Dr. Noel Swanson

Read this scenario and tell me if you think it is fair:

Policeman stops a motorist and says, “Good morning, Sir”.

Motorist replies, “Good morning Officer, how can I help you?”

Policeman: “We believe you have broken a traffic law. We need you to prove to us that you haven’t.”

Motorist: “I assure you I haven’t. Which law do you think I have broken?”

Policeman, as he hands the motorist a big fat book of traffic laws, “One of these, Sir.”

Motorist: “And when do you think I broke one of these laws?”

Policeman: “Sometime in the past three years. So, as I said, we need you to prove you haven’t.”

Motorist: “How am I supposed to do that?”

Policeman: “Well, for a start, we need you to prove that you haven’t run through a red traffic light. Please supply us with the date and time of every traffic light that you have driven through last year. We will then check our cameras for those dates to see if you went through a red light. Then, when you have done that, please supply us with the details of every trip you took last year. We need date, time, exact locations, and the speed you were traveling. We believe that maybe you broke a speed limit.”

Motorist: “Goodness, That will take me months to compile. Who is going to pay for all this?”

Policeman: “You will, Sir. We are just doing our job trying to catch criminals.”

Now read this and decide on fairness:

Tax Officer: “Good morning, Mr. Businessman. We want do do an audit on your business.”

Businessman: “Good morning. Sure. Why is that?”

Tax Officer: “We believe you may have broken a tax law in the last three years.”

Businessman: “Really? I assure you I haven’t. All my books are up to date. Which law do you think I have broken?”

Tax Officer: “One of these, Sir” as he hands over a several volumes of tax law.

Businessman: “So you can’t identify which law you think I have broken? What makes you think I have?”

Tax Officer: “Just doing our job trying to catch criminals, Sir”

Businessman: “So how do I prove I haven’t?”

Tax Officer: “Well, for a start, you can send us details of every transaction your company made last year. Then we can go fishing to see if we can find anything.”

Businessman: “Goodness, that will cost me thousands in accounting fees. Who is going to pay for this?”

Tax Officer: “You will, Sir. Whether or not you prove to be guilty. Like I said, just doing our job trying to catch criminals”

How is it that in all aspects of law, EXCEPT in tax law, the accused is presumed innocent until proven guilty AND the burden of proof lies on the accuser?

In criminal law the state pays for the cost of policing the laws and investigating possible infractions. As a result they are careful about where they invest their time and money, and bring charges only if they are sure they can win.

In taxation, the victim pays for the cost of policing and investigating (an audit typically consumes huge amounts of time and money that could be better spent on actually running the business). Furthermore if, at the end, there are no infractions found, the tax man just walks away without any penalty for bringing a false accusation. In some cases the burden of the audit is so great that the business actually fails, putting innocent workers out of a job.

Is this fair or good for the country?

Absolutely not! Every audit is fundamentally a waste of time and money, and therefore a drain on the country’s economy. Of course, at times they are a necessary evil in order to catch real criminals. But they should be done with great regard to minimizing the cost and impact on the nation’s businesses.

So, what is the solution? As in criminal law, the burden of proof should lie with the tax man. That means the cost of the audit (investigation) should be borne by the tax man.

Of course, if an infraction is found, then the costs involved in the investigation should be paid by the defendant (the business). But, and it is a big BUT, in order to prevent frivolous charges and investigations, these costs  should be in proportion to the infraction.

For example, an audit is done at a cost of $50,000. At the end, the business is found to have underpaid taxes by $109.53 as a result of mis-categorizing a receipt. Should the business pay for the $50,000 audit? Absolutely not! Perhaps a penalty of 10x would be reasonable, in this case $1095.30. This turned out to have been a frivolous audit.

In another example, an audit is done, also at a cost of $50,000. In this case a serious case of fraud is uncovered, amounting to tens of thousands of dollars of unpaid taxes. Naturally, in this case, the penalties would be commensurate and, perhaps, criminal charges would be laid. This was a totally appropriate audit.

Setting it up this way would have a number of beneficial effects for the country:

1) The true cost to the country of enforcing tax compliance would become immediately obvious. Indeed, this would be the immediate objection from the tax authorities and the government – that switching to this system would be hugely expensive and the people would not stand for it. But the People are already paying for it: anything that increases the cost of doing business ultimately gets passed on to the public through higher consumer prices, lower wages, and reduced income and corporate tax revenues, decreased international competitiveness, and even lost jobs.

Isn’t it time for all this expense to become transparent? This would provide a great incentive to simplify the tax laws, making it easier for businesses to comply, and for authorities to police.

2) The tax office would, like the police, have to be careful in how they allocate their resources, focusing on the most important and most likely cases of fraud. Instead of targeting innocent businesses, attention would be focused on those that look the most suspicious.

3) The number of needless audits would decrease. This can only be beneficial to the country as a whole.

The role of government is to provide the highest overall benefit for its population. Tax audits are a serious hidden cost that do immeasurable harm to businesses, and thus to the country as a whole, with unproven benefits.

It is time that this system became more transparent, more fair and, ultimately of greater service and benefit to the people.

Agree? Then leave a comment below and copy and send this article (or a link to this page) to as many business owners – and other friends – as you can. And then send a copy to your local politician and ask him to take action.