Poor self-assessment of your taxes can lead to costly consequences

Apr 03, 2016 News

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By Kiana Wilburg
Collecting tax revenue usually follows a system called the self-assessment system.   This is where taxpayers

are allowed to compute their own tax charges yearly, relative to their income, allowances and reliefs.
As taxpayers are not usually well-informed on the intricacies of this and other similar matters, many depend on the services of tax preparers (usually accountants and attorneys) in helping them self-assess. The taxpayer is always responsible for the self-assessment information which is then supplied to the Guyana Revenue Authority (GRA).
In this article, the quirks of the self-assessment system will be examined and sharing his views on the subject in a recent interview was Chartered Accountant, Shawn Naughton.
He explained that if the amount of taxes self-assessed is under that which should have been legally assessed, then serious implications can ensue. Naughton said that the worst case scenario is that the taxpayer could be penalized and may even face criminal prosecution for bad self-assessment returns. He said that this would be the case, whether or not the taxpayer used a tax return preparer to help him prepare his self-assessment return.
The Chartered Accountant posited that effectively, the taxpayer could be defrauded by his return preparer, as he has to pay for the preparer’s services and may also have to pay for the preparer’s mistakes.
He said that revenue could also be lost to the country if the underassessment goes undetected.While it is not desirable to make return preparers responsible for their clients’ tax return information, Naughton asserted that these persons need to take responsibility for the quality of services they provide.
He highlighted that the ‘Offences’ section of Guyana’s Income Tax Act indicates that “every person without reasonable excuse who makes an incorrect return, makes an incorrect statement, or gives any incorrect information which is required by the Act, whether made on his own behalf or on behalf of another person shall, not withstanding anything to the contrary contained in the Act, be liable on summary conviction to a fine of G$15,000 and double the illegal tax benefit resulting from the infringement”.
It also states that where the illegal tax benefit results from any person knowingly making false statements or false representations, whether on his own behalf or on behalf another person, the penalty is G$15,000, three times the illegal tax benefit and imprisonment for up to six months.
Naughton pointed out that this can be significant especially to tax return preparers.
“As an example, if my accountant submits an incorrect return on my behalf without reasonable excuse and this can be proven he will be liable on conviction.   If the tax saved as a result of the incorrect return is G$1,000,000 the accountant would be penalized for G$2,000,000 plus G$15,000. This has nothing to do with my additional tax liability of G$1,000,000, which must still be paid by me,” he said.
The Chartered Accountant added that when an accountant is found to be involved like this, all of his clients are usually seen as high risk to the revenue authority, which usually leads to tax audits on all of his clients.
To support his case, he cited the case of Reginald B. Landrum, a USA tax return preparer, who pleaded guilty to one count of aiding in the preparation of false tax returns during a court hearing in 2013. Court records show that between 2006 and 2010 Landrum prepared and submitted to IRS 58 false tax returns using false information, resulting in larger tax refunds for his clients. The total tax loss associated with the 58 fraudulent tax returns Landrum prepared and filed was US$229,691. At sentencing, Landrum faced up to three years in prison and a US$250,000 fine. (https://www.justice.gov/usao-wdnc/pr/prison-time-and-stiff-penalties-await-tax-fraudsters-prosecutors-warn.)
Naughton said that false statements and/or false representations are presumed to have been knowingly made whenever a certain degree of negligence is revealed.   He stated that in his given example, if it could be proven that his accountant “knowingly” produced incorrect statements, as a result of the obvious level of his negligence, he would have been liable to G$30,000,000 plus G$150,000, in addition to having to serve jail time.
Naughton said that where on investigation it has been found that a taxpayer has been assessed less tax than he should have been, that taxpayer would have to pay the additional taxes. He said that if it is found that the return was not prepared in good faith then the taxpayer may be additionally penalized.
“Note that the taxpayer is usually prepared to testify against the preparer. This is because the taxpayer himself can face conviction if it cannot be proven that the preparer is the one responsible. Note that criminal proceedings against a preparer would need to engage the services of the Department or Chambers of  the Director of Public Prosecutions (DPP) here in Guyana,” expressed the Chartered Accountant.
He added, “If it is determined that a preparer represent a high risk of tax revenue loss, the relevant revenue agency would usually investigate the preparer by reviewing all returns prepared by him over the statutorily allowed period. After determining the number of false tax returns, tax revenue lost, and the adequacy of evidence against the preparer, the preparer’s file would be forwarded to the DPP (in the case of Guyana) for further review and ultimate prosecution.”
Naughton pointed out that unlike the USA; Guyana does not yet have a set of minimum standards, to be used by return preparers, as a guide when preparing clients returns.   He said, too, that Guyana does not have case law guidance in this area.   He opined that the level of negligence which is likely to result in liability is therefore unclear.
Naughton noted that the USA government began to regulate the work of tax return preparers fairly recently.  He said that prior to this, the work of tax return preparers was regulated by their professions (mainly, the American Institute of Certified Public Accountants – AICPA).
The Chartered Accountant said that in attempting to meet the due diligence standards set out by the US government tax return preparers should, in each case, ask:
1. What needs to be done in preparing the return for it to meet all relevant legal standards?
2. Do I have the requisite knowledge? (e.g. you should not handle cases involving offshore income if you have not been trained to handle such income in the returns);
3. Are all the facts available?
4. How would additional facts be obtained should there be such a need?
5. What laws need to be applied in preparing the return given the facts of the case? And;
6. What documents should be kept in the client’s file (used for, among other purposes, defending the preparers work).
Naughton said that the return preparer should always use professional judgment in deciding whether further enquiry is necessary.  In the case of Guyana, he said, where recordkeeping has historically been a problem, a return preparer would be advised to try to get missing information from alternative sources as far as possible.
The tax-expert said that revenue statistics for 2013 indicate that returns filed by self-employed taxpayers, for that year, reflected an average of G$98,000 tax revenue per taxpayer.   He said that that figure equates to a monthly average of G$8,000.
Naughton noted that this finding is significant, especially given that the average public servant pays more than G$8,000 in taxes per month.
He said, “We may effectively be operating a regressive tax system in Guyana (where taxpayers earning less pay more and those earning more pay less) while or intention is to operate a progressive system.   This situation needs to be monitored, year on year, as clearly the tax system is broken and needs to be fixed.”
The Chartered Accountant said that businesses paying minimal to no taxes on hefty profits have been a very topical issue in recent years, internationally. He said that such issues have even made the front pages of many news publications around the world.  The tax-expert noted that the working class can be found protesting the new phenomenon of having to pay greater taxes – relative to their income – than is paid by rich businesses and governments. He said that this negative publicity puts fully compliant and upstanding self-employed business persons under unnecessary pressure.   To avert this, Naughton said that these business persons may need to indicate that their entities are being responsible, by making public statements which shows their individual contributions to the nation’s tax revenue.
The Chartered Accountant is of the firm belief that Guyana needs the assistance of its tax returns preparers to help in the tax compliance fight if the contribution made by our self-employed taxpayer is to be improved.
He said that while the mentioned penalties are scary, competent return preparers are not likely to be caught by these.
Naughton said that it must be remembered that clients pay tax return preparers to ensure that their tax returns break no laws, while ensuring that they benefit from maximum reliefs and allowances allowed under the law.   No laws need to be broken to achieve this standard, Naughton emphasised.

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