Sunday, 14 March 2010

A Consultant’s Guide to Tax Auditing. Part 1: How to Identify under-reported Income

We all know that in Greece, the under-reporting of income by individual workers such as lawyers, plastic surgeons and other worthy members of society is a chronic problem. Government efforts to date have yielded some interesting press accounts, for instance, of doctors in Kolonaki who declare less than EUR 30,000 per year. Unfortunately, I haven’t read of any practical steps since then.

I have a simpler way of implementing a tax audit. This is based on the fact that most unreported income is no longer stored under mattresses, but in bank accounts. The disparity between total bank deposits and income reported indicates that bank accounts are essentially operating as a repository for income which is not reported.

At present, national law prohibits the “opening” of a bank account, i.e. the sharing of information between the bank and the tax authorities, on financial holdings by individuals, without a court order. This is a major problem in the fight against tax evasion, and one of PASOK’s priorities should be to reverse this decision to make it easier to audit private accounts.

If this can be assured, then the audit method becomes easy. Audits can be run using the deposit account information of each bank branch, as follows:

Step 1: Request from each bank branch a list of the 1,000 largest personal accounts, in terms of cash flow (deposits and withdrawals), including the name, address, ID number and tax identification number (AFM) of the account holder.

Step 2: Cross-check the volume of incoming cash to total income declared in the annual tax declarations of these same individuals.

Step 3: If a disparity is detected, freeze their bank accounts until the account holders come in to their local tax office to justify the disparity.

Step 4: Tax the difference between income reported and income incurred at the prevailing tax rate, with the tax to be paid in 12-24 months installments, and the bank account freeze lifted only once this agreement has been signed, and the first payment has been made.

This relatively simple method removes the needs to visits to specific professions, and removes the risk that the members of the Hellenic Tax Authority “adjust” the results of the audit in exchange for bribes.

This is a data-based check, so it can be done quickly, and cannot be changed through the forgery of historical data.

This is also important, because it sends a clear signal to banks that they cannot continue to facilitate large-scale money-laundering and under-reporting of income. The role of even state banks in this area is endemic, and must be stopped.

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