OPINION: In my previous article, I discussed late filing penalties, late payment penalties, and use of money interest rules. Today, I complete the discussion of the penalties and compliance regime by discussing shortfall penalties and criminal penalties, writes Murray McClennan in Taxing Times.
Shortfall penalties Shortfall penalties apply to most taxes and duties (the major exception being child support payments). A shortfall penalty is imposed as a percentage of a tax shortfall (an understatement of tax or overstatement of a loss); resulting from the actions of a taxpayer, such as filing an income tax return. There are five separate categories of shortfall penalty; each with its own specified rate of penalty. Not taking reasonable care: 20 per cent - this does not mean that perfect compliance is required, rather refers to the effort required commensurate with the reasonable person in the taxpayer's circumstances;
Taking an unacceptable tax position: 20 per cent - an unacceptable tax position is one that when viewed objectively fails to meet the standard of being "about as likely as not to be correct". That is, the position adopted is capable of being seriously considered by a court;
Gross carelessness: 40 per cent - this covers breaches that fall just short of the evasion category, but go beyond a lack of reasonable care. Generally, a taxpayer will have exhibited a high level of disregard for the consequences.
Taking an abusive tax position: 100 per cent - for having taken an unacceptable tax position, or entered into or acted in respect of arrangements or interpreted or applied tax laws with a dominant purpose of taking, or of supporting the taking of, tax positions that reduce or remove tax liabilities or give tax benefits; and
Evasion: 150 per cent - fraud, such as not returning cash sales. There can be some limits on the dollar amount and reduction in level of shortfall penalties for the first two categories. In addition, the level can be reduced by voluntary disclosure, either before or after receiving notification of an audit by the Inland Revenue Department, as well as for timing differences. Equally, the rate of shortfall penalty can be increased because of the taxpayer obstructing Inland Revenue.
There are also shortfall penalties for promoters of an arrangement that results in an abusive tax position. For example, if an adviser promotes a scheme that is subsequently held to be an avoidance arrangement the promoter will be subject to a shortfall penalty.
Criminal penalties Offences for which criminal penalties may be imposed include:
Not keeping proper records;
Not supplying information when requested; and
Knowingly committing specified acts or omissions relating to tax obligations and does so intending to evade tax or to obtain a refund or a tax payment. The tactics of not keeping business records or supplying relevant information can result in the imposition of penalties. The penalty for a first offence is up to $25,000 and the penalty for a second or subsequent offence is up to $50,000.
As the above and my previous article illustrate, the range of penalties is extensive. If you are concerned that your actions or failure to act may result in a penalty, you should take advice from an appropriate adviser.
» Murray McClennan is director of Tax Central Ltd, a specialist tax consulting firm.
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