Working the Enquiry: Claims of Non Taxable Sources: Testing Explanations
The circumstances in which such claims are made will need to be taken into account. They are often advanced as an explanation once you have discovered apparent understatements, rather than presented earlier before anything appears to be amiss. You should not accept such claims unless you are satisfied that they are correct.
question the taxpayer in person to extract all available information about what is alleged
- Are there inconsistencies in what is alleged?
- Are there inconsistencies in what is being said?
- Is there a lack of authentic detail?
examine any documentary evidence which the taxpayer produces
- Does it appear to be genuine?
- Even if genuine is it an explanation for all the alleged deficiencies?
question any third parties whom the taxpayer claims can verify the story EM2054.
- Do you believe they are telling the truth?
- Have they any vested interest?
- Is their evidence merely circumstantial, and does it validate the whole of the claim?
Experience has shown that the majority of such claims are false and are withdrawn, or at least not persisted in, when seriously challenged. It is expected that the tribunal will reject such claims if pursued to a hearing. Except, where there is clear and irrefutable evidence to support the taxpayer’s contentions, any claim of this nature should be firmly resisted.
When considering the quality of what the taxpayer is telling you, you should have regard to what you have learnt about them during the course of the enquiry.
- Has the taxpayer been truthful and co-operative so far?
- What are the known omissions from the returns?
- What other evidence do you have for understatement of profits?
- Does the claim seem credible in itself and as an explanation for the alleged deficiencies or introductions?
For instance, if a taxpayer has told you that he or she banks all surplus business monies for fear of robbery, would he or she really accumulate large sums of cash at home? Could occasional large betting wins fund both further betting and a consistent level for living expenses?
In short, do you believe the taxpayer? EM2056. If you do decide that you can accept this claim, you must not inform the taxpayer until your Compliance Manager has been given the chance to review the case fully EM2057.
Where any disputes arise, or you reach an impasse, you should consider whether Alternative Dispute Resolution (ADR) may help you and the taxpayer resolve these. See the ADR web pages for guidance about ADR.