Billions in Tax Debt Illegally Forgiven by National Tax Service, Audit Reveals
An extensive audit has uncovered a deeply concerning practice within the National Tax Service (NTS), revealing that billions of Korean won in taxes owed by delinquents were illegally forgiven. The Board of Audit and Inspection (BAI) found that the NTS deliberately bypassed legal procedures to write off over 1.4268 trillion Korean won in uncollected taxes. This action was reportedly driven by an aggressive internal target to reduce the nation’s total uncollected tax debt, which stood at a staggering 122 trillion Korean won, to a “single-digit” percentage (below 99 trillion Korean won).
The audit report, focusing on the “Management of National Tax Delinquency Collection,” detailed how the NTS prioritized the remission of high-value delinquent taxes, viewing this as the most efficient route to significantly shrink the overall outstanding amount. This strategy, however, has been deemed an unlawful abdication of the NTS’s duty to collect taxes owed to the state.
Understanding Tax Statutes of Limitations
The fundamental principle governing tax collection is the statute of limitations. For most taxes, this period is five years. However, for tax liabilities exceeding 500 million Korean won, the statute of limitations extends to ten years. If the state fails to collect these taxes within the stipulated timeframe, the debt is legally erased.
To prevent such a scenario, tax authorities typically identify and seize the assets of delinquent taxpayers. This act of seizure effectively interrupts the statute of limitations, meaning the clock stops ticking, and the tax obligation can, in theory, continue indefinitely until paid.
However, a provision exists where the NTS can exceptionally release asset seizures. This typically occurs when the anticipated costs of forced collection are deemed to outweigh the value of the seized assets, rendering the process unprofitable. When a seizure is released without further collection action, the statute of limitations resumes its course. If no additional assets are identified and the statutory period expires, the tax debt is then erased. The NTS then formally writes off the uncollected tax, effectively exempting the delinquent from their obligation. This process, according to regulations, requires strict adherence to established procedures and conditions.
The Drive to Reduce Uncollected Taxes
The genesis of this controversial practice can be traced back to a National Assembly audit in October 2020. Initially, the NTS claimed it could not disclose the cumulative uncollected tax amount due to system limitations. However, a subsequent internal review the very next day revealed the figure to be 122 trillion Korean won.
Facing the prospect of significant public criticism for its apparent failure to collect these substantial debts, the NTS reportedly made a strategic decision. The agency aimed to publicly announce the cumulative uncollected amount in June of the following year, and critically, to reduce it to below 100 trillion Korean won by that deadline.
The specific rationale for setting the target below 100 trillion Korean won remains vague. Officials involved at the time indicated to the BAI that the target was chosen arbitrarily from a range of figures (120, 110, 100, and 90 trillion Korean won) during a report to Commissioner Kim Dae-ji, without any particular basis. Another official corroborated this, stating the decision was made to reduce the cumulative uncollected amount to a “single-digit” figure, implying a desire to present a more favorable, manageable statistic.
To meet this ambitious target, the NTS needed to reduce the uncollected amount by over 22 trillion Korean won within an eight-month period. Given the unlikelihood of delinquents spontaneously settling such vast sums, the agency resorted to accelerating the expiration of the statute of limitations for unpaid taxes.
Unlawful Procedures and Performance Metrics
In pursuit of its objective, the NTS formulated a “Roadmap for Reducing Cumulative Uncollected Taxes and Adjusting the Statute of Limitations.” This plan mandated regional offices to uniformly reduce their uncollected amounts by 20%. Furthermore, these reduction targets were integrated into performance metrics for regional offices, tax offices, departments, and even individual employees, creating a competitive ranking system. Monthly “Delinquency Resolution Status Review Meetings” were instituted from early 2021 to publicly track and compare the performance of each tax office in reducing cumulative uncollected taxes, thereby identifying underperforming units.
Under intense pressure to meet these quotas, frontline tax offices began to release asset seizures. Under normal circumstances, releasing a seizure merely allows the statute of limitations to resume, without immediately erasing the tax debt. However, the BAI found that tax offices engaged in systematic manipulation of the system. They would manually backdate the resumption of the statute of limitations to the day after the seizure was released. This fictitious timestamp effectively erased the period during which the asset had been seized, creating the illusion that the statute of limitations had never been interrupted.
For instance, if an asset had been seized for ten years, starting two years after the tax was imposed, releasing the seizure and then backdating the resumption would make it appear as though the state had not attempted to collect the tax for the full twelve years, effectively erasing the debt. The BAI confirmed that tax office employees were aware of the illegality of these actions but proceeded nonetheless to meet their performance targets.
Prioritizing High-Value Delinquents
The NTS actively fostered this illegal conduct. The agency concluded that focusing on reducing the debts of high-value and habitual delinquents would yield the most significant impact on the cumulative uncollected amount. In November 2020, a list of 282 high-value delinquents, with debts ranging from 1.64 billion to 103.8 billion Korean won, was compiled. Regional offices were instructed to review and release seizures for these individuals to manipulate their statute of limitations.
This directive led to the partial or complete erasure of tax debts for a significant number of individuals. Notably, this included 25 individuals under investigation for intentional asset concealment and 183 others whose names had been publicly disclosed for high-value or habitual delinquency. The practice continued and expanded in March of the following year, with an additional 27,633 high-value delinquents, owing over 50 million Korean won each, being targeted for similar treatment.
Through these illicit means, the NTS managed to erase 16.5499 trillion Korean won in unpaid taxes from 209,149 delinquents between 2021 and 2023. While some cases involved genuine errors in seizure processing or failure to release seizures when legally required, the BAI conclusively identified that at least 1.4268 trillion Korean won was illegally forgiven, despite the NTS’s clear obligation to continue collection efforts.
Specifically, 722.2 billion Korean won from 1,066 high-value delinquents were unlawfully erased. The BAI strongly criticized this, stating, “Unjust benefits were provided to intentional and malicious high-value or habitual delinquents.” The report highlighted that among these 1,066 individuals, 208 had been publicly named, 90 were subject to travel bans, and 15 were under investigation for asset concealment. Their erased debts, totaling 268.5 billion Korean won, allowed some to re-engage in economic activities, including purchasing real estate with concealed assets, thereby evading regulatory oversight.
Disproportionate Impact and Limited Accountability
Interestingly, the NTS did not actively encourage the erasure of small-value delinquents’ debts, deeming them less impactful for meeting their reduction targets. The BAI pointed out the inequitable outcome of this approach: “Excluding small-value delinquents from statute of limitations adjustments led to unreasonable outcomes, as their assets remained seized, preventing them from economically recovering.”
In September 2021, the NTS publicly announced that the cumulative uncollected amount as of June 2021 had fallen to 98.7 trillion Korean won, a reduction of 23.3 trillion Korean won from the previously calculated 122 trillion Korean won. However, the illegal erasure of delinquent taxes continued unabated. The BAI’s investigation revealed that from December 2020 to 2023, 1,494 delinquency officers across seven regional NTS offices and 132 tax offices illegally processed over 21,285 asset seizure releases, resulting in the unlawful erasure of 1.4268 trillion Korean won in legitimate tax claims.
Despite the scale of the misconduct, accountability has been minimal. Only one NTS official faced disciplinary action. The majority of those responsible had already retired, and most of the infractions fell outside the three-year statute of limitations for disciplinary measures under the State Public Officials Act. The BAI did issue a warning to the former head of the collection division, who was credited with devising the “statute of limitations adjustment plan,” and recommended that a record of misconduct be kept for former Commissioner Kim Dae-ji.
