Sun | Aug 20, 2017

Don't punish taxpayers for errors

Published:Saturday | November 7, 2015 | 11:00 AMPatrick Galbraith, Contributor
Patrick Galbraith

In The Gleaner article of October 21, 2015, my colleague, Everald Dewar, pleaded for help on behalf of taxpayers who have made innocent errors and mistakes. I, too, plea for leniency.

The current system of imposing interest and penalty on taxpayers is inflexible and unfair. It presupposes that each type of offence by taxpayers is of the same magnitude and deserves the same treatment.

For example, a taxpayer who files a tax return and later discovers that he had made a mistake, and voluntarily pays the additional tax due, is treated the same as a taxpayer who deliberately underpaid his taxes and is assessed by the tax authority.

In the first instance, a mistake was made; in the second, tax evasion was committed. But no distinction is made in the imposition of charges. These are two circumstances the tax authorities should distinguish between and treat separately to encourage behaviour change among taxpayers. No doubt, if a taxpayer knows that he will be offered no leniency for disclosing a mistake, he will be tempted to conceal it.

 

fairness

To promote compliance and honesty among taxpayers, a taxpayer should feel a sense of fairness in how he is treated; therefore, the principle of proportionality must be adopted in addressing the matter of interest and penalty. In other words, the punishment must fit the crime.

The tax authority is not guided by any legal framework or any publicly known structure of amending charges. In cases where the authority accedes to the request of a taxpayer to review interest and penalty charges, the basis of making a decision is normally on 'ability to pay'.

This can hardly be a fair basis to encourage taxpayer to be compliant. Even though a taxpayer has the

ability to pay, why should he not obtain leniency on the basis that the mistake was not intentional and he is taking a voluntary action to remedy the situation?

 

small investment

Of course, there is the time value of money where the taxpayer would, unintentionally, benefit from the error by not paying all the tax when it was due. However, the loss in value of revenue is a small investment to foster compliance and good relationship.

Many mistakes are unintentionally made by taxpayers who have record-keeping challenges, no structured system of making accurate returns, and systems not able to produce correct figures. And indeed, mistakes are also made by accountants who prepare the returns for taxpayers.

While the onus is on the taxpayer to file accurate returns, where there is unintentional error, interest and penalty charges could be suspended and the taxpayer educated and advised of how to get his house in order to encourage future compliance. If he fails to comply within a certain period, the suspended charges could become payable.

The UK Finance Act of 2007 demonstrates how a legislation can be used to promote fairness in the imposition of financial penalty. The legislation outlines the use of a range of financial penalties based on the action of the taxpayer and nature of the error, resulting in the inaccurate payment of tax. The act gives Her Majesty Revenue and Customs (HMRC) the flexibility to reduce, suspend or cancel penalty for a mistake made despite reasonable care, to 100 per cent penalty for deliberate and concealed inaccuracies.

Where a person who would otherwise be liable has made an unprompted disclosure, HMRC may reduce, suspend or cancel the penalty based on the quality of the disclosure.

Likewise, by the Government

establishing a legal framework of classifying the nature of the offences and taxpayers' actions in categories,

the Jamaican tax authorities can objectively address mistakes and tax evasion separately. Offending taxpayers would know exactly which category they are in and what action to expect from the tax authority.

This approach would generate a level of certainty and fairness in addressing interest and penalty charges, which taxpayers would appreciate, and would make them more inclined to report a mistake resulting in additional tax.

- Patrick Galbraith is director of taxation, DGS Chartered Accountants and Business Advisors.Email feedback to columns@gleanerjm.com and pgalbraith@dgsja.com.