Why Did Your "Number" Come Up
Most audits and investigations are targeted at cases where Revenue believes there is a risk of underpayment of tax. On average Revenue carries out over 13,000 audits each year and of these less than 500 are selected at random. The success in the take up of on-line filing via Revenue’s Online System (ROS) and the development of sophisticated risk profiling software has enabled Revenue to better target cases for review and to widen the scope of its audit activity. Coupled with the screening of cases at district level, Revenue can identify and rank potential risks in real time and take whatever action is deemed necessary.
Risk Profiling
Tax returns filed with Revenue are analysed and ‘scored’ according to certain rules which vary depending on the size and nature of the business. Revenue also monitors failures to submit returns and to make payments of tax on time. In the current business environment the reason for a high risk ranking in many cases is because outstanding taxes are being flagged by the Collector General’s Office. Other reasons leading to an audit include informants, your relationship to another taxpayer who is being audited, being part of a special group that has been singled out for investigation (i.e. the single premium insurance products offshore accounts enquiries), or being part of a Revenue project such as the auditing of medical practitioners and locums.
Kinds Of Audits
Revenue carries out comprehensive audits (i.e. all tax heads), multi-tax head audits (i.e. PAYE and VAT) and single tax head audits.
Revenue also conducts a significant number of assurance checks and these are usually carried out by way of letter. These checks are designed to enable verification of specific items without initiating a resource intensive audit or enforcement activity. The number of assurance checks performed each year has grown significantly, from 98,981 in 2005 to 347,445 in 2008 (the most recent year for which information is available). Assurance checks include:
- verification of documentation and requests for additional information in relation to Income Tax, Corporation Tax, VAT and gift/inheritance taxes.
- checks of customs documentation
- excise checks including VRT
- checks arising from suspicious transaction reports
- eligibility checks arising from special investigations.
Stages in the Audit Process
In most cases a taxpayer will first become aware of an audit on receipt of an audit notification letter from Revenue. It is important that this correspondence is dealt with promptly as it may be possible to scale back the period under review and/or to change the date selected by Revenue.
It is recommended that professional advice be taken at this stage to identify tax issues present in the business. A common misconception is that tax issues were identified and rectified by the accountant during the preparation of the annual accounts. In fact, many tax issues – especially VAT and PAYE – go undetected and these can lead to significant exposures in a Revenue audit.
Often Revenue will agree to conduct the audit at your advisor’s office rather than at your business. However, the inspector will wish to examine the business facilities first hand and will often take this opportunity to ask questions. It is important that your advisor is present at this and all face-to-face meetings with Revenue. There is no such thing as idle conversation with a Revenue inspector even during a site visit. Having an advisor present at the site visit will buffer you from questioning and probing by the inspector.
The critical moment of the audit occurs at the opening meeting with Revenue. At this meeting Revenue will outline the scope of the audit, carry out an interview by questionnaire with the business owner and invite a voluntary disclosure. A voluntary disclosure must be made to minimise any settlement arising and to avoid publication of the disclosure in Revenue’s quarterly defaulters list. Failure to make a proper voluntary disclosure will result in higher penalties and possibly publication. A voluntary disclosure cannot be amended or added to once the initial meeting is concluded.
Following the opening meeting Revenue will identify what records they wish to review. It is good practice to present the books and records in a tidy and orderly fashion. Records that are complete, organised and cross-referenced will give Revenue reason to be confident that the business affairs are in order. Generally, Revenue will review the books and records in isolation. Following this review they will reconcile their findings with any voluntary disclosure made. If the findings are broadly in line with the voluntary disclosure, it should be possible to conclude the audit subject to agreement of the total settlement which will include the tax underpaid, interest on late payment of that tax and a penalty. Having an advisor at this stage will ensure that the penalty is not excessive having regard to the nature of the issues identified.
If Revenue identify underpayments of tax that are not included in the voluntary disclosure this may lead to higher penalties, publication and, in serious cases, even prosecution.
Is The Decision Of The Revenue Inspector Final?
If you do not agree with the Inspector’s findings the differences should be carefully documented in writing and discussed with Revenue as soon as possible. Otherwise the audit may become protracted and Revenue may seek to impose higher settlement terms.
The options available to taxpayers in dispute with Revenue include an internal review and an appeal of assessments issued on foot of the audit. However, unless there is a fundamental difference in the interpretation of tax law, the best outcome is usually secured by early negotiation with Revenue.
Options For Handing An Audit
A taxpayer may choose to handle the audit directly or to engage a tax advisor. If the taxpayer decides to handle the audit directly here are some basic do's and don'ts to follow:
- Be organized.
- Review the information provided by Revenue and understand your rights and obligations.
- Carefully review all relevant transactions in the period under review.
- Ensure all transactions have been treated correctly in line with legislation and Revenue statements of practice.
- Consider whether transactions outside the period under review warrant disclosure to Revenue.
- Give Revenue only the documents needed to support the deduction being questioned.
- Never give Revenue more or less information than is requested.
- Prepare a written voluntary disclosure and have it reviewed by an experienced professional.
- Answer all questions honestly, but briefly.
- Never give an inspector the only copy of a document.
- Do not leave your original records with Revenue.
- Don't chatter or exchange casual conversation.
- Stay calm, don't be argumentative or belligerent.
- Keep copies of anything that you sign.
- Keep records of your meeting including questions asked and responses given.
The Tax Advisor's Role
The cost of engaging a tax advisor should be weighed against the cost in terms of time and stress involved if you have no representation. In the majority of cases the benefits of taking professional advice from the outset will significantly outweigh the cost.
As experienced tax advisors we will limit your “exposure” and reduce the stress of dealing with the audit. We will interface with Revenue on your behalf throughout the process – except for the initial meeting when you must directly deal with Revenue. We can help in the following ways:
- narrow the scope of the audit if sufficient reasons exist and Revenue agree.
- brief you on how to prepare for each stage of the audit process,
- outline questions that are likely to be asked and explain what documents that are likely to be examined.
- carry out appropriate levels of due diligence in advance of the audit to identify potential issues.
- draft the voluntary disclosure.
- ensure that the audit is conducted in a reasonable manner and that it does not "mushroom" by extending into other tax heads and periods outside those selected for review.
- negotiate with Revenue in relation to the level of penalty to be applied.
- correspond with Revenue on points of law and audit practice – we speak the same language as Revenue.
Less than 2 to 4 percent of the tax returns that are filed are audited. If you number comes up, be prepared to get things organised and to present your business in the most favourable light possible.
A big part of handling a Revenue audit is communication and the ability to talk Revenue’s language. If you have these skills, you may want to handle the audit yourself. If not, we have the skill and experience to manage the process for you.
For more information on our services or to download a PDF copy of this article visit http://www.andrewstax.ie/
