Editorial: Muzzling the IRD hounds

Not so many years ago the Inland Revenue Department was forced to deliver an abject apology and a $550,000 compensation package to a couple whom they had hounded for more than a decade over a wrongly based tax bill.

Abject as it was, the belated apology must have been cold comfort for the couple who had lost their home and a thriving business which had once employed 400 people.

But for everyone else there was the hope that the apology was the first sign of a change of attitude at the tax department which had been rightly and extensively criticised for its bullying methods. The criticism was formalised by a multi-party Parliamentary Committee which condemned the department's culture and called for a more flexible and compassionate approach.

With the apology it appeared that the tide was turning and in future taxpayers might expect the department to display more judgment and less of the attack-dog mentality.

Not so it appears, judging by a Weekend Herald report into the way the IRD is going after people who lost money in a $29 million swindle run by Donald Rea, who died in May during his trial in the Tauranga District Court. Tactics used include demands for immediate payment of large amounts of tax, rapidly escalating assessments of penalty payments and threats of bankruptcy.

To anyone who recalls the events that led to the department's apology in 2000 this will be depressingly familiar. However, it is not merely a matter of heavy-handed tactics but of whether Rea's victims should have to pay tax at all.

At issue are sums of money paid to the victims of the scam to keep them interested. The IRD cites an Appeal Court ruling to argue that regular payments such as these are gross income and therefore liable to tax. However, the victims claim the money is merely part of their own capital being recycled and their advisers cite another Appeal Court ruling which says payments based on fictitious transactions cannot be income.

Whatever the learned judges and the IRD may think, common sense is firmly on the side of the victims. They were swindled by a Ponzi scam which, like all confidence tricks, plays on greed and gullibility to persuade people that illusion is reality.

The conman claims to have access to investments that deliver astronomically high returns. To reinforce the illusion he pays some of the cash back pretending that it is interest when, in reality, it is just a portion of their own capital being returned to sender.

The payments that so interest the IRD are therefore nothing more than one of the essential ingredients of a conman's illusion. In the Rea case 260 people fell for it, putting up $29 million, nearly $16 million of which was returned to keep the illusion going. There was no interest, no dividend, no real economic activity, only that illusion.

Of course it is possible to have some sympathy with the IRD. It is a difficult, necessary and unenviable task to collect tax money from citizens who are not always willing to pay up. Moreover, tax collectors have to deal with people who are adept at creating smokescreens of their own to avoid their responsibilities.

But this is no excuse for their bullying conduct towards the Rea victims. On the contrary, it is all the more reason why they should be able to recognise a confidence trick when they see one and to exercise their judgment appropriately.

In this case the right decision would be to call off the hounds. To do otherwise is to buy into the world view of a conman and to declare officially that a confidence trickster's illusion is, in fact, reality.