Latest news with #TaxCourt
News24
4 days ago
- Business
- News24
A VAT crash course, courtesy of 9 000 gold coins
A recent Tax Court judgment stands as a cautionary tale, write Megan Langton and Mornay Bornmann. • For more financial news, go to the News24 Business front page. South African Revenue Service (SARS) Commissioner Edward Kieswetter has spelled it out again after the May 2025 Budget Speech: SARS is committed to collecting significantly more tax this year. He warned that SARS will use all legal instruments to address non-compliance. Despite best efforts to educate and forewarn South Africans, there are still taxpayers and their advisors who make very expensive mistakes when challenging SARS. For delinquent taxpayers who take the risk, the reality is that this Commissioner is not making idle threats. The recent Tax Court judgment in Southern Africa versus SARS stands as a cautionary tale. The taxpayer lost its claim for a R26.9 million input VAT refund. This matter relates to 9 000 gold coins, weighing 358 kg and a customs value of R157 million, brought into South Africa. The taxpayer is a clearing agent operating on behalf of a third party (BIV). The judgment reads that both the taxpayer and BIV 'were under the mistaken impression that no importation VAT was payable on the importation of the coins'. The taxpayer did not initially declare VAT on the import of the gold coins, which entered through OR Tambo International Airport from the UK. SARS informed the taxpayer that gold coins are not exempt from VAT and that a Voucher of Correction (VOC) was needed to bring VAT into account. The taxpayer then passed a VOC to declare VAT, which SARS accepted. SARS later deducted R26.9 million in VAT from the taxpayer's deferment account. The matter was further complicated when the gold coins were subsequently exported back to the UK. However, SARS refused to accept a second VOC, intended to retrospectively cancel the original customs declaration on which the VAT was paid. The court was not impressed Failing to convince SARS to issue a refund of the import VAT, the taxpayer took their plethora of arguments to the Tax Court. This included claims that: The taxpayer qualified as a representative taxpayer or responsible third party entitled to the refund under sections 154 and 158 of the Tax Administration Act; No valid importation had occurred because the goods were later exported; and The taxpayer was entitled to an output tax adjustment under section 21 of the VAT Act. The presiding officer was Judge J Bam of the High Court, Gauteng Division. In a well-written judgment, the taxpayer's arguments were squashed, with the Court stating: Through the life of this case, the Commissioner has consistently informed the applicant of its position. The Commissioner cannot be forced to make a refund of VAT contrary to the provisions of the VAT Act. The Judge agreed with SARS's rejection of the refund on the basis that the taxpayer was not the lawful importer. This was because it was BIV, not the taxpayer, who was reflected as the importer according to all supporting documentation, the VAT registration number, and the accompanying import forms. In one of the most damning lines of the judgment, the Court concluded: The appellant has no case against the respondent. It never had. The taxpayer was ordered to pay SARS's legal costs, including the costs of two counsel. Applying for a simple VAT ruling from SARS prior to import would have clarified whether the agent could claim input VAT, and under what circumstances. The taxpayer and BIV could have imported the gold coins with no VAT risk. What is quite striking is not how the case failed, but how easily it could have been avoided. Megan Langton is a tax attorney at Tax Consulting South Africa, and Mornay Bornmann, attorney for cross-border taxation at Tax Consulting South Africa. News24 encourages freedom of speech and the expression of diverse views. The views of columnists published on News24 are therefore their own and do not necessarily represent the views of News24.
