Revenue Audits are now an integral part of the taxation system. They compliment the system of self assessment and promote voluntary compliance. The function is to detect and deter noncompliance.
The purpose of an audit is to determine the accuracy of returns of tax liability, tax payments and claims for repayment. They may identify additional liabilities, in which event the unpaid tax or overpaid repayment may be charged together with interest and penalties.
Remedial action may be required by the taxpayer on foot of an audit where irregularities and errors are discovered in the course of the audit. In the case of significant tax evasion, reference may be made to the investigations and prosecutions division of the Revenue Commissioners.
Audits may be undertaken randomly. Purely random audits are less common. More commonly, they may be based on profiling, information received or on examination of returns. An audit may be undertaken by an individual or by a group of auditors. This will depend on the nature of the business and complexity.
Revenue operate a risk evaluation analysis and profiling system. There are a series of principles built into the system, which are constantly adjusted, in order to identify high risk cases of evasion and under declaration. Revenue take into account matters such as
- the reconciliation of VAT returns with other income returns, the returns of other traders;
- difference in margins with similar businesses in the sector;
- low drawings and salaries;
- abnormally high overheads;
- loans to company participators;
- unexplained capital changes;
- poor compliance.
Most audits are based on criteria such as those above. Revenue do not disclose the reasons for audit.
E-auditing is electronic analysis of returns. Electronic analyses of returns are undertaken systematically. E-auditing is electronic is suitable for analysis of a large number of transactions. It is likely to become more common over time. Electronic checks are part of most audits.
Revenue will may call to a traders premises without prior notice. It has significant power which it may exercise “on-the-spot”. This is done on the basis of the general powers of Revenue to enter premises at all reasonable times. It may require immediate access to paper and and electronic record and date. In some cases, Revenue may be prepared to reschedule for the more suitable time shortly thereafter.
On-the-spot audits are more likely to take place with “cash” businesses and systems. On-the-spot checks are common with electronic cash registers and point of sale technology. .
A Revenue investigation may take place where there may be serious tax evasion. This may follow from a Revenue audit. It may lead to reference of the matter to the investigations and prosecutions division.
The investigation will generally involve notification to the taxpayer that he or it is under investigation. It may specify action required and the set out the required period. This may be extended as circumstances require. In the case of serious tax evasion, the investigation may commence without notice.
A person receiving an investigation letter may make a disclosure. He may not be able to make a qualifying disclosure, avoid publication or receive assurances that he /it will not be referred for prosecution.
21 days notice is generally give of a proposed revenue audit or investigation to the taxpayer. This will state the nature of the Revenue audit or investigation. The taxpayer used to be given the opportunity to make an unprompted qualifying disclosure. He may be now given the opportunity under the new code, to make a prompted qualifying disclosure before the examination of books and records. An audit of a small company is likely to include an audit of the director’s personal taxation.
The taxpayer may regularise his affairs in the absence of an audit. This is advantageous in terms of minimising penalties and interest. There is provision for correction of innocent errors, technical adjustments and making a claim on the basis of treatment which has no net effect on the tax paid. The taxpayer may make a qualifying disclosure in such circumstances.
In certain circumstances, Revenue may allow a self correction without penalty. The taxpayer must notify the adjustment in writing and include a corrective computation. Payment in settlement of the liability must be made. The self-correction must take place within 12 months of filing.
Self- correction will not be available if an audit or investigation has been notified. It is not available for deliberate acts which occurred in any previous period. Revenue may allow self correction without surcharge, within certain limits.
A threshold of €6,000 applies to self-correction of VAT returns. Within the limits of self-correction, interest, penalties and surcharge will not generally arise.
A penalty is not generally sought, if on audit, the tax default is not deliberate or attributable to a lack of reasonable care in the organisation of tax compliance obligations. The factors in mitigating penalties completely will, include the discrepancy being less than €6,000, keeping of proper books and accounts, the frequency of recurrence of errors, previous compliance record, and materiality.
