NTS Arbitrarily Extinguished 1.4 Trillion Won in Tax Arrears... Lifted Travel Ban Three Times for High-Value Delinquent Taxpayer

Board of Audit and Inspection Reveals Key Findings on National Tax Arrears Collection Management
Statute of Limitations for Seizure Release Retroactively Entered as 'Date of Seizure'
17,545 Cases of Small-Scale Delinquent Taxpayers' Assets Seized for Over Five Years... "Economic Disadvantage" Pointed Out
Seizure of Wine and Luxury Bags Released for High-Value Delinquent Taxpayers... Board Recommends Disciplinary Action
"System Needs Improvement" for Omission of 'Private Debt Information' in Inheritance and Gift Tax

The Board of Audit and Inspection has found that the National Tax Service unlawfully and improperly extinguished 1.4268 trillion won in national tax collection rights by retroactively entering the timing of 'seizure release' and other information into the system to reduce the cumulative amount of tax arrears from 122 trillion won to below 100 trillion won. The Board also pointed out that while some high-value and habitual delinquent taxpayers received 'benefits' such as lifting of travel bans or seizure releases, properties of small-scale delinquent taxpayers were left seized for long periods without assessing the feasibility of public auction, highlighting widespread issues in the overall management of tax arrears collection.

In the audit results on the 'Status of National Tax Arrears Collection Management' released on January 12, the Board of Audit and Inspection stated, "We found issues such as arbitrarily extinguishing arrears for high-value delinquent taxpayers or granting benefits such as lifting travel bans and seizures, while leaving the seizures of small-scale delinquent taxpayers unattended for extended periods." The audit was conducted from May to July 2024. The National Tax Service's arrears increased from 1.92 trillion won in 2020 to 2.43 trillion won in 2023, and the cumulative arrears have grown to around 100 trillion won, raising concerns over the effectiveness of tax collection.

The Statute of Limitations for Seizure Release Starts 'the Day After Release'... But Retroactively Entered as 'Date of Seizure'

The most significant issue uncovered in this audit was that the National Tax Service arbitrarily reduced the size of cumulative tax arrears. According to the Board of Audit and Inspection, after the National Assembly demanded the disclosure of cumulative arrears during the October 2020 parliamentary audit, the National Tax Service decided to disclose the figure on the 'National Tax Statistics Portal' starting in 2021. When the provisional tally showed cumulative arrears at 122 trillion won, the agency set a goal to reduce it to below 100 trillion won.

Subsequently, the NTS headquarters assigned a uniform 20% reduction target to each regional office and issued seizure release review instructions 12 times, along with work guidelines directing staff to retroactively apply the statute of limitations starting point to past dates such as the 'collection date' or 'seizure date,' contrary to the law. The reduction in cumulative arrears was reflected as a performance evaluation metric, and a system was established to achieve the target by disclosing each institution's performance ranking and underperforming offices.

The statute of limitations for national tax claims is generally five years (ten years for amounts over 500 million won). If the statute of limitations is interrupted by a seizure, it resumes from the day after the seizure is released. Therefore, it is, in principle, impossible to 'immediately extinguish' arrears through seizure release. However, the Board of Audit and Inspection found numerous cases where retroactive system entries made it appear as though the statute of limitations had already expired.

For example, in March 2021, when the Seoul Regional Tax Office ranked sixth out of seven regional offices in performance, it devised a plan to uniformly retroactively set the statute of limitations starting date to the 'seizure date' when releasing real estate seizures of delinquent taxpayers, unlawfully extinguishing 103.1 billion won in arrears. Although local tax offices reported to headquarters that retroactive seizure release was improper, headquarters responded that "this is a matter for the Seoul office to handle independently" and took no action, according to the Board.

The Board of Audit and Inspection noted that even for 'priority management targets'-including 5,905 individuals subject to public disclosure and 354 under investigation for suspected asset concealment-special instructions were issued, resulting in the arbitrary extinguishment of 722.2 billion won in arrears for 1,066 high-value delinquent taxpayers. Among them, 289 individuals (268.5 billion won) were also subject to public disclosure, travel bans, or asset tracing. At Banpo Tax Office, for instance, in January 2021, when releasing the bank account seizure of a high-value and habitual delinquent taxpayer (J), the starting date was retroactively entered as May 2010, immediately extinguishing 23.1 billion won in arrears.

