Lifestyle audit has been a subject of discussions in our country in the last few years; a discussion recently heightened by President Uhuru Kenyatta’s declaration of war on corruption. The declaration has led to an unprecedented number of high profile public officials being charged with corruption related offences.
Lifestyle audit is an investigation of a person’s living standards, which include assets owned, savings and their expenses compared to known income.
The more common parlance used in tax investigations is ‘means test’ which is a way of ascertaining whether reported incomes over a period is sufficient to cover the person’s living expenses and other known payments.
Vetting of public officials and lifestyle audits have been on the cards since July 2011 when the new EACC Act was discussed. Despite this, no audits of wide reach and effect have taken place to date.
Ironically, the governor who pioneered Memorandum of Understanding (MOU) in 2013 with EACC on lifestyle audit of county staff to weed out corrupt employees is currently in a protracted tussle with the same EACC over allegation of corruption and misuse of office. At the MOU signing ceremony, EACC said that the outcome of the audit for the county was going to be used as a template to be replicated in the other 46 counties.
For avoidance of doubt, lifestyle audit to detect corruption and fraud, including tax evasion is not the preserve of public officials, but affects all citizenry who are bound to adhere to the rule of law. It is only that public officials occupy a unique place in society since they are entrusted with taxpayers’ money and therefore bear heavier duty to safeguard it.
Tax statutes, more so, of the income tax types, if enforced properly, are powerful tools for taming criminals by taxing them on the proceeds so that the taxpayers can get back a slice of ill-gotten wealth. The cases narrated below go to show this importance. Al Capone, a notorious head of a criminal enterprise was jailed using tax laws even though the crimes he was accused of included murder, extortion and bootlegging.
A book about the world’s greatest unresolved crimes by Roger Boar and Nigel Blundell narrates how in 1971, a mystery hijacker named D.B. Cooper got away with $200,000 in ransom after an airplane hijack. The Federal Bureau of Investigations (FBI) closed the file due to inability to resolve the crime and limitation of action statute.
However, the tax file remains open forever according to Inland Revenue Services (IRS). In fact, IRS indicated that there is no limitation of action with regard to tax evasion/fraud and that the tax due from the man had exceeded the ‘principal’ amount by 50 per cent on top of which a 10-year jail term awaits him for failing to file income tax returns. IRS said they tax illegal money just as they tax legal money.
The inapplicability of limitation of action statutes with regard to taxes is also echoed in our tax legislation. The Tax Procedures Act provides that where a taxpayer fails to submit tax returns as required or the commissioner disputes the filed returns, he has the powers to issue default or amended assessment within 5 years following the last date of the reporting period to which the assessment relates.
However, the restriction to 5 years does not apply in case of gross or willful neglect, evasion or fraud by a taxpayer. This means that a tax investigation can go back 20 years as long as there is suspicion of fraud or evasion.
Media is replete with individuals who, in their craving for validation, flaunt their wealth. A flamboyant man, now deceased, was a while back quoted in a media interview on how he ordered his family’s breakfast and how he took laundry to a top hotel. Others have intimated how they consume top range whisky. Owners of ‘church enterprises’ have not been left out in flaunting God’s ‘blessings’ on them.
What these individuals should know is that the flaunting of their wealth if they were not legitimately earned, including paying the due taxes on them could easily reverse their rags to riches stories. A competent and honest tax official can easily unravel their shenanigans if their wealth falls within the purview of the taxing statutes.
The official can look into one’s assets to see how they were built over time in order to confirm that they were built out of taxed money, where applicable. The official can ask for details of houses, bank accounts, vehicles and other assets one owns.
Others items that can be queried are personal expenses including grocery bills, insurances, holiday expenses, club memberships, rents and schools fees.
Not to be left out are the philanthropic activities which even though are acts of benevolence could turn out to be source of tax troubles if they are being given out of untaxed income.
Mr Khalif is the proprietor of Tax Tracker. [email protected]
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