Technical adjustments arises from the interpretation or application of legislation. A technical adjustment will not attract a penalty, if due care has been taken and the treatment is based on an interpretation of law, which could reasonably be considered to be correct. Regard is to be had to the complexity of the issue, available precedents, court decisions and guidance. Matters which are well established and clear will not be accepted. Statutory interest is applicable.
Where there has been no loss of revenue, there is less likely to be an imposition of surcharges, penalties and interest. However, the Revenue have an interest in upholding the integrity of the tax system and will not readily accept a failure to operate the system notwithstanding that no revenue loss is involved. The onus is on the taxpayer to prove that there has been no loss.
A claim of no loss will not be accepted,
- where the failure is deliberate;
- there has been a genuine failure to cooperate;
- the absence of loss is not proved to the satisfaction of the Revenue;
- where the taxpayer has not cooperated;
- where the default is careless, and that there is neither a qualifying disclosure nor cooperation.
Statutory interest may be limited to periods during which there was a temporary loss of revenue. In the case of an innocent error or technical adjustment where the taxpayer took reasonable care, penalties are not likely to be imposed where the general compliance criteria above apply.
In case of a no loss of revenue, a prompted qualifying disclosure and cooperation will generally limit penalties to 6% or €15,000, whichever is less, in the case of a first qualifying disclosure. This increasing to 6% or €60000 in the case of a third and subsequent qualifying disclosure. In the case of unprompted disclosures (with cooperation, penalties are lesser of 3% or €5,000 on first qualifying disclosure rising to 3% and €40,000 on the third and subsequent disclosures.
The cases above refers to cases where there is careless behaviour. In other cases where there is no disclosure and careless behaviour, but with cooperation penalties may be up to 9% or €100,000.
Because these cases are by way of concession, there is no formal appeal if they are not made available.
A taxpayer is given an opportunity to have a court examine whether that person is liable to a civil penalty for contravention of tax or duty legislation. He may agree, however to pay a penalty without court intervention. Where a person is found by a court to be liable to pay a penalty, that penalty may be collected and recovered in the same way as tax is collected and recovered.
Revenue guidelines distinguish between deliberate behaviour, careless behaviour with significant tax consequences and careless behaviour without significant tax consequences. These determine the level of civil penalty. A taxpayer who makes a qualifying disclosure will not be investigated for prosecution, subject to exceptions.
A qualifying disclosure is a disclosure of complete information in relation to the full particulars and matters relevant to the tax liability. It must be accompanied by a declaration, that to the best of the person’s information, knowledge and belief, the information supplied is correct and complete. It must be accompanied by payment of tax and interest on the late payment.
Qualifying disclosures whether prompted or unprompted, must state the amounts of all tax and interest and under all heads which arise in consequence of deliberate behaviour that were formerly undisclosed.
In the case of a prompted disclosure, in the careless, with gross negligence or insufficient care categories, the qualifying disclosure must set out the liability to tax and interest in respect of the relevant tax head and periods within the scope of the proposed audit. In the case of unprompted qualifying disclosure in the careless, gross negligence or insufficient care category, all liabilities to tax and interest in the tax head and profits within the subject of the unprompted qualifying disclosure.
If a disclosure is made, the auditor may still take the view that additional liabilities may arise under different heads or periods, not within the initial scope of the audit. Where the audit’s scope is formally extended, the benefits of the prompted qualifying disclosure is extended accordingly.
A taxpayer will continue to have the benefit of the unprompted qualifying disclosure, where the audit is not formally extended, but the auditor draws attention of the taxpayer to issues which were not within the initial scope of the audit.
The auditor may pursue related penalties for tax heads and periods not within the scope of the initial audit. The benefit of prompted disclosure will be extended to them. In cases not involving deliberate behaviour, if the auditor draws the attention of the taxpayer to issues without formally extending the audit, the taxpayer will have the benefit of the unprompted disclosure in respect of additional liabilities disclosed on such issues.
