Introduction:
In developing economies, where societal expectations seem to exceed the actual deliverables provided by the government to the governed, there is an urgent demand for the government to rise to the occasion by ensuring that basic human needs and infrastructure are adequately provided. This is a testament to the much-talked-about good governance. Regrettably, the incidences of theft, embezzlement, fraud, bribery, corruption, and other forms of misdemeanours within the system have sadly become significant impediments to meeting these societal demands for good governance.
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It is in light of this expectation gap that a few individuals have devised loopholes within the system to either evade or avoid tax remittances. These sharp practices start with the incidence of “tax avoidance” before escalating to “tax evasion,” which likely benefits the taxpayer at the expense of the tax authorities. It is a known fact that individuals and corporate organisations, by nature, are often unwilling to properly file and pay taxes. This bad behavioural tendency paves the way for the societal cankerworm known as tax avoidance and tax evasion.
Tax evasion and avoidance examined:
Tax avoidance can be defined as the process of arranging one’s tax affairs in such a way that the taxpayer pays less tax than they would have ordinarily paid. In practical terms, it takes advantage of loopholes in the tax laws. Tax avoidance appears to be legal in the eyes of the law, though with negative implications. It is essential to record that avoidance of tax liability usually occurs when a taxpayer explores available loopholes in tax legislation to reduce their amount of tax liability due to the government.
On the other hand, tax evasion is a deliberate and willful act of dodging or reducing one’s tax liability. In practical terms, tax evasion takes the form of criminality in dodging or reducing tax liability due to the Inland Revenue Service. Evasion of tax is classified as an illegal action on the part of the taxpayer. Ironically, it may take the form of failure to file a return to the relevant tax authority, making false declarations, or failing to remit a tax liability due to the government.
Tax evasion and avoidance risk factors:
Tax evasion and avoidance risk factors consist of events, conditions, or circumstances that indicate an incentive or pressure to commit tax fraud. These factors include failure to file tax returns, deliberate under-reporting of revenue, falsification of accounting information, failure to pay taxes when due, weak governance structures, absence of internal control systems, abuse of tax reliefs and exemptions, improper disclosure of relevant information, inappropriate documentation procedures, use of tax haven policies, lack of transparency and accountability, and absence of a whistleblowing policy.
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Effects of tax evasion and avoidance:
As stated earlier, fraud is an ill wind that blows no one any good. Tax evasion and avoidance result in reduced government revenues, hinder economic decision-making, erode trust and public perception of governance, and stifle economic growth and development. Additionally, they lead to reduced government efficiency and a corresponding increase in corruption among perpetrators.
The position of forensic investigation in curbing tax evasion and avoidance
Forensic investigation, applicable to both civil and criminal cases, is defined as the application of specialised skills, knowledge, techniques, and expertise in investigative exercises. This can then be applied in collecting relevant investigative evidence, which will be analysed and reported in a prescribed manner admissible in a court of law for purposes of dispute resolution.
In today’s world, where illegal wealth acquisition is rampant, forensic investigation appears to be a solution to curbing this menace. Forensic investigations assist in the following ways: ascertaining the nature of the wrongful act, determining the exact amount by which the government was short-changed, identifying the parties involved, and establishing the motive behind the act. Often, tax evasion and avoidance are the result of collusion between two or more parties.
Forensic investigation also documents all noticed loopholes based on the control procedures established by the regulatory tax authority. Additionally, recommendations targeted at curbing tax evasion and avoidance are captured in the forensic investigation report. I commend the tax authorities and regulatory agencies that have embraced forensic investigation to curb tax evasion and avoidance. I am optimistic that those yet to adopt these principles will do so soon. The benefits far outweigh the challenges posed by the long legal battles in our courts.
In addition to adopting forensic investigation, the following measures should also be implemented: the enactment of anti-tax evasion and avoidance legislation, promoting ethical values across all levels, encouraging whistleblowing, sustaining good work ethics, promoting judicial reforms, proper record-keeping, and public enlightenment campaigns. Effective internal control systems, public awareness of the dangers of tax evasion, and risk assessment processes must also be promoted. Fair rewards for job performance and purposeful leadership mechanisms are essential, as is promoting accountability and transparency across all sectors.
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On a final note, sanctions and punitive measures should be imposed on defaulters or indicted individuals, including government officials, to serve as a deterrent to others.
Conclusion:
We must all join hands in the fight against tax evasion and avoidance, starting from our homes, professional groups, town unions, religious affiliations, and government quarters. This is the only way we can truly reap the benefits of good governance.
Kingsley Ndubueze Ayozie, KJW, FCTI, FCA, a public affairs analyst and chartered accountant, writes from Lagos.
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