How Revenue catch the Tax Cheats

Oct 23, 2017

Sunday Business Post, 22 October 2017
However much we might grumble about it, Ireland is an unusually tax compliant society, with reported compliance levels reported at 85% or more.  Many taxpayers don’t have a choice but to pay their taxes.  The PAYE worker can do nothing about the income tax the employer deducts every month, the shopper can do nothing about the VAT charged on the clothing or groceries, and you can’t opt not to pay the excise duty on the petrol at the pumps.  

Tax evasion is wrong.  Most taxpayers recognise that, but despite the generally positive compliance attitude, evasion at times became a virtual industry in this country – there were reasons that we had tax amnesties and special tax investigations like the Bogus Non Resident Accounts investigation and the Offshore Assets investigation.  A few years ago the Public Accounts Committee estimated that as much as €1 billion in unpaid taxes was lost to the exchequer over a ten-year period.  The evasion came to light as businesses went into liquidation.  From a commercial standpoint this is the biggest problem with tax evasion – tax dodging businesses compete unfairly with compliant businesses because they illegally make for themselves a lower cost base.

Tax evasion involves making an incorrect return, or not making a return at all, or not paying what is due.  All revenue authorities are watchful of their tax base, even if they are a bit coy as to how they go about it.  The rationale for this reticence is the same as the rationale for the Gardaí not advertising where the speed camera will be.  Blanket tax compliance enforcement is a costly business, so deterrence and spot-checks are the order of the day.  If you’re reading this article in the hope of finding tips for avoiding being caught out, you’d better stop now because you will be disappointed.  But if you’re curious about some of the steps Revenue take to protect the tax base, please read on.

Consistency

In Ireland, the tax return process is highly automated.  For all practical purposes, all tax returns and payments are submitted electronically.  This isn’t just efficient from the tax processing point of view.  It also opens up the individual components of the tax return to electronic comparison and scrutiny.  Disappearing sources of income or unusually high or low claims for allowances and deductions compared to others in your industry sector will ring alarm bells in Revenue headquarters and trigger queries being raised.  Revenue constantly increase the level of detail required on the tax return – this year for instance additional information on rental properties is being sought. 

Revenue’s automated analysis process – the Risk Evaluation Analysis and Profiling system (REAP) - looks for mismatches in the information they already have on you.  For instance, a low income figure returned would prompt queries if they had a vehicle registration tax record showing you had bought an expensive car during the year.  A parallel system to REAP called CRISP analyses customs declarations by businesses, again looking for inconsistencies.

Financial Information

Information is being sent automatically to Revenue by financial institutions each year.  You can take it that Revenue will already have a fairly good idea of how much money you have on deposit with your bank.  Revenue also receive suspicious transaction reports under the Anti-Money Laundering rules alerting them to possible tax evasion on monies which are the proceeds of crime.

It’s not just the banks that must provide reports to Revenue.  They will routinely receive information from the likes of auctioneers if you’ve been involved in any high-value transactions.  Most businesses also have to submit details to Revenue of amounts paid to contractors.  All these sources offer opportunities to Revenue for information matching against what is declared or not declared on your return of income.

Bringing it all back home

The tax authorities across Europe automatically share with each other the information they have on your income, fees, property and investments.  Nor is this limited to the EU.  Many countries, including Ireland, already routinely disclose investments made in their territories by US citizens to the US Internal Revenue Service and get information back in return. 

The introduction of Local Property Tax introduced a rich new seam of information for Revenue to mine.  Utility bills, housing data, and information on payments made by other government departments like Agriculture came systematically to them for the first time.  Schemes like the Home Renovation Incentive have as their main objective the provision of a tax break to homeowners while supporting the building industry, but have as another objective the collection of data on the income of contractors.

Number crunching

All that information requires a lot of processing and number crunching.  Successive Budgets have seen increases in the resources allocated to counter evasion, often through improvements in data analysis systems. 

The fine print in last week’s Budget contains proposals towards “enhancing ICT capacity for data matching and analytics, and capability building.”  That one is specifically directed at ensuring PAYE compliance.  Another new compliance project will tackle “risks identified by ecommerce and online businesses”.  When Revenue say “compliance project”, they actually mean “non-compliance project”.  There will be new measures to protect the tax base against cross-border activity.  Between them, these proposals have been estimated to bring in an additional €100 million.

Civic Minded Citizens

Not all detection of evasion is quite so high-tech.  From time to time Revenue receive reports from people on the activities of their less civic minded neighbours, former friends or former partners.  Revenue officers also do the common sense things that you should expect any enforcement agency to do, like read the newspapers or simply look around.  I once came across a case of a tradesman being pursued for tax evasion, having erected scaffolding and put his signs up across the road from the local tax office.

Most of the time though, the data analysis, data matching and circumstantial evidence serves only as a prompt to Revenue to raise direct enquiries or carry out inspections, audits and investigations on a taxpayer premises.  Revenue report that they carried out just over half a million such “interventions” last year to ensure compliance with the tax code, a process that yielded €555m.  Much of that money came from correcting mistakes which the taxpayers had made on their returns, and not from recovering taxes lost through deliberate evasion.  An error triggers the same response from Revenue as fraud.  The only difference is in the calculation of the settlement amount.

Business has a key role in the tax compliance process – almost 80% of all taxes are collected by and from businesses.  For that reason, while Revenue can target any taxpayer, much of their tax policing activity is focused on companies and the self-employed.  But take it that if you have money invested anywhere in the developed world, or a real estate transaction, or commercial activity or income of any size, there are details about it somewhere on a Revenue database.  And if those details don’t match up with your tax returns, chances are you will be challenged at some stage for tax evasion.

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