Guaranteeing Fair Tax InvestigationsTax administration in Korea has been improving impressively lately. Thanks to the computerization of tax affairs, taxpayers no longer have to submit as many documents as they used to. Tax officers are now more polite and less authoritative. Controversies persist, however, over the fairness of selecting individuals or businesses for tax investigations, and those chosen for an inquiry usually take it as their rotten luck. Tax investigations into large corporations are even viewed as political retaliatory actions.
The tax authorities seem to be making efforts to render the selection process more transparent by announcing the criteria and the reasons for an investigation. Stating the parameters of selection is not enough, however. If taxpayers' rights are to be fully protected, the law has to plainly state their rights to file a protest against the investigation if they object to the stated reasons.
Under the Framework Act on National Taxes, all tax returns filed by taxpayers are presumed to be truthful, unless there is clear evidence to the contrary, such as data pointing to deliberate omission or errors in the entries on the tax return, or when a taxpayer fails to comply with his or her obligation to taxation, when there is specific information about tax evasion or when a tax return is deemed untruthful compared to the criteria set by the commissioner of the National Tax Service. The law also makes it possible for tax inspectors to conduct investigations anytime, to take sample tax surveys or to verify the truth of self-assessment tax returns, since assuming their truthfulness does not necessarily make them so.
The law allows tax inspectors to question taxpayers or investigate their account books and documents when it is essential to do their jobs. This regulation is necessary to ensure taxpayers' execution of their duties to pay taxes, but it can also lead to tax officers' abuse of their statutory powers, which in turn sets off the question of fairness in selecting those to be subject to tax investigations.
The issue of fair selection will not rise if the taxpayers are chosen on a random basis by the computer for an inquiry. But if the investigations target a particular business or individual for a detailed probe or special investigations, they are not likely to comply without objections, unless the investigations are based on clear and convincing reasons.
Under the current law, the businesses or individuals selected for investigations receive a written notice in advance. But the notice only lists the types of investigations, such as general, regular, detailed or special, without stating specific reasons for the investigation. Taxpayers can only react negatively and become anxious if the notice does not inform them of the reasons for the impending investigation. The advance notice for tax investigations, therefore, has to give clear reasons for being selected as a target if the taxpayer is to comply with the investigation without protest and to have faith in the tax authorities. It can also motivate taxpayers to file truthful tax returns.
The businesses chosen for an investigation usually suffer great losses, not only in terms of time, but also from financial damage caused by a compromised external image and severe disruption in their business. The smaller companies where the company president has to handle every affair by himself are especially vulnerable. The emotional and mental damages taxpayers suffer can be particularly severe if they come under investigations due to insufficient or erroneous information.
We need the enactment of laws to redeem taxpayers liable to suffer from both tangible and intangible types of damages from an investigation that takes place over unfair reasons. In short, the Framework Act on National Taxes has to secure a system that allows taxpayers to lodge a protest against what they believe to be unfair reasons for a tax investigation so that the legitimacy of the stated reasons can be ascertained by law. Such a system would not only guarantee the lawful rights of taxpayers but also motivate tax authorities to exercise greater caution in selecting the targets for investigations and help make tax administration more transparent.
The current law states that the advance notice for a tax investigation should be given seven days before the investigation, but this is too short a notice. It should be given much earlier and the law should be also changed to allow taxpayers to file objections when necessary.
It is an important duty of tax authorities to investigate the truthfulness of tax returns and verify whether people are paying their taxes. Taxpayers should also comply willingly with a tax inquiry, in order to eliminate distrust and unnecessary friction with the tax authorities. If this is to happen, the tax authorities have to give specific reasons for conducting an investigation in the advance notice and prove that the selection process is based on fair and objective standards. At the same time, there must be a legal system that protects the rights of taxpayers by allowing them to lodge a protest against unfair tax investigations. The systemic improvements will help to make tax administration more transparent and reliable.