Can the Taxpayer Recover Costs Incurred in Seeking Legal Advice and Related Accounting Services Necessary to Answer the SARS Query?

A question that arises is whether a taxpayer is entitled to recover costs incurred in answering a query raised by SARS that does not give rise to an additional assessment or that can be referred to as wasted costs in dealing with SARS queries that are unreasonable.

When a taxpayer receives an enquiry from SARS, it should be reviewed in order to establish whether the query is fair and reasonable based upon the provisions dealt with earlier. If the taxpayer believes that the questions asked are unreasonable, this should be raised with SARS before commencing work on dealing with those questions.

Where, however, a taxpayer believes that he/she has been unfairly treated by the Commissioner, and that a SARS’ official has exceeded its powers, it would be entitled to lodge a complaint with the official dealing with his/her affairs, failing a resolution at that level with the branch manager of the office concerned. In the event that the matter is not satisfactorily resolved at that level, he/she would be entitled to lodge a formal complaint with the SARS Service Monitoring Office currently headed by Professor L Olivier. That office was created in order to address administrative difficulties, and cannot intervene where a matter has proceeded to the Tax Court or any other Court. That office is also there to assist taxpayers with delays in refunds and other administrative difficulties but, particularly, perceived abuses of power.

I am not aware of any taxpayer having successfully sued SARS in this country for wasted costs, and it remains to be seen if this will happen.

In answering the question posed, it is appropriate to refer to the experience of other countries in this respect.

In certain instances, the South African Police Service can be held liable for negligence of police officers and related conduct. I could not find any reference in the South African Revenue Service Act prohibiting a taxpayer from seeking to sue SARS for damages. It must be remembered that many of the decisions taken by the Commissioner: SARS and his officials constitute administrative action as defined in the Promotion of Administrative Justice Act, Act 3 of 2000.

Professor H Corder, Dean of the Faculty of Law at the University of Cape Town, has raised the question of whether a taxpayer would not be entitled to recover costs under the provisions of the Promotion of Administrative Justice Act, Act 3 of 2000.

Section 8 of the Promotion of Administrative Justice Act, contains the remedies available in proceedings subject to judicial review where the taxpayer’s right to administrative justice has been violated. Section 8(1)(f) allows the court conducting proceedings of judicial review in terms of section 6(1) of the Administrative Justice Act to make an order as to costs. In the Promotion of Administrative Justice Act Benchbook by
I Currie and J Klaaren, the following is stated at page 191 in respect of the provisions of section 8(1)(f):

“Section 8(1)(f) allows an AJA Court the power to make orders as to costs. One issue for interpretation will be whether such orders are limited to the costs of proceeding in the AJA Court or whether and, if so, under what circumstances a costs order may take into account costs incurred in relation to the administrative action.”

It would appear that there is a possibility that it is not only the costs incurred in proceeding to court, but where the taxpayer incurs other costs as a result of an official not making a decision or because the official has acted contrary to his governing statute that he/she will also be entitled to recover other costs.

In addition to the above, section 8(1)(c) of the Promotion of Administrative Justice Act states as follows:

“setting aside the administrative action and –

(i)  remitting the matter for consideration by the administrator, with or without directions; or

(ii) in exceptional cases –

(aa) substituting or varying the administrative action or correcting a defect resulting from the administrative action; or

(bb) directing the administrator or any other party to the proceedings to pay compensation;”

C Hoexter in The New Constitutional & Administrative Law, Volume II Administrative Law, deals with the payment of compensation at page 294 in the following terms:

“As already mentioned, an action in contract or relict is likely to be a more appropriate remedy than judicial review where an aggrieved person wants to recoup financial loss sustained as result of administrative action. The Rule 53 Motion Procedure is in any event not particularly well suited to the resolution of disputes of facts, which tend to crop up in cases of this kind. Nevertheless, the Promotion of Administrative Justice Act recognises that an award of damages may sometimes be justified in proceedings for judicial review – perhaps where an administrator has acted dishonestly, for instance. Section 8(1)(c)(ii)(bb), which is coupled with the remedy of setting aside, states that ‘in exceptional cases’, the court may direct ‘the administrator or any other party to the proceedings to pay compensation’.

