Tax audit - TAJ's perspective
While grappling with marvellous feedback from the article 'Tax audit - A presumption of guilt' published on October 3, fairness calls for us to strike a balance between the responsibilities of the Tax Administration Jamaica (TAJ) and the rights of the taxpayer.
It is TAJ's prime responsibility to detect and deal with tax evasion and non-compliance with the tax laws.
Therefore, in order to treat everyone with equal fairness TAJ must purposefully investigate cases where there are reasons to think that taxes have been understated.
TAJ will devote greater resources to those areas having higher tax risks, inevitably, a high proportion of self-employed and private companies are investigated.
In an audit, the taxpayer will be invited to meetings initially to allow the auditor to effectively find out what they need to know and specifically to understand the business.
A meeting is far quicker and more efficient than pursuing enquiries entirely by correspondence. As a whole, auditors do conduct meetings in a professional, objective and courteous manner.
One possible reason why accounts are selected for enquiry may be the gross profit rate shown by the business. This is only one test among many, but this has been found to be a pointer to evasion.
There are indications that TAJ is mostly not comfortable with taxpayers' final accounting figures nor the information generated from the accounting systems.
Where it is manifestly clear that records are unreliable or, as in some case, clear evidence of omissions, the solution is not to audit through the books of the business but around the accounting system.
To this end, TAJ sometimes uses information from third-party sources; an indirect approach is then applied to arrive at total income. Such approaches includes: the invoice method, bank deposit method along with the LINOR method.
The LINOR method was developed by two astute revenue agents, Norris Miller and Lincoln Johnson, and is based on industry averages applicable to the retail trade.
The TAJ is given power by Parliament to get information from third parties and such sources are usually not disclosed. Nevertheless, the information can be misleading and where assessments are upheld based on it, difficulties arise.
In such situations, the taxpayer is put into an impossible position in having to disprove unrealistic assessments. It is true that the law places onus on taxpayers to show that assessments made are excessive because the facts that are needed to establish the correct amount of their income are held by them and not with the tax auditor.
Overall, agents do apply their experience and common sense in assessing the reliability of evidence. But there are times where the agent may fail to exercise proper care or judgement. In such cases, the taxpayer has the right to complain to a higher authority, such as the manager in charge, who should ensure a fair but impartial outcome. Taxpayers are encouraged also to seek advice from professionals, who can handle their case in defending their interest in negotiation with the TAJ.
In carrying out audits, tax agents have to steer a very difficult course. They are probably going to meet resistance. This writer recalls, during a tour of duty as a revenue agent, being assaulted by an irate taxpayer and put through a citizen's arrest.
Nevertheless, agents must conduct their enquiries thoroughly and fairly. They must be sufficiently assertive without being discourteous and aggressive. They must not be deflected from the proper course of enquiry but must be cognisant of the taxpayer's rights.
Sometimes, given an agent's stance in pursuing a particular assessment, one gets the impression that he harbours a grudge or has something against the taxpayer or stands to obtain a personal gain. There have been frequent suggestions that tax agents are rewarded for their success in investigation cases and have targets for money yield. Let it be known that this is not so; they are not paid by reference to how much they collect.
It is obvious that there is room for evaluation on both sides of the divide so that one day when the taxpayer asks: 'Mirror, mirror, on the wall, who in this land is fairest of all?' It answered: 'You, my queen, are fair, it is true; but the 'taxman' is a thousand times fairer than you.'
Everald Dewar is senior taxation manager at BDO Chartered Accountants in Kingston.email@example.com