Tax examination is a series of administrative acts to collect data related to taxation and investigate them by executing the rights of inquiry and inspection described in tax law in order to ascertain the facts whether they satisfy the necessary conditions of taxation.
Recently people demand for more accurate assessment of income as the burden of people has aggravated because of the increment of the national finance and investment to the public funds for economic restructuring and the development of the national pension and medical insurance system. As a result, the importance of tax examination is being extended
Tax Examination is one of the most important areas in Tax Administration. It is the final resort to guarantee the right of taxation of a government and equally important under either the Self Assessment System or the Government Assessment System.
In spite of the considerable amount of tax evasion, it has not been a serious social issue in Korea until now, because Korean government didn't have difficulty in securing tax revenue owing to the continuous high growth of national economy. It has been, however, criticized that the tax sources such as self-employed businessmen and high-income specialists are poorly managed. The unfairness of taxation between them and salaried workers who are called 'glass wallet' grows to be problematic.
These problems result from inefficiency of the structure of the tax administration, which was divided by tax item. It is especially inefficient for Tax Examination. The following details have been pointed out ; ① There was not an exclusive division to take charge of the tax examination in the district tax offices. Instead, the people who were in charge of the registers of taxpayers by tax items executed the tax examination as well. They managed the registers, instructed the self assessment of tax, processed data, and collected taxes at the same time. Therefore, the tax audit has not performed its function properly due to the burden of overwork, poor specialization, and close relationship with taxpayers; ② Integrated management on tax sources by person and by company was not carried out to verify whether they made honest tax returns or not. Various tax evasions were not tackled systematically and efficiently because the works of the tax examinations dispersed and overlapped between tax items. As a result, it created excessive cost of the fulfillment of tax obligation and tax administration; ③ The tax evasion was weakly punished because criminal investigation on it was poorly performed. Accordingly, the intentions to make unfaithful tax returns could not be prevented in advance.
The National Tax Service of Korea reshuffled its structure and system on September 1, 1999. It reformed the whole system of tax examination. It reorganized its system into the specialized organization by function instead of tax item and doubled the number of the personnel for tax examination.
Regardless of those efforts, however, various problems continue to be raised. It is hard to set up objective criteria to select subjects of audit. On one hand, the function of tax administration can not be applied strictly. On the other hand, whether it functions properly cannot be checked and evaluated for the lack of the systematic feedback of information and audit specialists.
Recently, the importance of tax examination on new tax sources such as international transactions and e-commerce transactions is increasingly emphasized. Furthermore, tax authority is urged to collect tax information systematically, build computer integrated management and application system, set up a specialized division for computer audit and raise specialists for tax examination.
This paper tries to figure out these problems and solutions in terms of four aspects of tax administration; legality, effectiveness, fairness, and democracy.
①For the legality of the tax examination, it deals with re-establishment of the strategies of the tax examination, legal complement related to the re-establishment, proper measures of selecting the subjects to audit and the process of the dispute resolution.
②For the effectiveness and fairness of the tax examination, the following topics were studied;
- severe deficiency of audit personnel facing the increasing demand for the tax audit;
- reorganization of audit system and personnel to cope with this problem;
- specialization of the audit personnel, especially the improvement of their capacity in international audit and computerized audit;
- establishment of the system of collecting tax information available for automatic verification of honest report on tax payment;
- necessity of sharing data related to tax payment among the governmental bodies.
③For the democracy of the tax examination, it proposes to introduce the concept of administrative procedure into the tax examination, simplify tax laws to raise the tax compliance and open tax information to the public.
In order to approach the most rational and realizable solutions to those problems, this paper studied operational realities of the tax examination in Korea, the previous research materials in this topic and cases of foreign countries. I also interviewed audit staffs in tax administration to collect broad opinion. In conclusion, the followings should be improved for the tax audit to be properly conducted in Korea.
