Its Limitations

Although his results are insightful, there appears to be a number of limitations in his study. Devos’s study used investigations and material discrepancies from such investigations as the initial foundations of his findings. Firstly, Inland Revenue during those periods used an Output Model (see Appendix 4, which will be discussed in greater detail in Chapter 5) for the funding of Taxpayer Audit. 250 Secondly, it is essential to understand how Inland Revenue actually selects investigations. Investigations can result from computer based software programs using a score or rating determined by the risk associated with each industry and comparisons of the financial accounts ratios.251 As an example, if the Industry is cash based, the level of the Industries Gross Percentage is one indicator used to determine whether an investigation is to commence.252 In respect of GST refunds, they are screened by an investigator to detect potential fraud.253 Inland Revenue also receives anonymous information about taxpayers who attempts to cheat the Revenue by not paying the correct amount of tax. Again, an experienced investigator will then review the anonymous information about a taxpayer and will select only those cases with a high risk of discrepancies.254 Investigations also arose from knowledge of an industry and/or experienced gained from years as an investigator.

In summary, given the requirements of the Output Agreement and the method of selection of investigations, it is rational to expect that material discrepancies will arise each year. Given these conclusions it was to be expected that Devos would conclude that the rate of taxpayer non-compliance each year would be unacceptable.

250 _{The Output Model is an agreement reached between the Minister of Revenue and the Commissioner of} Inland Revenue for funding of their operations. Refer to Appendix 4.

251 _{M Nel, “An Analysis of the Compliance Approach used by Revenue Authorities with Specific Reference} to Case Selection and Risk Profiling”. (A Thesis submitted in fulfilment of the requirements for the degree of Masters in Commerce Taxation 2004 Rhodes University South Africa) p 35-36 available at eprints.ru.ac.za/964 (as at 30 June 2010).

252 _{Gross percentage is accounting formulae of Gross Sales Less Cost of Goods sold.} 253 _{See n 251, pp 29-30.}

254 _{Controller and Auditor-General Inland Revenue Department: Performance of Taxpayer Audit (July 2003),} p 47.

Devos made the point that even with the introduction of the penalty regime the level of non-compliance is still high. However, he failed to consider the implications in the change in Taxpayer Audit which occurred in this period and the findings of the Audit Office review of Inland Revenue Audit.255 Penal tax is imposed under the provisions of section 420 of the Income Tax Act 1976 when the Commissioner has discretion to impose (subject to a case stated appeal to the Taxation Review Authority) a penalty of up to 300% of the deficient tax.

Figure 4.2256 sets out the penal tax imposed from 1983 – 1997.

The Audit Office Report of November 1987 found significant shortcomings in the application of penal tax.257 As shown in Figure 4.2 Inland Revenue imposition of penal tax began to climb significantly after that Audit Office Report in 1990 and then from 1991 to 1994. Interesting questions could be raised at this stage. Was the subsequent increase in the imposition of penal tax a consequent of the report? Was the change in Taxpayer Audit

       255

 See n 39, p 32. 

256 _{Inland Revenue Department Annual Reports 1983 – 1997.}  257 _{See n 39, p 32.} 0 1000 2000 3000 4000 5000 6000 $

Figure 4.2 Penal tax imposed from 1985 - 1997.

Taxpayers

structure an influence on the increase in penal tax imposed? As a consequent, had Inland Revenue increased its focus on tax evasion, and adopted a more aggressive approach in respect of material discrepancies due to this report?

Although one can agree with the concept that monetary penalties alone will not diminish non-compliance, what Devos’s failed to question and explain is what is a material discrepancy? In fact, Inland Revenue has not in any of its Annual Reports during Devos’s study defined this term. As shown in the Inland Revenue Statistics (see Chapter 5 Figure 5.1) tax discrepancies each year continue to grow. Was this continual growth due to the requirement to obtain budgetary and material discrepancy often in excess of 45% of major investigation cases?258

Devos’s study dealt exclusively with the prosecution of taxpayers for breaches of the Inland Revenue Acts and those cases that the Department considered that an offence under the Crimes Act 1961 had been committed. One has to remember that the decision to prosecute is discretionary which brings with it the elements of evidential issues.259 Also, the decision to prosecute may be different for each Regional Office. As an example, the Regional Office dealing with the Horticultural Industry would have a higher rate of prosecutions given the location of the Kiwifruit Industry. Various offences such as failure to furnish returns are subject only to the legal standard of strict liability and it is the discretion of the Courts to impose a custodial sentence.260

In addition, Devos’s study did not show which areas a material discrepancy were ascertained. This distinction is important as since 1996, Inland Revenue (see Appendix 5) has set out in its Annual reports and various other publications the areas of audit focus.261 If the material discrepancies are primarily centred on the same areas such as the cash

258 _{Inland Revenue Department Annual Report 2002, p 95.}

259 _{Evidential Issues include the quality of evidence, the quality of investigation work papers, and the ability} of the officer’s to create a case for a successful prosecution.

260 _{Strict liability is a legal concept that does not require mens rea – simply failing to furnish a tax return is an} offence. Section 143 of the Tax Administration Act 1994 refers.

economy that the Inland Revenue was targeting, then the increase may indicate a more successful Inland Revenue Compliance Strategy.

Finally, Devos also reflected on the Court’s approach to custodial as opposed to monetary penalties. The number of convictions does not necessarily indicate whether sanctions had an impact upon taxpayer compliance, as it is possible that the impression of the Courts’ preference is for monetary penalties.