innocent until proved guilty. The immediate but oft unspoken thought of the tax adviser is: Oh yeah, welcome to the world of tax investigations.

Everald Dewar is senior taxation manager at BDO Chartered Accountants in