Where the income tax authorities have reason to suspect that a resident individual subject to taxation has not made complete and accurate return of income for taxation purposes, they may require an investigation to determine the correct position. This investigation is ordinarily called a back duty investigation. The victim is required to appoint his own accountant to carry out the investigation at his own cost. The appointment has to be approved by the income tax department. A statement known as a capital statement is usually the form in which the results of this investigation are summarised. The purpose of the statement is to attempt a reconciliation of net worth at the opening and at the close of the period respectively by reference to known and estimated sources of income and expenditure. The final discrepancy that is revealed being the closest possible approximation of the undisclosed income which gave rise to the investigation in the first place.

The following procedural points should be noted: The investigation relates to the income and expenditure of the tax payer in his private as well as business capacity. The enquiries must therefore extend to his wife and children and other dependants. All sources of potential information must be tapped such as: bank statement, deposit receipts, brokers notes, insurance policies, interest and dividend counterfoils etc. Receipts and payments have to be traced through to source and destination respectively. Do not ignore small items since they may indicate the existence of assets previously undisclosed. The amount of insurance covered should be ascertained since it may indicate the approximate value of the underlying assets. The final report should refer to the deficiences in the information provided as well as the assumptions and estimates which it has therefore been necessary to make.

Special points which arise in this investigation are: the period to be covered which could be many years, the apparent cash available for living compared with the tax payers actual standard of living, the accumulation of capital compared with known sources of such accumulation, the existence of other sources of income and capital must be investigated. This will include: gambling wins, gifts and legacies. The result of the investigation may be that undeclared income comes to life. This will involve the payment of tax on the income, interest thereon, and a negotiated penalty in some cases strangely very rare, the tax payer may be jailed. The statement of capital may look like this.

Taxpayer..............................................................................................

Period covered by this investigation..................................................................