First, new strategy on tax examination and legal complement should be re-established. The purpose of the tax examination is to encourage taxpayers to comply voluntarily with tax law and prevent his/her future tax evasion by verifying if their tax payment is appropriate and imposing post measures such as additional assessment and penalties on improper tax payment.
Therefore, the new strategy of the tax examination should focus on promoting taxpayers' voluntary compliance with newly established purpose of tax audit. National support for the justification of tax examination should be acquired by setting up an appropriate level of honest tax payment, starting from the areas in which the insincere tax payment prevails, and by publicizing it to taxpayers.
New strategy of tax examination should pursue the change of taxpayers mind as well as the correction of the insincere tax payment. It should be divided by short, middle, and long term strategies and the established purpose itself has to be modified with evaluation and feedback conducted by each term. In addition, the basic principles and procedures of tax examination need to be legislated. It will contribute to the credibility and fairness of tax examination.
Second, the taxpayers' rights and interests must be protected. The violation of taxpayers' rights caused by tax audit should be prevented in advance and corrected promptly by the tax authority itself. The preliminary protection of taxpayers' rights in a process of tax audit is more important than well-equiped dispute resolution
Third, the range of tax examination should be extended and its exactness should be improved until the whole society can take notice of its function. It is pointed out that the rate of tax examination in Korea is only one-tenth to one-hundredth of that of other industrialized countries. It turns out to be one of the principal causes that tempt people into tax evasion. Dishonest tax reports are not properly prevented in advance through tax examination. Criminal investigation on dishonest reports fails to be strict. The penalty against tax evasion is not severe enough. The sense of guilt of taxpayers over tax evasion is considerably low.
Therefore, it is required to raise the rate of tax examination to the level of the major industrialized countries such as the U.S. and Japan. Insincere tax payment is to be strongly and strictly punished according to its degree of severity. The related system has to be improved and publicly informed so that the same type of tax evasion could not recur in the future.
Fourth, reinforcement of tax audit manpower and the reshuffle of organization are required. The National Tax Service extended the division of tax audit, increased the personnel for audit and reorganized the tax administrative institution by functional organization. But it is not still enough considering the increasing amount of work of the tax administration and demands for tax audit.
Various researches conducted by specialized institutions came up with same recommendation. They suggested that the personnel for the tax examination should be increased from the current 5,000 persons. Together with the reinforcement of the audit personnel, the system of recruitment, training and management of personnel should focus on their specialization. An organization to take exclusive charge of the international and computer audit should be created and the effective adjustment of the audit function between the headquarters and the regional tax offices are required.
Fifth, a scientific and specialized tax examination is required. The tax examination is a measure to verify whether taxpayers make honest tax returns or not. It also plays a role to prevent their tax evasion. Accordingly, the audit policy of the tax authority has a great influence on the tax payers' behaviors.
In order to meet the purpose of tax audit, the research for the audit should be intensified. The accurate definition of the honest tax payment, its exact measurement, reflection of the measurement on the audit policy, feedback of the audit result, and the improvement of related system for the objective and exact execution of the audit are equally important.
The timing and efficiency of the audit for a specific type of tax evasion are to be secured through build-up of an integrated computer management system of tax information. Specialization of tax audit based on type and size of business should be established. Specific types of tax evasion should be programmed to audit by the 'Spot Check' according to the characteristics of the taxpayers.
In addition, in order to meet the rapid trends of the Informationalization of industries, the continuous reinforcement of the organization and manpower specialized in computer audit is essential not only in headquarters but also in regional tax offices.
Sixth, a systematic infrastructure for collection and application of tax information has to be built up to check honest tax report automatically.
The actualization of taxation level of self-employed businessmen and professionals, which is currently criticized, has to depend upon a systematic exposing system of tax information such as the enlargement of credit card use, rather than upon the excessive administrative authority to encourage honest tax report and tax examination.