IOL News
27-05-2025
- Business
- IOL News
Sars imposes R30 million tax bill on businessman: a caution for directors and shareholders
A recent Tax Court ruling highlights the importance of accurate record-keeping for directors and shareholders, as Sars imposes a staggering R30 million tax bill on a businessman due to undeclared loan accounts. Image: File photo. A recent Tax Court ruling in favour of the South African Revenue Service (Sars), which treated large loan account balances as undeclared income, serves as a warning to directors and shareholders to properly manage these accounts, maintain accurate records, and be prepared to explain the origin of funds when Sars flags loans as unexplained. The case of Taxpayer D v CSARS (IT 35476, 25 February 2025) dealt with the question of whether the taxpayer had satisfactorily explained a large sum reflected as a loan account owing to him in one of his wholly owned companies. The dispute was factual in nature, relating to the source of the funds for the 2014 to 2017 tax years. The case revealed a staggering tax exposure. Sars assessed the taxpayer on undeclared income of R37.1 million, as well as R20 million in undeclared interest income linked to shareholder loan accounts. This resulted in a total assessed amount of R57.1 million. Besides the tax obligation, the Court ruled that Taxpayer D also had to pay interest accrued, an understated penalty, and legal costs, including the cost of two counsel and an expert witness. Taxpayer D is a successful businessman who owns several companies. The structure is always the same, and he is the sole shareholder and director. According to Court papers, he earns income from his companies in the form of salaries, dividend income, and interest on shareholder loan accounts. Judge J. Manoim said in his judgment that the subject matter is the taxpayer's personal affairs, which are a product of how he used and accounted for his loan accounts in one of his companies. The manner in which the taxpayer operated the accounts of his companies gave rise to the case. The taxpayer used these loan accounts to fund other companies in his group. It was noted in the judgment that: 'When he did so, he would earn interest income from the company he lent the money to, which would then be credited to a loan account he had in the company. What added to the complexity was that he also, in his capacity, borrowed from some of his companies to fund another, whereafter he paid interest to his lending company. Generally, he paid a lower interest rate when he borrowed compared to the higher interest rate he received when he lent.' Sars said Taxpayer D gave inconsistent explanations for the cause of the unexplained increases in the balances of the loan accounts. The amounts were not supported by the income declared in Taxpayer D's returns. Key Legal Principle: Burden of Proof Rests with the Taxpayer Referring to these amounts, the judgment reads: 'The amounts are large. It called for an explanation from the taxpayer, but he did not come to give one [in the Tax Court].' The Court reaffirmed that the burden of proof lies squarely with the taxpayer, as set out in section 102(1) of the Tax Administration Act. In this case, not only did the taxpayer fail to discharge the burden of proof, but his failure to testify also suggests that if he did, his testimony would elicit facts unfavourable to his case. Therefore, the Court also ruled that drawing an adverse inference was warranted. The Court further held that it was not enough for Taxpayer D to rely on reconstructed figures or second-hand explanations, such as from his accountant who testified. Sars' expert witness with 40 years' experience discredited the evidence by Taxpayer D's accountant as 'guesswork', and described the reconstructed financial records as methodologically flawed. Without credible, firsthand explanations, Sars' assessments stood. What This Means for Business Owners and Shareholders This case illustrates Sars' readiness to assess both unexplained capital increases and accrued interest on shareholder loan accounts. Inadequate records, multiple accounts, or unclear audit trails can significantly increase tax exposure. Without clear, contemporaneous documentation, Sars may treat inflows as taxable income or impute interest. To mitigate these risks, business owners, directors, and shareholders must ensure their loan accounts are consistently reconciled and reflect legitimate economic activity. Take Proactive Steps Before Sars Flags Your Account Following the Budget Speech on May 21, 2025, Sars announced that the 2025/26 financial year revenue estimate of R1.986 trillion, as outlined by the Minister of Finance, places a responsibility on the agency to implement revenue-raising initiatives. 'By dutifully implementing its compliance programme, Sars is well positioned to collect all revenue due to the fiscus. Sars will specifically accelerate work on collecting all debt, with a specific focus on undisputed debt', Sars said in a statement. This sends a clear message that taxpayers can expect intensified scrutiny from Sars, which aligns with its Project AmaBillions, a special initiative focused on tax debt collection over the next three years. Taxpayer D's case serves as a warning to all. Had he taken the matter seriously from the outset, his liability could have been reduced by at least R7.5 million. Any taxpayer who does not understand their loan accounts or is uncertain about the accuracy of their accounting records should consult a tax attorney to proactively engage with Sars and secure the best possible outcome. * Langton is a tax attorney, and Mornay Bornmann is an attorney: cross-border taxation at Tax Consulting South Africa. PERSONAL FINANCE
Wall Street Journal
02-05-2025
- Business
- Wall Street Journal
What an IRS Battle Over an 850-Year-Old Painting Means for Your Taxes
Nobody likes a battle with the Internal Revenue Service. But some battles are worse than others—and Oscar Tang has just been through a doozy. The Tax Court recently issued a decision in a long-running case between the IRS and Tang, a wealthy Chinese-American businessman and philanthropist. The dispute was about donations of early Chinese paintings by Tang's family partnership to New York's Metropolitan Museum of Art in 2010-2012.
