by Jack Moore, C.A.
This is a fairy tale about the dreaded income tax department.
In days gone by, after a taxpayer had filed the necessary financial information
which was used to compute the taxable income and income tax of the taxpayer,
a phone call or letter sometimes arrived as a precursor to a visit by the
income tax department auditor. The system, generally, was for the department
to review the records of all taxpayers on a cyclical basis. Taxes were,
and still are, self determined by the taxpayer rather than the ancient method
of meeting with a local government official (the tax collector) and determining
a mutually satisfactory amount whilst quaffing a few libations, thereby
doing the deal more calmly. The exercise was usually painless and even educational.
Times have changed.
Today there are far more taxpayers, both personal and corporate. Many individuals
are either in business as a proprietor or partner. Taxes are far more onerous
than before and represent a much more significant expense of doing business.
The taxpayer and/or his advisors know best if an expenditure was laid out
to earn income or was of a personal (non-business) or capital (fixed asset)
nature. It is the job of the tax auditor to dispute that which the taxpayer
knows best.
There are two main types of taxpayers: large and small. There are two main
levels of tax auditors: those who do large and those who don't. We will
deal with those who don't.
The cyclical system has pretty well gone by the wayside. Since the advent
of computers, the data reported by the taxpayer is recorded in such a fashion
that comparisons of expenses by years and by categories are possible, thereby
triggering a closer examination of the information provided. This may be
done in the office of the tax auditor (a desk assessment or review). It
can result in a request for information which can be done by telephone or
letter. The ultimate outcome is for the tax auditor to arrange for either
a visit to you or a visit from you. In either case, the happening is not
going to be fun, and it will likely cost you more income tax or advisor's
fees. There are some steps to take at this point which may mitigate your
downside.
The tax auditor may say things to you like "it is in the Act"
and "it is in the Bulletins" and "that is not allowed"
and "you must have a receipt for everything". The dialogue goes
only one way. His major function is to leave you with an increase in your
taxes. He is expected to bring to your attention any errors which would
result in you getting a refund. It doesn't happen very often!
If it is possible, arrange to have the tax auditor come to your place of
business. They get paid no matter where they work, while you may not get
paid while visiting them. Never send your vouchers to them for examination.
If you must, then go with them. The process will take place faster if you
are there. Try not to answer questions during the review, but rather wait
until the end: most will get answered as time goes on.
Now for the most important piece of advice: LISTEN TO THE QUESTION, ANSWER
THE QUESTION, STOP TALKING, WAIT FOR THE NEXT QUESTION. Most taxpayers get
into trouble by saying too much, by answering the wrong question (didn't
understand it), and by making small talk which invariably turns into big
problems.
Now for another very important piece of advice: talk to your tax advisor
before talking to the tax auditor. If you don't have one, then think very
seriously about getting one. Some are very good, some are just good and
some are not good. Ask a successful friend or colleague, but not a person
who says that they never pay any tax. Those people are either stretching
the truth, dreadful in business (not earning a taxable profit) or cheat.
Keep asking until you find a real friend.
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