Revenue Audits – Your 10 point survival guide

Nov 20, 2017

Sunday Business Post, 19 November 2017

There are 450,000 or so self-employed or self-assessed individuals who have to make returns of income every year to Revenue.  Most of them filed their tax returns last week.  In addition tens of thousands of companies have to make returns as well.  All of these tax returns are screened and checked.  If Revenue see something they don't like, they will make enquiries.  There are few enough businesses that haven’t been at the receiving end of Revenue curiosity at some stage, at least to some degree.  So what do you need to know to deal with Revenue Audits, investigations or enquiries?


1         Why me?

Almost all Revenue audits happen for a reason.  Either Revenue are dissatisfied with something on one of your returns, or have information that some income hasn’t been declared, or you have claimed something incorrectly.  If you are in business, they may have picked up something incorrect or suspicious in the way you operate PAYE or VAT.  Revenue do audit some cases each year at random but it’s most unlikely that you have been randomly selected.

Revenue sometimes look at particular industry sectors or business activities.  You may receive an enquiry because of the sector you operate in, rather than because of anything you might or might not have done.  For example in recent times Revenue have focussed on the medical profession, and on professional contractors operating through their own companies.  The construction sector is perennially being challenged, and at the moment some claims by businesses for tax relief for Research and Development expenditure are being audited.


2         What is Revenue looking for?

Revenue operate a system they call REAP - a computer database which logs all the information they hold on you received directly from yourself, or from third parties like the Department of Social Protection or the Department of Agriculture.  They will also have things like Stamp Duty records, so outside of your return of income they will have data about your purchases and sales of assets.  These records are matched up to the contents of your return of income.  The fewer items that match properly, the higher the risk of being audited or investigated. 

In tandem with all this sophisticated matching and screening, there’s plain old fashioned information.  Revenue read the papers.  They consider tip-offs from civic-minded citizens and slighted partners and spouses.  And in more recent times they have a wealth of information on offshore activities coming in from their counterparts in other revenue authorities across the world. 

Revenue will not tell you precisely why they have been in touch – you’ll have to figure that out.


3         What do I do when I get a letter from Revenue?

Open it!  I am constantly amazed by the trouble people create for themselves by ignoring tax correspondence or by just assuming their accountant is handling it.  Revenue will usually copy in a taxpayer’s professional adviser, but it’s not guaranteed.  A brown envelope with a harp on it rarely improves your day, but open it anyway.  Then look at the letterhead.  If it makes any reference to Investigation Branch, get legal advice straightaway.  Chances are that Revenue are looking to prosecute you for tax evasion.  Most cases don’t involve investigations, but are just queries or notices of an audit.  That said, on average someone is jailed every month as a result of a Revenue investigation.


4         It seems to be a routine query – what should I do?

Sometimes an apparent discrepancy on your tax return will be handled by Revenue issuing a query letter asking questions about a specific item.  Depending on how satisfactory your response is, Revenue will either decide to fully audit your case or let the matter rest.  The letter will specify a time limit for a response, and it’s generally a good idea to answer it within the 21 days, or whenever specified on the letter.  If you need more time than you are being offered, ask for it.


5         The letter says “Notice of a Revenue Audit” – what does that mean?

The letter may state that your tax affairs are to be “audited”.  If so, and there are indeed some problems, there may be an opportunity to settle outstanding taxes without the investigation and prosecution process.  If you are unclear about the queries, you are within your rights to write back to ask for clarification, or perhaps to phone the tax office and ask the tax inspector to explain to you exactly what is needed.  You can also ask for more time to deal with the issue.  As with a routine query, the main thing is not to ignore the correspondence or delay answering it.

The letter will usually outline the area Revenue proposes to audit, whether that is your own personal tax liability, your company’s corporation tax liability, or the business taxes you operate such as VAT or PAYE.  It won’t go into specifics.

6         What are the main tax problem areas?

First of all, an audit notification doesn’t mean that you are being accused of tax evasion.  Tax law is overly complicated, and tax payments can be missed simply through an innocent error or carelessness.  Most Irish businesses are tax compliant and are good at handling the routine stuff; sales, purchases, stock, and the like.  Tax problems often arise as a result of non-routine activity, such as the transfer of assets into or out of the business.  Property transactions, particularly the VAT aspects, are often problematic. 

Revenue often focus on where money leaves the business or the company and is paid into the hands of individual owners or employees.  Are the books and records up to date and correct?  Is there any non-business expenditure included in the accounts?  Are all employees shown on the payroll?  What controls are in place over the payment of expenses to employees?  What kind of benefits are being provided by the business to owners and staff? 

7         I’ve found a problem – how do I sort it out?

If you find a problem after you get the Revenue audit notice, most business taxpayers have the option to offer what is called a Qualifying Disclosure to Revenue.  You should tell Revenue within two weeks of receiving the audit notification that you intend to make a Qualifying Disclosure.  After contacting Revenue in writing about your intention, you will then have another sixty days to put together the Qualifying Disclosure and make arrangements for payment of back taxes and whatever interest is due (at rates of up to 10% per annum). 

The Qualifying Disclosure must address all the different types of taxes mentioned in the Audit Notification and any tax of any sort which was deliberately evaded.  So if for example, the Audit Notification concerned VAT, but you also had people on your payroll where you didn’t apply PAYE, you would have to include any underpaid PAYE in your Qualifying Disclosure.

8         Will there be penalties?

If there’s a problem, there probably will be penalties.  Revenue will calculate what these are based on the contents of your qualifying disclosure.  Generally speaking, Revenue will not ask you to settle tax more than four years back, but they will reserve the right to go beyond four years.   Typically, this will happen if Revenue suspect fraud or neglect on your part, as distinct from simple carelessness about keeping your tax affairs up to date. 

Making a valid Qualifying Disclosure can mean that you pay a much reduced penalty.  Penalties start at 100% of the tax at issue, but proper disclosures can abate the penalty down to as little as 3%.   You can appeal a Revenue penalty through the courts if you think it is too harsh.  Most people don’t appeal penalties however, as a court appeal can put your private business and tax affairs into the public domain if the case is reported.


9         Will my name be published?

That depends on how serious the matter is.  Tax penalties are calculated by reference to the nature of the mistake (deliberate or otherwise) and the amount at issue.  If the penalty is calculated as being 15% or less your case will not be published.  There’s also a minimum threshold for the settlement amount – if the settlement is below €35,000 you won’t be published either.  Another good reason for making a disclosure is that in most cases it will keep your name out of the paper as a tax defaulter.  However, if you have form with the Revenue as a persistent offender, you might not be able to rely on these get out clauses. 


10       How long does the process take?

After responding to a Revenue enquiry letter, you may not get a response for some months, if at all.  A span of two to three months from the time of receiving an audit notification to conclusion and settlement, perhaps including a few days when Revenue officers are on site in your business, can be expected.  However some cases can drag on a lot longer especially if some of the tax issues are unclear and are being contested.  Inevitably there will be some business disruption – you could have to make available to the tax inspectors all types of data, books and records which can soak up a lot of your time and your staff’s time.  Revenue can also seek electronic copies of data from your accounts system.

Brian Keegan is Director of Public Policy and Taxation with Chartered Accountants Ireland