Inadequate Tax Disclosure Comes from Lack of Knowledge –
MORE OFTEN THAN not, inadequate disclosure is the result of a lack of knowledge into a transaction on the part of the person compiling the tax return and not necessarily as a result of reluctance to fully disclose the transaction. This “lack of knowledge” could be overcome by having access to all the facts pertaining to a material transaction. It will ultimately lead to the person preparing the tax return being in a better position to complete the return, ensuring adequate disclosure and handling any queries. Accessibility to facts could be achieved by hands-on record keeping in the form of files containing all the documents in respect of a material transaction, i.e., agreements, memoranda, minutes of meetings, resolutions, opinions, and correspondence. A complete understanding of the facts will include interaction between the various role players in a transaction, the key decision makers, and the tax department.
Inadequate disclosure can also be as a result of a lack of understanding of the detail required when a particular transaction is disclosed. The question arises as to what constitutes adequate disclosure? How much information needs to be provided to the IRS before a transaction has been adequately disclosed? One would think that a taxpayer can accept that the duty rests on the IRS and its officials to ask the necessary questions and call for the necessary supporting documentation in order for them to unravel the finer details of a taxpayer’s affairs. This, however, is often not the case as the courts are reluctant to expect the IRS such a degree of diligence. In one South African tax case (ITC 1459) the meaning of “material facts” was interpreted by the court as follows: the court laid down a simple test to determine whether certain facts were material. It considered the information furnished subsequent to the tax authority’s inquiries regarding the present transaction and compared that information with the detail in the returns including their supporting documents. It was held that from the lack of detail provided in the return it was obvious that the IRS or its officer did not have all the material facts. It was the absence of those facts which led to the issue of the original assessments. In addition the court held that it is no answer to say that the tax authority should have been alerted by what it saw, or was able to see, in the return and accompanying documents. The question is whether the tax authority had all the material facts when it issued the original assessment. It does not matter that the tax authority’s ignorance was partly due to a failure to make inquiries before issuing the original assessment.
In another South African tax case (ITC 1594) it was held that an obligation rests upon a taxpayer to render an accurate and full return on which he can be assessed and not to do so in a vague or ambiguous manner casting the onus upon the tax authority to elicit the complete picture by a series of queries.