The Board concluded that, through such methods, 1.4268 trillion won in arrears was unlawfully extinguished in 20,933 seizure releases between December 2020 and December 2023. By asset type, this included 702.1 billion won in real estate, 414.2 billion won in bank deposits, and 317.9 billion won in insurance policies.

In contrast, for small-scale delinquent taxpayers (less than 5 million won in arrears, 560,000 individuals), numerous cases were found where properties were seized but left unattended for long periods without assessing the feasibility of public auction or taking follow-up action. The Board reported that 17,545 cases of real estate seizure remained under long-term seizure for over five years without public auction or other procedures. Of these, more than half (9,390 cases) either had no summary appraisal requested (1,938 cases) or, despite summary appraisal results indicating no feasibility for public auction (7,452 cases), no action was taken. One case involved Banpo Tax Office seizing a delinquent taxpayer's building for 2 million won in arrears in 2005, receiving a notice in 2007 that public auction was feasible, but failing to proceed with the process.

Travel Ban Lifted Three Times for High-Value Delinquent Taxpayer, Seizure of Wine and Luxury Bags Also Released... Board of Audit and Inspection Recommends Disciplinary Action

The Board of Audit and Inspection also found that the Seoul office, after imposing a travel ban on a high-value delinquent taxpayer and his son for 20.9 billion won in income tax arrears (44.6 billion won as of 2022) and seizing 30 luxury bags and 1,005 bottles of wine, handled the release procedures inappropriately.

When the daughter-in-law requested the release of the luxury bags in 2017, claiming ownership, the request was denied due to lack of evidence. However, in 2019, the seizure was released without additional documentation, on the grounds that the bags were 'for women' and thus presumed to belong to the spouse. For the wine, requests for release in 2017, 2019, and 2020 were rejected due to 'insufficient grounds,' but in December 2022, a tax collector instructed the release within a week, claiming that the previous refusal constituted 'neglect of duty.' Even though purchase evidence was confirmed for only 30 out of 1,005 bottles, the Board found that wine worth 480 million won, including Roman?e-Conti, was released from seizure after eight years. Although 222 bottles owned by the delinquent corporation were to be re-seized, they were left unseized based solely on the taxpayer's claim that 'classification work was not completed.' Only after the audit began did the office belatedly seize them in March 2024.

The lifting of the travel ban also failed to meet requirements such as a 'specific business plan' and 'no risk of fleeing abroad.' Nevertheless, when the high-value delinquent taxpayer, who was unemployed, requested the ban be lifted to attend overseas events, the investigation report was arbitrarily filled out as 'business contract concluded.' In another case, the ban had been extended just three months earlier due to 'risk of fleeing abroad,' but was then lifted based on a contradictory statement that there was 'no such risk.' As a result, both the taxpayer and his son had their travel bans lifted multiple times (three times each). In one case, the son had the ban lifted immediately in September 2023 after requesting it by phone at the airport, without providing any supporting documents.

Omission of 'Private Debt Information' in Inheritance and Gift Tax... "System Needs Improvement"

The Board of Audit and Inspection found that although the National Tax Service had accumulated 1.06 million cases of 'post-management debt information' (creditor, debt amount, maturity) during inheritance and gift tax investigations, which could be useful for collecting arrears, the system was developed to utilize only entries made after September 2022, resulting in omissions. The Board confirmed that, among entries made before September 2022, there were 1,717 cases where high-value delinquent taxpayers (with arrears of 100 million won or more) were creditors, amounting to 217.8 billion won, but these were not identified or utilized by staff. Only during the audit were 11.3 billion won in assets seized.

Accordingly, the Board of Audit and Inspection notified the Commissioner of the National Tax Service to improve the National Tax Administration System (NTIS) to prevent the arbitrary application of the statute of limitations starting point and improper extinguishment of collection rights. The Board also instructed the agency to strictly manage its work to prevent the establishment of unreasonable targets and policies in violation of laws for the purpose of reducing cumulative arrears, and issued warnings for one person and personnel action for two others. The Commissioner of the Seoul Regional Tax Office was also instructed to prevent the issuance and distribution of unlawful work guidelines, with a warning issued for one person involved.

Regarding the improper handling of seizure and travel ban releases for high-value and habitual delinquent taxpayers, the Board recommended disciplinary action for five individuals to the Commissioner of the National Tax Service and a warning for two individuals to the Commissioner of the Seoul Regional Tax Office. For the issue of long-term seizure of small-scale delinquent taxpayers' assets, the Board instructed the Commissioner to promptly request summary appraisals or release seizures where public auction is not feasible, and to expedite compulsory collection procedures.