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The taxman’s power needs to be balanced against taxpayers’ rights

05 September 2016   (0 Comments)
Posted by: Author: Amanda Visser
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Author: Amanda Visser (BDlive)

The vast majority of taxpayers are willing to comply with the tax laws; and there are many who are willing but not able, US taxpayer advocate Nina Olson wrote in a statement to the House of Representatives earlier this year.

It could be because of the "astonishing complexity" of the tax law. It could be because they have suffered some devastating financial, medical, or personal event.

"My point is, rather than designing tax administration around the small minority of taxpayers who are deliberately evading payment of tax, we should design our rules and procedures to make it easier and clearer for the willing taxpayers to comply," Olson says.

"The IRS (the US Internal Revenue Service) will still have its examination, collection, and criminal investigation powers to address the wilfully noncompliant. But those activities should not be the driver of the agency, as they are today," she argues.

SA is no different. The tax laws are complex, tax education is not up to standard and there is the issue of suspicion and mistrust between taxpayers and the South African Revenue Service (SARS).

Patricia Williams, partner at law firm Bowman Gilfillan, says taxpayers have the right to fair administrative action, which encompasses a wide range of rights.

In practice, though, these rights are not "generally accessible", mainly because SARS’s own complaints system is ineffective, the tax ombud is largely "toothless", and a taxpayer can take a matter to court but this is both expensive and time-consuming, she says.

SARS has extremely broad powers to enforce the tax law and collect taxes from taxpayers, she says. The Tax Administration Act has provided taxpayers with some rights to advance notice before many of these powers are executed.

But the point remains: SARS is extremely powerful.

This issue, the balance of SARS’s power against taxpayers’ rights, will be raised during the annual Tax Indaba in Midrand in the second week of September.

Keith Engel, CEO of the South African Institute of Tax Professionals (SAIT), says the tax administration process is a mixed picture. Many problems and "misunderstandings" exist on both sides.

"However, there are also pockets of improvement, with the tax ombud being a much more successful venture than many expected," he says.

"Proposed legislation to broaden the powers of the tax ombud implicitly recognises this success. The issue is whether the tax ombud will get the full freedom of action it deserves."

Sibusiso Thungo, tax manager at the South African Institute of Professional Accountants (SAIPA) and a former SARS official, says many of the officials with whom he deals take pride in their work.

"This demonstrates an understanding of service excellence and SARS’s commitment to improve its service delivery."

But he does note a disconnect between the powers SARS has to enforce the law and its responsibility not to infringe taxpayers’ constitutional and administrative rights.

He says the tax ombud’s office plays a vital role in keeping SARS on its toes. The proposed widening of the ombud’s mandate will be important.

"Over the years there have been some allegations that SARS usually withhold refunds especially towards its financial year-end. If these allegations are true, this practice will undermine taxpayers’ rights. In addition, it is also unconstitutional and unjust," says Thungo.

SARS spokesman Sandile Memela says there is a misconception about tax refunds with many South Africans, who are not always eligible to pay tax, approaching a SARS branch for tax registration.

Unfortunately, tax fraud is always a challenge during tax season. Frauds prey on taxpayers through scams such as identity and profile theft, as well as third parties posing as tax practitioners who promise taxpayers refunds.

"When taxpayers are aggrieved by an assessment or not satisfied with a decision taken by SARS, if the decision is subject to objection and appeal, they have a right to dispute the assessment or decision," says Memela.

The Tax Administration Act provides the legal framework for these disputes across all tax types found in the various tax acts, excluding the customs and excise Acts.

Memela says tax appeals can be heard by either the tax board or tax court, and then as a final resort there is the ombud.

But Williams says the powers of the Ombud are very limited.

She says the office should have similar powers to the Tax Advocate in the US, enabling it to issue taxpayer assistance orders that are binding in situations where this is justified by the urgency and the need of the taxpayer.

The ombud can make recommendations but these are not binding on SARS or the taxpayer.

Williams says adherence to constitutional requirements such as acting with impartiality, fairness and without bias, and being accountable and transparent, is "frequently lacking".

One example of this is in the case of third-party tax collectors, where SARS appoints the bank or a debtor to pay the funds that are held or owed to the taxpayer to SARS instead.

In many instances third-party collectors are instructed not to notify the taxpayer when the money is paid to SARS, claiming taxpayer confidentiality.

"In truth, there is an exception to the secrecy provisions as regards providing the taxpayer with the taxpayer’s own information. This type of approach by SARS embodies the very opposite of transparency," says Williams.

There has been much said about the relationship between tax consultants and SARS and the suspicion and mistrust that is sometimes almost tangible.

Williams says a common problem is that certain tax practitioners treat SARS officials in an arrogant and disrespectful manner, including "talking down" to them.

"If one can get past this (suspicion and mistrust), tax matters are far easier to resolve. One tool in getting past suspicion and mistrust, is properly identifying and disclosing the real facts, in the form of evidence."

Sharing evidence early on in a dispute with SARS can reduce mistrust and speed up resolution.

However, getting information does not always seem to be easy.

Williams says taxpayers are frustrated when they cannot get hold of a "real human being" to deal with their tax issue, or when there are notifications, audits or assessments on the electronic e-filing system which they were not aware of until it was too late.

Olson is on record saying automation is a major cause of taxpayer issues in the US. It may improve the productivity of tax systems, but it also results in problems, and human intervention is necessary to resolve issues.

According to Thungo, there is still a need for tax education and tax awareness, especially for ordinary taxpayers and small businesses.

"This, however, cannot be achieved by SARS alone, other players such as the Department for Small Business Development, the Department of Trade and Industry and bodies like SAIPA and SAIT also have a role to play," he says.

Williams suggests a taxpayer bill of rights, similar to that of the US. It groups the existing rights in the tax code into ten fundamental rights, and makes them clear, understandable and accessible.

Williams says the current internal SARS complaints system is completely ineffective, and unfairly delays taxpayers’ access to proper assistance.

"This should either be revised considerably, in such a manner that there is transparency and accountability for the decisions reached during the complaints process, or it should be abandoned, with taxpayers having direct access to the tax ombud or court," Williams suggests.

She says there is room in our law to hold public officials personally liable for the costs of litigation, where they have acted unfairly and unreasonably.

"Taxpayers should ask courts to hold SARS officials personally liable in these types of situations. A few examples of the courts holding SARS officials accountable for their actions are likely to significantly increase the fairness and reasonableness of SARS’s behaviour."

She says the tax base has to be broadened through audit and enforcement action so that tax-compliant taxpayers are not unfairly burdened.

"SARS needs access to more tax and legal skills, both internally and externally…. Highly skilled professionals have no need for heavy-handed behaviour, and can improve tax collections without threatening taxpayer rights," she says.

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Section 240A of the Tax Administration Act, 2011 (as amended) requires that all tax practitioners register with a recognized controlling body before 1 July 2013. It is a criminal offense to not register with both a recognized controlling body and SARS.

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