[Contribution] Coercive fines to end tax audit standoffs

Lee Sung-jin, vice commissioner of the National Tax Service

By Lee Sung-jin

Vice commissioner of the National Tax Service

Tax audits are often likened to a tug-of-war. The National Tax Service strives to secure as much supporting documentation as possible to ensure fair taxation based on the principle of evidence-based taxation, while taxpayers, concerned that complying might lead to unfavorable outcomes and disadvantages, often refuse to cooperate and hold out. This persistent deadlock -- caught between cooperation and avoidance -- has long been a familiar scene in tax audits.

The reason such tug-of-wars have recurred lies in the lax penalty framework of the previous system. The NTS’ only resort to secure cooperation -- the administrative penalty under the Framework Act on National Taxes -- had clear limitations. While the NTS could impose penalties for noncompliance, the maximum legal amount was capped at 50 million won ($35,000) regardless of the taxpayer’s business size, and it could be levied only once during the entire audit period.

From the taxpayers’ standpoint, they are inclined to weigh the potential tax savings from withholding documents against the relatively modest penalty. Some taxpayers quietly adopted a tactic of strategic noncooperation -- letting the audit period slip by while withholding evidence, then submitting only selective evidence in court to manipulate the case in their favor. This improper and widespread practice placed honest taxpayers -- those who cooperated faithfully and were assessed their fair share of tax -- at a relative disadvantage, raising serious questions about fairness.

To address this shortcoming, the coercive fine system, which took effect on Sept. 15, is an attempt to resolve pointless standoffs and find a new equilibrium. Unlike the previous one-time penalty, the new system allows for repeated fines until the required materials are submitted, with the amount proportional to the taxpayer’s revenue rather than a fixed one, thereby imposing social responsibility commensurate with the scale of the business.

Meanwhile, the NTS should exercise restraint and fairness in wielding its investigation powers -- requesting only the absolutely necessary and relevant materials for the audit. The introduction of a review committee, in which a majority of the members are external experts, to deliberate and determine whether fines should be imposed was designed to enhance procedural transparency and objectivity by demanding the NTS conduct audits according to stricter standards. Taxpayers, for their part, should adopt an attitude of transparent cooperation and proactive clarification where necessary, rather than responding with mere resistance or avoidance, to foster communication and prevent misunderstandings.

The purpose of this system lies not in punishment but in the reinforcement of mutual accountability. The most desirable scenario would be one where both the NTS and taxpayers internalize these new rules. Hence, the mere existence of the rules will encourage voluntary compliance, without the need for actual enforcement. Going forward, the coercive fine system, if implemented with fairness and restraint, is expected to evolve into an example of government innovation and proactive administration in securing legitimate taxing authority.

The ethics of tax practice gain root in fairness, not fear. The new system is expected to help both taxpayers and the tax authority foster a shared awareness, building a balance point between sincere cooperation and fair investigation. Only when this balance is achieved can both sides truly advance together toward a more mature and transparent tax environment.

Lee Sung-jin is vice commissioner of the National Tax Service. The views in this column are his own. -- Ed.