This is Part II of a look at the problem of non-compliance with tax laws. A regular Source feature, Undercurrents explores issues, ideas and events as they develop beneath the surface in the Virgin Islands community.
Street vendors, waiters, bartenders, handymen, casual laborers … With so many of its people being paid in cash, the Virgin Islands is an especially comfortable place to under-report income and “save” on income tax payments. But just how widespread is this practice?
“It’s almost a given” in the retail industry, according to an accountant.
“Logically you have to assume” most people who deal in cash underreport, said an attorney.
“There’s at least 80 percent of taxi drivers not telling the truth,” said an industry expert, who later modified the statement to between 65 percent and 80 percent. “There’s a few honest ones.”
“Cheating is across the board,” said a longtime businessman.
And the government assessment: “I get the impression that a significant amount of under-reporting goes on,” said Attorney General Vincent Frazer, cochairman of the Tax Collection Task Force.
No one has numbers, of course. In an attempt to get a feel for the scope of the problem, the Source interviewed several knowledgeable residents in the private sector who were willing to share first-hand information pertaining to various segments of the community – on condition that they are not identified by name.
Street talk still abounds about businesses maintaining two sets of books – one that is accurate and one to show the Internal Revenue Bureau. But the businessman implied that, at least in recent years, it is more talk than reality. With most transactions now being electronic, it would be very difficult to maintain that scam.
However, he said, “When I go someplace and they only take cash, I get sort of uneasy … an all-cash business should be a red flag.”
If even a portion of the business is cash, there’s still the temptation to pocket some of it, according to some sources.
“I think it’s safe to say that it would not be uncommon to skim,” said an accountant. “That is the norm.”
Virtually every source pointed to the taxi industry as one rife with under-reporting. With operators driving unmetered cabs and taking cash only, opportunity abounds.
“They usually try to report (annual income of) $15,000 and under,” said an industry expert. It costs $300 for a safari van tire, $80,000 to build a safari, not to mention the cost of “a big mansion on the hill,” so “it doesn’t add up.”
Drastic under-reporting can backfire, the expert said, when a driver wants to take out a loan and can’t prove he has sufficient income to pay it back.
It can be a problem in personal injury cases too, according to an attorney who recalled a civil suit in which a driver claimed $75,000 in lost income because he was unable to drive for a few months, yet his income tax return showed he reported earnings of less than a fourth that amount for the entire year. What he claimed in the suit “was probably closer” to the real amount than what he told the IRB, but he had no way to prove it.
Another attorney noted that rental income often goes unreported. The problem is not unique to the territory, but may be more prevalent here simply because the practice of renting out an extra unit or two in the family home is common practice. It’s difficult for the government even to know how many such properties there are. But some jurisdictions have discovered a way to “find” the rentals. They offer small tax breaks to taxpayers who pay rent for their residence and can prove it by supplying certain information – information that leads right to the landlord.
That’s the sort of approach that the government should use in other arenas, according to a businessman. “They should do forensic auditing” – that is, take a close look at the books of companies that deal with subcontractors, in order to get an idea about the income level of the subcontractors. “They should do asset checks” on people too, comparing the cost of the proverbial mansion on the hill against the salary reported by its owner.
Unfortunately, he said, the government doesn’t have the manpower to conduct the kind or volume of investigations needed “and the business community knows that.”
Frazer said the task force is conducting investigations of taxpayers who are not compliant with tax laws and has targeted “certain groups” – primarily those that are largely cash-based.
The economic burden of taxes and the complexity of the system itself sometimes push people into non-compliance, the auditor said. But whatever the cause, the effect is detrimental to the public welfare. With less money in the public piggybank, there is less to be spent on maintaining and improving the infrastructure used by all.
Moreover, as a businessman said, “It’s discouraging for those of us who are paying taxes” to know so many others are not.
