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Business closures by Ecuador’s IRS prove to be effective: tax revenues are up nationally and in Cuenca

Ever wondered about the story behind those large, adhesive “Clausurado” signs plastered on the doors of closed-down businesses?  Most of us know they’re the result of a business failing to pay taxes or violating other government regulations. Few of us know much more.

The signs are the work of Ecuador’s Internal Revenue Service (IRS) and are usually the result of a kind of entrapment operation run by the Service. The practice is justified, the government says, because of the large number of tax evaders and rule violators.

Employees of the IRS routinely visit businesses, posing as customers, to see if rules are being followed. A small business that keeps its own books is required to give customers a receipt for all purchases over $4. A larger business, defined by the initial capital investment and by the fact that it has an accountant to keep its books, is required to provide receipts for all purchases, no matter what the amount. IRS is also looking for other violations that can trigger a businesses' closure.

“The way we do things may seem unorthodox by U.S. or European standards,” says Gustavo Moreno of the IRS office in Quito, “but we do these things by necessity. The rate of non-compliance on for paying taxes and keeping records is very high in Ecuador — and all of Latin America, for that matter. We don’t have the computer data bases that you have in North America to know whether a business is paying taxes and treating its customers fairly.”

When IRS agents find violations for the first time a business is shuttered for seven days but not required to pay a fine. If the same violation occurs a second time, the closure is for 10 days and the violator is fined. Further violations can mean court appearances and permanent closure. Last month in Cuenca, 23 businesses were checked by government agents and six were closed for violations.

According to Moreno, the IRS’s monitoring system is having the desired effect. Nationally, business tax collections exceeded expectation in the first quarter of 2009. Results are even better in Cuenca, he says. “In May, our collections in the canton were 114% of what we expected. I would call this success.”