Everald Dewar | Taxing a lie
During a tax enquiry, revenue agents requested a copy of a taxpayer's loan application form.
The taxpayer refused and was issued with a notice under Section 171 of the Revenue Administration Act - the RAA - demanding the document.
The taxpayer confessed to me and explained that he did exaggerate his business profits on the form to obtain a mortgage. He wants to know whether the revenue agent will be able to use the information on the loan application form to increase his tax liability.
The taxpayer is facing a dilemma. If the document is not produced, the agents can issue a third party notice on his bank under the RAA.
When Emperor Honorius saw the Visigoths coming over the hill he knew the Western Roman Emperor was doom to fall. This is how I felt the day the RAA was amended to include provisions that allows the tax authorities to gather detailed information of a general nature from banks and other financial institutions and also from 'any person', whether the taxpayer does business with them or not.
One ought not to be surprised at anything that happens under the Income Tax Act or General Consumption Tax Act, given the awesome powers of the authorities under the RAA. The commissioner General can go directly to a judge (ex parte) for a production or inspection order. Stiff fines or imprisonment are also provided for in the RAA where persons fail to provide information requested or who give inaccurate or incomplete information.
Of course, if the offence is committed by a company, then the directors or other similar responsible officer will be liable as if they had personally committed the offence.
Getting back to the hapless taxpayer, when he applied for the loan the lender required him to complete an application form and provide proof of income. This proof for an employee can be a payslip, usually three. For the self-employed, as in the case of the taxpayer, it could be copies of certified accounts, usually by a chartered account.
Whether the loan is granted or not, the application forms become the property of the lender. Is the revenue agent wasting his time by requesting something that is not in the taxpayer's possession or within his power to produce?
If the taxpayer said he never received a copy, or if he did but then destroyed or misplaced it, should the request to produce it then not 'die the death'? Why go to the bank; what would the agent need such information for?
The revenue authorities cannot assess taxes on the basis of the application, because the income data is likely to include an element of optimisation or just plain exaggeration to increase the chances of obtaining the loan.
The accounts filed with the tax return is the only reliable basis to start with. Exaggerated statements made to a third party are no evidence at all, especially for a tax audit. It might simply mean that the taxpayer lied to get a loan. Should he pay taxes based on a lie?
Whatever the outcome, it may not put the taxpayer in a good light with the agents or the commissioner general of Tax Administration Jamaica. The agents might be keen to assert, at the very least, that a man who will lie to a lender will lie about his taxes.
The best thing is to brazen it out. Yes, the taxpayer exaggerated his profits. Yes, this is reprehensible. But no, he is not the only one to have done it; and no, it does not prove anything, one way or the other, about the accounts. Accept the fact, but attack any unwarranted conclusions that the agent may seek to draw from that fact.
Some of these things do happen and, though foolish, they can hardly be called fraud. It is really a question of ethics.
Tax accountants sometimes have to assess the basic honesty and accountability of their clients. They are aware that their duty is not only to the client, but also as mediator between clients and the taxman - if it means reaching a compromise or doing a deal with the agent. And yes, the law does give the tax commissioner the power to do deals.
This taxpayer will be very unlucky if his encounter with these agents is as unreasonable as the situation where a cashier pilfered substantial sums of money from her employer. The tax agent disallowed the loss, on the basis that the owner of the business, having not produced a police report, must have been intimately involved with the cashier.
- Everald Dewar is senior taxation manager at BDO Chartered Accountants in Kingston.