In reality, many transactions occur without any invoice. There are forged tax invoice traders. Disguised member stores of credit cards prevail. In the current situation in which such abnormal tax information transfer exists, the Third Party Information Reporting System has to be extended for all the tax information to be submitted.
For this purpose, following measures need to be taken: ① by extending the foundation of giving and receiving regular receipts i) reduce the number of disguised simplified taxpayers through the reception of all the regular receipts in case of government expenditure and increase the transparency of execution of the budget ii ) extend the range of data collection to prove expenditures of the company iii) extend use of credit cards ② establish the system for non-profit organizations to submit tax information ③ largely extend computerized management of non-regular receipts such as admission tickets ④ establish an integrated system for collection and application of above-mentioned information
Seventh, establishment of an efficient audit system for the international transaction is required. Recently, the transaction types are increasingly complicated day by day. The volume of international trade is rapidly increasing and various financial derivatives are emerging. Furthermore, as the foreign-currency trade was wholly liberalized as of January 2001, a new system for controlling tax sources became necessary in order to completely prevent tax evasion which took advantage of international transactions.
For this purpose, followings are required: ① entire reorganization of the system for controlling tax sources by building up an infrastructure for tax information related to international transactions ② reinforcement of the specialized personnel and organization to cope with up-to-date international transactions such as transfer pricing, financial derivatives and e-commerce ③ reinforcement of the number of tax agents dispatched overseas to cover the major ten transaction countries in order to intensify the collection of tax information from foreign countries and intensification of prior observation.
Eighth, it is urgent to introduce the concept of the administrative procedure into the tax examination. The administrative procedure, based on the principle of legalism, is a means of efficient coordination between contradictory interests of the conflicting parties. Considering the fact that the tax examination is an important administrative action directly influencing the property rights of people, the concept of the administrative procedure has to be invited to all over the procedures and scope of the legal regulation of tax examination.
For this purpose, followings are required: ① systematic participation of the people in the stage to establish a strategic purpose of tax examination ② creation of the procedure regulation for the taxpayer's rights to express his/her opinion to be guaranteed at its maximum in the process of tax examination and substantial guarantee of the participation of a tax practitioner in all the process of tax audit ③ removal of the taxpayer's anxiety and protection of his/her rights through the invitation of an interim notice system of the audit contents in case of a long-term field audit ④ introduction of a discussion system and the adjustment of conflicting interests when terminating the tax examination.
Ninth, improvement of integrity and transparency in tax examination, readjustment of tax law and improvement of the method to calculate capital gains are required.
For clear and fair conduct of tax audit, followings are in need: ① improvement of the objectivity for selecting the subjects of tax examination ② drastic reduction of discretions in tax examination ③ audit based on reliable tax sources through the systematic support of the various tax information ④ strict control of and support for the examination officials
Furthermore, it is required that the convenience of tax payment should be improved by unifying tax laws which are now individually divided by tax items into a simple law. The convenience of people should be increased by simplifying the method to calculate the capital gains when calculating the capital gain tax caused by the transfer of the rights related to land, building, and real estate. Although the spirit of the tax law is principle of real taxation, the amount of tax has to be simply and clearly calculated based on the tax standard value which the government announce for the convenience of the tax payment, improvement of efficiency and transparency of the tax administration.
Tenth, there is an issue to open information related to the tax examination to the public. Fairness can not be realized without guaranteeing the rights of the people to know what the government is doing. In order to realize the fairness in taxation, the data of the tax administration should be open to the public as far as possible. The Publicity effect of inducing the honest tax payment may be expected through this access.
Accordingly, the tax administration is expected to make a good use of it as a method of obtaining the taxpayers' understanding of and cooperation with the tax administration. It is desirable for the tax authority to have a positive point of view to voluntarily open information to the public and then legislate a law related to the information access, rather than a passive point of view to open the information to the public only when it is requested to.
However, the information of individual taxpayers related to the tax examination, as the examples of foreign countries, has to be regarded as the constitutional rights to be protected.