Forbes
29-04-2025
- Business
- Forbes
In Lawsuit Settlements, Most Emotional Distress Damages Are Taxable
Judges Or Auctioneer Gavel On The Dollar Cash Background, Top View, Close-Up. Concept For ... More Corruption, Bankruptcy, Bail, Crime, Bribing, Fraud, Auction Bidding, Fines The tax treatment of legal settlements has spawned large volumes of tax cases, and most end up coming out in the IRS's favor, so it pays to know what you are up against. If you make claims for emotional distress, your damages are taxable. But if you claim the defendant caused you to become physically sick, those damages can be tax free. On the other hand, if it was emotional distress that caused you to be physically sick, that is taxable. It seems highly artificial, but the order of events and how you describe them matters to the IRS. Compensation for personal physical injuries are tax free under Section 104 of the tax code. Yet exactly what is "physical" isn't so clear. Some of the line-drawing comes from a footnote in the legislative history to the tax code adding the 'physical' requirement. It says 'emotional distress' includes physical symptoms, such as insomnia, headaches, and stomach disorders, which may result from such emotional distress. See H. Conf. Rept. 104-737, at 301 n. 56 (1996). All compensatory damages flowing from a physical injury or physical sickness are excludable from income. Even in employment cases, some plaintiffs win on the tax front. For example, in Domeny v. Commissioner, Ms. Domeny suffered from multiple sclerosis ('MS'). Her MS got worse because of workplace problems, including an embezzling employer. As her symptoms worsened, her physician determined that she was too ill to work. Her employer terminated her, causing another spike in her MS symptoms. She settled her employment case and claimed some of the money as tax free. The IRS disagreed, but Ms. Domeny won in Tax Court. Her health and physical condition clearly worsened because of her employer's actions, so portions of her settlement were tax free. In Parkinson v. Commissioner, a man suffered a heart attack while at work. He reduced his hours, took medical leave, and never returned. He filed suit under the Americans with Disabilities Act ('ADA'), claiming that his employer failed to accommodate his severe coronary artery disease. He lost his ADA suit, but then sued in state court for intentional infliction and invasion of privacy. His complaint alleged that the employer's misconduct caused him to suffer a disabling heart attack at work, rendering him unable to work. He settled and claimed that one payment was tax free. When the IRS disagreed, he went to Tax Court. He argued the payment was for physical injuries and physical sickness brought on by extreme emotional distress. The IRS said that it was just a taxable emotional distress recovery. The Tax Court said damages received on account of emotional distress attributable to physical injury or physical sickness are tax free. The Tax Court said the IRS was wrong to argue that one can never have physical injury or physical sickness in a claim for emotional distress. The court said intentional infliction of emotional distress can result in bodily harm. Medical records and settlement agreement language can help materially. With the right combination, you may be able to resolve an IRS query or audit. To exclude a payment from income on account of physical sickness, the taxpayer needs evidence he made the claim. He does not necessarily have to prove that the defendant caused the sickness. But he needs to show he claimed it. In addition, he needs to show the defendant was aware of the claim, and at least considered it in making payment. To prove physical sickness, the taxpayer should have evidence of medical care, and evidence that he actually claimed the defendant caused or exacerbated his condition. This is one of many issues in how legal recoveries are treated for tax purposes. The more medical evidence the better. Moreover, if there is a scant record of medical expenses in the litigation, consider what you can collect at settlement time. A declaration from the plaintiff can help. A declaration from a treating physician or an expert physician is appropriate, as is one from the plaintiff's attorney. And then there is the settlement agreement. Whenever possible, settlement agreements should be specific about taxes. The IRS is likely to view everything as income unless you can prove otherwise. Try to be explicit in the settlement agreement about tax forms too. You don't want to be surprised by IRS Forms W-2 and 1099 arriving unexpectedly in January the year after the settlement. You can read more about how legal settlement awards are taxed.