The Constitution, in turn, gives scope for the award of ‘constitutional damages’ for the infringement of fundamental rights. Apart from compensating the victims, such awards may be useful in promoting respect for human rights, deterring future violations of rights and punishing public officials for their flagrant disregard of rights. However, the Constitutional Court has so far adopted a cautious approach to such awards.”

I am not aware of a taxpayer successfully seeking to recover costs from the Commissioner: SARS either under the provisions of the Promotion of Administrative Justice Act, Act 3 of 2000 or under the provisions of the Final Constitution. However, it would appear that there is a basis upon which aggrieved taxpayers could seek to recover costs or damages from the Commissioner: SARS in the event that their rights have been violated.

It is no doubt true that a fair number of audits and investigations by the Commissioner are the result of anonymous tips received from an estranged spouse or disgruntled employees and others. If the complainant has made allegations against the taxpayer and they have incurred accounting and other professional fees in answering the Commissioner’s queries, the taxpayer has suffered unnecessary expense where the investigation has not resulted in any changes in the taxpayer’s assessments. It is true to say that the Commissioner does not insist upon taxpayers consulting with accountants and legal advisors to answer the questions raised, that is the taxpayer’s choice. However, because of the complexities of the South African tax system, the taxpayer would be ill advised to deal with the Commissioner personally without seeking professional assistance.

In my opinion, the exposure of the Commissioner to the risk of being liable to pay compensation to taxpayers for misconduct on the part of SARS’s officials would improve the administration of the tax system in South Africa. Other countries have considered and addressed the issue of compensation to taxpayers where they incur costs because of inappropriate conduct by the Revenue authority’s officials.

D Bentley in Taxpayers’ Rights: An International Perspective comments on compensation internationally as follows:

“In a successful appeal, taxpayers should have the right to compensation for legal costs and expenses that they have incurred. They should also have the right to compensation for personal or economic loss resulting from any actions taken by the tax authorities without lawful authority or cause. This would include where an employee of the tax authority disregards the requirements of the tax law and regulations to the detriment of the taxpayer, for example, by releasing without authorisation, commercially sensitive information on a taxpayer’s file, either generally, or to another taxpayer. Compensation should be available for inadvertent as well as intentional or reckless actions. The protection for the government would be that the taxpayer would have to show loss.

It might be reasonable for the government to place a cap on the compensation, to limit its exposure to massive claims. It is detrimental to the proper administration of the tax system if the tax authority is restrained in its proper pursuit of tax evasion and fraud for fear of facing large damages claims in the event that it cannot prove its case. It would also be reasonable to require that all administrative remedies should be exhausted before a taxpayer may pursue a civil action for damages.”

It is important to balance the right of a taxpayer to seek compensation from the fiscal authority for abusing its powers with the exercise of its powers to enhance and secure compliance with the fiscal laws.

Sweden allows taxpayers to recover cost in limited cases. A Hultqvist, in D Bentley’s work, referred to previously at 306, summarises the position in Sweden in the following terms:

“Finally, the taxpayer may recover costs if there are very special reasons for reimbursement. For example, they may be reimbursed if the tax authority has been negligent, or nearly so, when auditing a company and has forced the taxpayer to pay a lawyer or accountant to defend itself against unreasonable tax charges. This provision is rarely applied.

The taxpayer never has to pay the tax authorities their litigation costs. On the other hand, taxpayers are not reimbursed for their own work or other internal costs in an action. This applies equally to the cost of using in-house lawyers.”

In the United Kingdom JT Newth in Simon’s Tax Briefing, Issue 122, 21 June 2004 Complaints, redressing compensation at pages 1 and 2 states the following:

“It has to be said that, nowadays, satisfaction is often reached at this point and restitution may be made by an official apology, with or without compensation to reimburse the fees of the professional advisor and/or a consolatory payment to the client. I have taken this route myself and reached an entirely satisfactory settlement with a Revenue department.”

