Why tax comes after you?

Self assessment system (SAS) for partnership and individuals is with us and indeed has been with us since 2004. The objective is to infuse a practice of voluntary compliance by taxpayers while at the same time reducing the workload of the Inland Revenue Board (IRB). In the accountancy world, accountants were anticipating the change with some excitement and impact.

This has the consequential effect of shifting the responsibility of determining the taxpayer's tax liability from the IRB to the taxpayer. Hence tax audits which would be a routine activity of the IRB, have become a feature of SAS.

Together with tax audits, comes penalty of almost 60% on top of payable tax for understatement or escape of income if discovered during an audit.

For those who get chosen for an audit, possible penalties may just be one expense. Accountancy cost for the redresses or remedies will not come cheap if they are likely to develop into a protracted detailed investigation.

During this two years, there have been cases of tax audits. Being selected for an audit does not in any way indicate that you have committed an offence. But in most cases, it has eventually turned into a probe.

We may well be wondering how we coped with our previous archaic and imbalance system. In the meantime, the changeover will probably be painful for the majority of taxpayers.

Why a taxpayer is picked for investigation? This could be involved with insufficient record keeping or due to one or more of the following reasons:-

• Charge out of expenses which is not related to the business.
• The obvious fluctuation of stock figures in the balance sheet.
• The margin of the gross profit is significantly fluctuated.
• Some items of expenses appear too huge to be factual.
• The conspicuous absence of expenses distinguished from the conventional items.
• Creditors appear to be too large in amount to be true.
• There is an outstanding substantial amount of amount owing to directors.
• The amount of equity is overturned.
• Drawings account is insubstantial in amount to be supported the taxpayer's financial commitments.
• There is a blazing purchase of expensive cars and houses.
• There is an extensive and expensive renovation to residential house.
• Personal's total net worth is not sustainable by the total apparent income over a period of time.
• A taxpayer with a very high public profiles.
• A company suddenly goes listing with bad tax background.
• A particular trade is to be investigated and the taxpayer happens to belong to that trade.
• Informer's report to IRB.

Reacting to these abnormal entries could present a boring test for the accountancy profession.