Taxman’s eye on social media nudges compliance

Recent media reports that the Kenya Revenue Authority (KRA) would train its eyes on taxpayers displaying luxurious lifestyles on social media, but under-declare their income sparked a heated debate.

A section of Kenyans termed it a misplaced priority. Others were pessimistic about its success citing unspecified difficulties that would arise in implementing this method of enforcing tax compliance.

Based on the foregoing sentiments, there is misunderstanding of the move. Kenya’s tax regime is based on self-assessment by taxpayers. The regime is founded on honesty and trust where taxpayers are expected to voluntarily make disclosures of income to KRA. 

Although self-assessment is largely successful, there are still a few cases of non-compliance and which call for alternative tax administration mechanisms.

With proliferation of social media platforms where people share their ‘lavish’ lifestyles, many tax administrations globally have turned to conducting lifestyle audits for such taxpayers to determine tax compliance.

A lifestyle audit is a comparison of known income with standards of living to identify gaps and indicators that someone is living above their known means. A lifestyle audit requires collection of information from a number of sources including social media postings.

In the US, financial audits have been conducted by the Internal Revenue Service (IRS) for decades to close the gap on unreported and underreported income. Through the audits, IRS officials can tell whether income was missing from a tax return by matching the lifestyle of the taxpayer to the tax return.

In a 1999 article titled “Less reason to be afraid? The IRS’s New Approach to Financial Status Audits”, Philip Fink and Charles Gibson posited that the IRS audits evaluate the taxpayer from an economic point of view instead of focusing the audit on some narrow aspect or issue of tax consequence.

South Africa is leading in Africa on implementation of robust measures to monitor tax compliance through social media surveillance. The South Africa Revenue Service (SARS) has established a specialised unit to focus on investigations of high net worth individuals whose lifestyles do not match their income and tax compliance.

In a recent case of Commissioner for the South African Revenue Service vs Hamiltonn Holdings (Pty) Ltd and Others (2020/35696) [2021] ZAGPPHC 138 (1 March 2021), the Commissioner obtained orders to seize assets of businessman, Hamilton Ndlovu, when he posted and bragged about his high-end vehicles on social media.

The audit conducted by SARS showed extreme discrepancy between Ndlovu’s tax returns and his lifestyle.

The concept of use of social media to conduct lifestyle audits for purposes of tax compliance has been widely critiqued. In a 2021 article titled “#Audited: Social Media and Tax Enforcement”, Prof Michelle Lyon Drumbl argued that the use of social media mining might disproportionately harm low-income taxpayers as it would likely locate individuals who engage in bluster, targeting for scrutiny those who are loud, flashy, or indiscreet, even though those individuals’ tax compliance may be no better or worse than quiet individuals.

In a survey conducted on British social media users, more than 75 per cent of people admitted to lying about themselves on social media.

Despite this, digitalisation and rise of social media has changed the way we live and conduct business and taxation models have had to change to suit the new reality.

Tax is a constitutional obligation that is to be borne fairly by all people ensuring that no one pays a shilling more or a shilling less. The move by KRA to monitor social media postings is therefore a brilliant one.

-The writer is a digital strategist.