Australian authorities have released draft guidelines explaining how taxpayers can claim compensation from the Australian Tax Office where that office’s actions have caused loss. (See A Carey ATO’s Compensation Guidelines Weekly Tax Bulletin No. 38 at page 1444 published by ATP.)

RA Scott in Suing the IRS and its employees for damages: David and Goliath, 20 Southern Illinois University Law Journal at page 50, commented on the position in the United States of America in the following terms:

“Congress has enacted some express rights to recover damages from the IRS. Because the action for improper disclosure of information is available for negligence and the damages are the greater of $1000 or the actual damages for each disclosure, people have a reasonable opportunity to recover compensation for their injuries.

Other rights are limited to the point that few people can recover. A proposal to include assessment in the malpractice statute was rejected, and the collection malpractice requirements are very difficult to satisfy. Because it is available only to the taxpayer, Congress intentionally excluded cases where collection is attempted from another person. Grounds are difficult to prove because there must be a reckless or intentional disregard of the Code or regulations, and damages are limited to the lesser of $100 000 or the ‘actual, economic damages’. Because a proposal to authorise recovery of actual damages for negligent collection was rejected, Congress wanted to restrict recoveries.

Because they have a substantial track record of lawless conduct, remedies in addition to damages are needed to regulate the activities of the IRS and its employees. Possibilities include injunctions to prohibit future misconduct, class actions to make remedies available to groups of people, and publicity of all damages judgements against the IRS or its employees.”

The United States of America’s legislature introduced the Taxpayer Bill of Rights in 1988 (Technical and Miscellaneous Revenue Act of 1988 PL 100 – 647 Subtitle J). The statute provides that if an Internal Revenue Service employee or officer recklessly or intentionally disregards any provisions of the Internal Revenue Code the taxpayer may bring an action for damages against the United States government (Taxpayer Bill of Rights 1 Section 6241(a). A Greenbaum, author of Chapter 15: United States Taxpayer Bill of Rights 1, 2 and 3: A path to the future or Old Whine in new bottles? in D Bentley’s Taxpayers’ Rights: An International Perspective, The Revenue Law Journal, Bond University: Queensland Australia at 347). The statute limits the award of damages to direct economic loss suffered by the taxpayer because of the Internal Revenue Service’s actions. The maximum amount of damages the taxpayer could recover was originally US $100 000 (Taxpayer Bill of Rights 1 Section 6241 (a)). If the action against the United States revenue authority is frivolous or groundless, the taxpayer is at risk of incurring damages up to US $10 000 (this is in accordance with Section 6241 (b) of Taxpayer bill of Rights 1). The Taxpayer Bill of Rights 2 subsequently amended the position. Greenbaum in chapter 15 of D Bentley’s book comments on the changes introduced by the Taxpayer Bill of Rights 2 in the following terms:

“Under TBR 1, before a taxpayer was able to recover legal fees from the government they had the burden of establishing that the position of the government in the proceeding was not substantially justified. TBR 2 shifts the burden to the government to prove that its position was substantially justified. There is a rebuttable presumption that the government was not substantially justified if it failed to follow regulations, revenue rulings or procedures, information releases, notices and announcements or private rulings, technical advice memoranda, or determination letters issued to the taxpayer.

Civil damage actions against the government for unauthorised collection activity were introduced under TBR 1. The damages limit for actions related to unauthorised collection action has been raised under TBR 2 from US $100 000 to US $1 million. Damages will still be limited to actual, direct economic damage as a result of the intentional or reckless action of an officer or employee, plus the cost of the action.”

It is my opinion that the South African fiscal statutes should be amended, or that specific legislation to regulate paying damages to taxpayers where the Commissioner violates its rights, should be enacted.

The next article in this series considers whether persons other than SARS officials can inspect the financial records of a taxpayer’s business.

Beric J Croome BCom, BProc, LLB, FCMA, H Dip Tax Law (cum laude), CA(SA)