Strong legal support boosts MISSA collections
posted 04/23/09

In the midst of declining tax collection in the country, Bruce Bilimon, the Ministry of Finance’s Assistant Secretary for Customs, Treasury, Tax & Revenue, organized a workshop to improve the audit and collection skills of the country’s tax enforcers and auditors. The training was facilitated by Carson McNeill, Revenue Advisor of the IMF, who also had facilitated tax trainings in RMI in the past.

On day 1, the group was able to learn different audit case selection techniques and using intelligence to determine levels of revenue and compliance.

On day 2, the participants were taught how to deal with delinquent taxpayers and non-filers, and effective collection methods, including audit assessments.

The main highlight of the workshop focused on the sharing of actual audit findings and tax collection cases experienced by the different tax authorities in the country. This enabled the participants, more particularly those from Ebeye, to learn the most common "ways and means" by which businesses tried to avoid paying the right amount of taxes.

The training would not have been a big success without the active participation and inputs from the participants, more particularly Asst. Secretary Bruce Bilimon, Itibo Tofinga and Lincoln Meia of the Ministry of Finance, John Peralta of MalGov, Bryan Edejer (pictured below), Mathilda Lanwi and Ave Gimao of MISSA.

The workshop also served as a forum for identifying flaws in the current tax system in the country. Ambiguities in certain provisions of the Tax and Revenue Code and the Social Security Act resulted to different interpretations which caused confusion and disagreements among taxpayers and tax authorities.

It is also a known fact that a number of individuals and businesses were able to illegally evade taxes due to weak enforcement of the law or, in certain cases, lack of the legal support necessary for successful prosecution. Since these tax evaders were able to succeed in the past, this may encourage them to evade taxes in the future.
This condition results in a significant amount of tax revenues being lost by the government, and it leads to unfair competition. As these tax-evading individuals and businesses pay little or no taxes, they can offer bids or sell their products at prices much lower than the tax-paying individuals and businesses.

Delinquent taxpayers and tax evaders were also observed to have used the pretext of "not knowing the law" as an excuse for not paying the right amount of taxes. However, as is known worldwide, "ignorance of the law is no excuse."

During the workshop, it was noted that there were lots of similarities on how each agency deals with delinquency and tax evasion – from routine and surprise visits to business establishments, verification of records and documents, gathering of information from third parties...until a tax assessment is completed and presented to the taxpayer. Such commonality reflects the group’s shared vision to enforce the authority vested to them by law.

However, one distinct advantage that MISSA has over the other agencies is the strong legal support that the Administration receives from its Legal Counsel, David Strauss (pictured below-right).

With the ever increasing benefit payments outpacing collections in recent years, MISSA has to find other ways to maintain a positive cash flow. Otherwise, it will resort to dipping into its Trust Fund to ensure uninterrupted payment of benefits averaging $1.1 million every month and another $1.0 million in administrative expenses every year.

With the help of its legal counsel, MISSA was able to step up its collection efforts that resulted in partial and full settlement of old debts, either amicably or through court orders. In FY 2008, MISSA was able to collect more than $1 million and another $1.5 is expected to be collected this fiscal year out of these old-outstanding receivables.

How does MISSA handle tax delinquency?

When MISSA serves a notice of delinquency or tax assessment to a taxpayer, all efforts are exhausted until the amount due is totally paid-off. This is one of the primary responsibilities of Bryan Edejer, MISSA’s Tax Compliance Manager, who has handled effectively the post he held since he joined MISSA in 2007. He is being assisted by Brad Lamille, Tax Compliance Supervisor and four Tax Officers - Almitha Clement, Ruthann Korean, Jackson Henry and Rotis Jitiam. (pictured below is MISSA's Tax Compliance and Audit team)

If the amount of tax deficiency is significant and the employer does not have the financial capacity to pay-off the entire amount, an affordable payment plan is offered and a promissory note is signed. This is normally done out of court and without the services of a lawyer.

However, not all delinquent taxpayers given affordable payment options cooperate with MISSA. When all amicable efforts have already been exhausted by MISSA’s Tax Compliance Department and the delinquent taxpayer remains adamant, the case is referred to David Strauss, MISSA’s current legal counsel, who either contacts the delinquent tax-payer regarding settlement or simply files an action to collect the delinquent taxes in the High Court.

Depending on the delinquent taxpayer’s payment history, degree of cooperation, current financial condition, and length of time in which the delinquent taxes are paid, the legal counsel may waive some of the penalties. By law, MISSA is authorized to impose a penalty of up to 100% of the contributions owed plus 12% interest per annum on the penalties. Additionally, MISSA is entitled to recover court costs and reasonable attorney’s fees (49 MIRC, Ch. 1, Sect. 149(1)).

In cases of promissory notes or monthly payments ordered by the court or by consent of the tax-payer, the periodic (usually bi-weekly or monthly) payments are closely monitored by MISSA and the legal counsel. A default in payments for three consecutive months results in a referral of the matter back to the legal counsel for further action.

Only a small number of the total delinquency cases result in court proceedings.

As of the last quarterly returns filed in Q1 2009, only 362 (or 51%) of the 712 employers in active operations on Majuro, Ebeye-Kwajalein and outer islands filed and paid their SS contributions on time. Their combined contributions represent about 80%-85% of MISSA’s total revenues. Consistently topping the list of those filing and paying on time is the RMI Government which contributes about one third (1/3) of the Administration’s Retirement and Health Fund collections.

The non-filers are comprised mostly of small mom and pop stores, schools and local governments who have long outstanding obligations with the Administration. For several years now, this group has been the focus of MISSA’s collection campaign. With the assistance of the legal counsel, a number of them have been ordered by the court to pay MISSA. However, as most of them are in financial distress, the Administration was unable to collect.

The need for a strong tax audit team

In 2006, the declining level of voluntary tax compliance and the increasing number of employers whose quarterly tax returns seemed doubtful prompted the Administration to assign full time Tax Auditors whose primary function is to examine payroll records of employers.

Tax audits have already been performed in the past but as MISSA’s Tax Compliance Officers were also tasked with other functions like data entry of quarterly returns, updating of employer filing status in the system, monitoring of delinquencies and legal referrals, only a handful of payroll audits were completed.

Since the Tax Audit Team was organized in 2006, more than 50 payroll audits have been completed which resulted to the discovery of tax deficiencies worth about $1.65 million. To date, almost $1 million of these accounts have already been collected. About a dozen more employers, including local governments, are currently under audit.

Of the more than 50 audits completed by MISSA, only 3 were found to have completely reported the correct taxable wages of their employees and paid the right amount of social security taxes. The rest have not reported or have under-reported the taxable wages of at least 1 of its employees.

These alarming statistics prompted MISSA tax auditors to be more vigilant and thorough in the conduct of their audit as employers are now becoming more creative and will always try to find all possible ways to reduce or avoid their tax obligations.

MISSA’s Tax Audit Department is currently headed by Tax Audit Manager Mathilda Lanwi. She is assisted by Tax Audit Supervisor Elvie John, and Stephen Tarbwilin, Tax Auditor.

MISSA‘s tax audit team has been in constant and close coordination with auditors of the Ministry of Finance. As both audit teams are tasked with the same responsibilities and use identical audit techniques and procedures, their sharing of information has been very useful in the early detection and identification of unreported and under-reported taxes. This concerted effort is the result of a memorandum of agreement (MOA) in 2006 signed by officials of MISSA, Ministry of Finance, MalGov, KalGov, and the AG’s Office. The MOA’s primary purpose was to ensure a free flow of information between and among the said government agencies to promote fiscal stability through improving the internal revenue generation in the Marshall Islands.