Intensifying lifestyle audits a means to an end in detecting tax evasion in Zimbabwe?

It is trite to say that tax evasion is not only a problem in Zimbabwe but also in other countries. The twin devils, tax evasion and avoidance, are problems which seem to have defied solution and have bedevilled the Zimbabwe tax system since time immemorial. Tax evasion which is usually a precursor to corruption has a negative effect on the tax operating environment through reducing the compliance levels. Tax avoidance on the other hand involves action taken to lessen tax liability and maximize after-tax income, and this is considered legal. The main difference is that in the latter, there is deliberate illegal non-payment of taxes. Lifestyle audits can be a very important tool to detect undisclosed income and minimise tax evasion.

When anybody hides his/her income from the government and does not report the actual income to evade taxes, the hidden income then becomes black money. There are many other softer terms to denote the same thing, such as undisclosed income, unreported income, covered income. Black money is created in many ways with one of the most common being drug trafficking. Other illegal professions in which people engage in for black money creation are prostitution, human trafficking and smuggling to mention just but a few activities that are deemed as criminal offences in the eyes of law. In Zimbabwe, ZIMRA makes use of lifestyle audits to identify tax evaders and it keeps a running tab on the number of audits being conducted and their results.

Lifestyle audits, also known as lifestyle, checks or lifestyle monitoring are an accountability tool that can be used to detect and prevent tax evasion. Such audits are typically conducted when the visible lifestyle or standard of living of an individual appears to exceed their known income level. The detection of such discrepancies can raise red flags warranting closer inspection. In such instances, an assessment of the individual’s income, assets and investments can be undertaken to determine if such seemingly extravagant expenditures could have come from illicit gains. If the audit shows a mismatch between a person’s known income and assets compared to their lifestyle and spending patterns, then there is an increased risk that the person is deriving income that is not being disclosed for tax purposes. This might also point to the fact that the persons are engaging on illegal activities.

ZIMRA usually conducts its lifestyle audits through desk reviews of available information and/or field observation of the individual’s day-to-day life. Lifestyle questionnaires have also proven useful. Civil society and journalists can also play an important supporting role in the verification process.

A prognosis of the tax system in the country highlights prejudice to one class of people. The formally employed, formal businesses and a little on the informal sector are the group of taxpayers who engage in legal activities. Looking at it, none of these groups of people display wealthy lifestyles, but the country is amassed with elite group of people whose lifestyle involves driving latest editions of the expensive vehicle brands. There is no systematic process relating to wealth tax to make sure that those who have more pay significantly more taxes. There are also no systemic processes to track illegal activities and claiming fiscus from these before the law sees to it that these are put to halt. This means that the poor are now taking less home which contributes to the suffering of the majority. There is an urgent need for development of mechanisms for taxation of the wealthier in the society and not only focus on the formally employed and legal sources of income.

ZIMRA can intensify their lifestyle audits and use the whistle blower programme to nab tax offenders and smugglers. They can do an intensive lifestyle audit on some of the wealthier people. They have to produce their invoices on what goods or services they rendered, and this has to match the value of the acquired properties. They will also be checking if these people or their businesses were paying taxes.

People under investigation can go to the High Court to account for their wealth but failure to do so automatically results in seizure of their assets. This will not only improve the country’s fiscus, but also deter conducting of illegal activities which are the source of some of the social problems currently obtaining in the country such as drug abuse.

Adoption of a lifestyle audit is very noble move that aims to unearth undisclosed income and tax evasion practices that occur in Zimbabwe, however revenue departments need to train and consult with leading experts in forensic investigation, particularly in money laundering and financial auditors, to device modern tools and strategies to detect citizens who have red flags.

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