Unlike the former position, the taxpayer need not self assess the penalty. This reduces the risk of noncompliance and further penalties. A qualifying disclosure need not make reference to penalties or state the amount of penalties due. On receipt of a qualifying disclosure, the auditor will agree the penalties. The taxpayer must make payment of the full amount of the settlement to include tax duty, interest and penalties.
The tax due must be paid on the liability, the subject of the qualifying disclosure. There must be a real and genuine proposal to pay the agreed liability, involving payment or agreed payment in accordance with the Revenue’s instalment arrangements procedures. If the taxpayer fails to honour the payment arrangement, and Revenue are satisfied the disclosure and intention to pay was not bona fide, it is not a qualifying disclosure.
If the taxpayer makes a prompt qualifying disclosure or unprompted qualifying disclosure, Revenue will not initiate an investigation with a view to prosecution, provided that it is a qualifying disclosure.
An audit of a parent company or subsidiary may necessitate audit of other group company. Where the audit does not extend to other group companies, this does not prevent such other group companies in making unprompted disclosure.
A Prompted Qualifying Disclosure is a qualifying disclosure that is made to Revenue, in the period between the date on which the person is notified of the audit and the date on which it starts. The date of notification is the date of the audit notification letter. This accordingly, is a disclosure made before examination of books.
An unprompted qualifying disclosure is a qualifying disclosure in respect of which, Revenue is satisfied that it has been furnished voluntarily before the audit or investigation commenced into any matter occasioning a liability to tax. Where a person is notified by Revenue of the date on which an audit is or investigation into any matter occasioning liability has been started, the disclosure must be made before the letter notifying the audit or before commencement of an investigation, as the case may be.
Communications with Revenue outside of the above circumstances will not necessarily prevent an unprompted qualifying disclosure. If there is no letter, or the letter does not give notice of an audit, unprompted qualifying disclosure may still be available. The letter may fail to constitute an audit letter, if it is insufficiently precise.
A disclosure is not a qualifying disclosure if before it is made, the Revenue officer has started an audit or investigation into any matter contained in the disclosure and had contacted or notified the relevant taxpayer or his agent in this regard. The disclosure is not qualifying, if it is made by the person is incomplete, in accordance with the criteria above. A qualifying disclosure must be in writing.
It is not a qualifying disclosure, if the matters in it have become known or are about to become known to the Revenue through their own investigations, investigations by another statutory body or are within the scope of an inquiry being carried out partly or wholly in public in which the person who made the disclosures is linked or about to be linked publicly
The degree of penalty mitigation is less in the case of the second, third and subsequent qualifying disclosures. Revenue have publish a table of reduced penalties. Where no additional qualifying disclosures are made for five years, subsequent qualifying disclosures are regarded as first disclosures.
A second qualifying disclosure arises if there was a liability to a specific tax head is the first qualifying disclosure Qualifying disclosures in the careless, without significant consequences, insufficient care category are not counted when calculating the number of qualifying disclosures. However, this is limited to circumstances of minor default.
Notice of intention to make a qualifying disclosure may be given, in order to give time to prepare the disclosure. In an unprompted qualifying disclosure case, notice must be given before a notice of issue an audit or before contact has been made by Revenue regarding a Revenue investigation.
Provided that notice of intention to make the disclosure is made within 14 days, an additional period is allowed to prepare the disclosure of 16 days. This is to allow time to quantify the shortfall and make the relevant payment. This period runs from the date of notice.
Revenue will examine unprompted qualifying disclosures for accuracy. The taxpayer must continue to fully cooperate in order to secure the relevant treatment. Revenue may choose to accept the disclosure without further examination.
Where there is no qualifying disclosure, but there is cooperation, penalty mitigation may be available in whole or in part. Cooperation includes delivery of all books and records, having appropriate personnel, furnishing prompt responses for all information and prompt payment.