Money Matter

Cooperative attitude can reduce tax-related penalties

Article exclusively contributed by Asia Progress (Tax Division)

As set out in previous articles, the Inland Revenue Department (IRD) undertook a review of all the accounting records of the company run by Mr Chan and came to certain conclusions.

The assessor found that the company regularly provided fringe benefits for staff, but had not reported these on the Employer's Return. Personal expenses, including the cost of home utilities and a domestic helper's salary, were incorrectly being claimed as business expenses, and a separate consultancy firm had been set up to disguise an employer-employee relationship. Private expenses were being claimed under the consultancy, so as to reduce the overall tax liability. These discoveries were to form the basis of settlement and the penalty to be imposed.

The assessor explained that under Sections 82 and 82A of the Inland Revenue Ordinance any person committing offences, which do not involve willful intent to evade tax, may have to pay monetary penalties in the form of additional tax. In general, the IRD imposes Section 82A penalties for irregularities in cases concerning profit tax, salaries tax, property tax and personal assessment. Mr Chan's case was assessed by the Field Audit team and was subject to a Section 82A penalty. The company's offences included the omission or understatement of income or profit and an incorrect claim for a deduction or allowance.

The assessor noted that the penalty imposed would depend on the nature of omission, the degree of cooperation and the length of time over which the offence had been committed. The table of penalties is as follows:

The assessor further explained that if a taxpayer showed intentional disregard for the law and adopted deliberate cover-up tactics, which involved the preparation of a false set of books, fictitious entries and multiple omissions over a long period of time, the level of penalty would fall under group (a).

However, less serious acts of omission resulting from recklessness, including gross negligence, would fall under group (b). Cases in which taxpayers had failed to exercise reasonable care and had not shown profits would come under group (c).

The assessor emphasised that these levels of penalty were for general guidance only. They could be adjusted up or down depending on specific circumstances. General factors taken into consideration were delays, the amount of tax involved, the reasons given for committing the offence, and the taxpayer's attitude.

Mr Chan was told the penalty could be reduced if he made a prompt proposal for settlement and showed a cooperative attitude, allowing things to be resolved more quickly. Otherwise, the IRD would determine the basis of any settlement, taking into account the amount of unpaid tax and the scale of penalties. If that happened, Mr Chan would have one month to appeal, but would also have to submit documents to support his objection.

After considering all the details and the documents on hand, Mr Chan promised to submit a settlement proposal within one month. As a taxpayer, he had learned that the best approach was to cooperate fully with the IRD's investigation process and that he could minimise the penalty by coming up with a detailed settlement proposal. He also resolved to ensure that his company's future accounting records and practices complied with the Inland Revenue Ordinance in all respects.

Q & A on tax-realted penalties
Q1 In general, Section 82A of the Inland Revenue Ordinance (IRO) will apply for which kind of cases?
A1 It will be imposed by the Inland Revenue Department in cases relating to profit, salaries and property tax, and in personal assessment cases.

Q2 Under what circumstances will a taxpayer be prosecuted under Section 82A of the IRO?
A2 Under section 82, the IRD will prosecute any person who willfully intends to evade or assist another person to evade tax by: 1. omitting from a return any sum which should be included
2. making any false statement or entry in any return
3. making any false statement in connection with a claim deduction or allowance
4. signing any untrue statement or return
5. giving a false answer to any request from the IRD
6. preparing and maintaining any false books and records
7. making use of any fraud to evade tax

Q3 How are penalties calculated based on the IRO scale of penalties?
A3 Using Mr Chan's case as an example, the total tax undercharged over the past seven years was HK$1 million. The penalty imposed was according to group (b) and the case involved incomplete or belated disclosure. With a maximum commercial restitution of 150 per cent, the penalty was HK$1.5 million and, together with the tax undercharge, the total tax and penalty was HK$2.5 million.

Taken from Career Times 12 August 2005
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Disclaimer: The opinions expressed in this article are those of the contributor

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