CBS News
10-04-2025
- Business
- CBS News
What will the IRS do if you don't file your taxes?
As we inch toward the final tax filing deadline of April 15, millions of Americans are feeling the stress that comes with filling out the complex forms and the potential of owing money to the Internal Revenue Service (IRS). That, in turn, can make it tempting to ignore the tax filing deadline altogether. If you've found yourself in this situation as the clock is winding down, you may be wondering what might happen if you just ... don't file this year. The short answer? Nothing good. While the IRS won't immediately dispatch agents to your door for unfiled taxes , ignoring your tax obligations generally sets in motion a series of increasingly hefty consequences that can impact your financial life for years to come. So, what may begin as a simple missed tax deadline can snowball into substantial penalties, interest charges and even legal trouble over time. If you're behind on filing or are at risk of falling behind, though, don't panic. The IRS has mechanisms in place for those who've fallen behind on their tax obligations — and understanding what happens when you don't file can help transform an overwhelming tax situation into a manageable one. Get help with your IRS tax debt today . When you miss a tax filing deadline but are owed a refund, there's generally no penalty for filing late. The IRS typically won't force you to file and receive your refund. However, you only have three years from the original filing deadline to claim your refund before you forfeit it entirely. After three years, that money becomes government property. For those who owe taxes, the consequences begin immediately after the filing deadline passes. One of the most immediate repercussions you'll face is the failure-to-file penalty . This is usually 5% of the unpaid taxes for each month your return is late, up to a maximum of 25%. As time passes without filing (or paying), the IRS escalates its collection efforts. You'll begin receiving increasingly urgent notices by mail. If these are ignored, the IRS may file a "substitute return" on your behalf — which sounds helpful but typically isn't an ideal fix. Substitute returns are based only on the income the IRS knows about, so they won't include deductions, credits or exemptions you may be entitled to. That usually means you end up owing more than you really should. After the substitute return is filed, the IRS will send a notice of deficiency that gives you 90 days to file your own return or petition the Tax Court. Ignoring this notice leads to a formal assessment of your tax liability, after which the IRS can begin more aggressive collection actions , including: In the most extreme cases of deliberate tax evasion, it is also possible to face criminal charges. However, you're unlikely to face criminal charges for simple non-filing, as they are typically reserved for fraudulent activity or substantial willful non-compliance instead. Chat with a tax relief expert about your options now . If you've fallen behind on filing your taxes, it's important to act promptly. The IRS offers clear steps you can take to fix the issue, and the most important one is to file your past-due returns as soon as possible. Getting those returns submitted stops the failure-to-file penalty and shows the IRS that you're making an effort — even if you can't pay the full amount you owe. If you're several years behind on filing your taxes, it might be a good idea to consult with a tax professional. They can help you gather the necessary paperwork and make sure you're not missing out on any deductions or credits. In certain cases, the IRS will only require the last six years of returns to be filed, though it depends on your situation. After filing, if you can't afford to pay what you owe, working with a tax relief company might come in handy. These companies specialize in helping people negotiate with the IRS . They can assist with setting up payment plans, Offers in Compromise (which is a settlement for less than the full amount owed), or help you apply for Currently Not Collectible status if you're facing financial hardship. While tax relief companies do charge for their services, the right one can help reduce the stress of navigating the situation — and may also help you save money — by helping you avoid more serious consequences. Ignoring tax obligations never makes them disappear — it only makes them grow more burdensome. The IRS has extensive powers to collect what it's owed, and the longer you wait to address unfiled taxes, the fewer options you'll have and the more expensive the resolution becomes. If you've missed filing deadlines or are at risk of doing so this year, the best course of action is to face the situation head-on. File your missing returns as soon as possible, even if you can't pay in full immediately. The penalties for not filing are far more severe than those for not paying, and having returns filed opens doors to payment arrangements and other relief options.
