In this article, Shane O'Donovan, a Tax Manager with PKF O'Connor, Leddy & Holmes Ltd, who specialises in providing tax consultancy advice to high net worth individuals and SMEs, gives advice on dealing with a Revenue Audit.
The dreaded day has arrived – a notification of a Revenue audit has arrived in the post and you have a missed call from your accountant, who has also received a copy of the notification. Is it too late to flee the country? Perhaps a move to Antigua might not be the worst thing in the world. In reality, a Revenue audit is not something to be feared. In any particular year, up to 50% of taxpayers receive a Revenue intervention – Revenue interventions are a fact of life.
Broadly, Revenue interventions can be broken down into three categories, namely:
- Revenue Non- Audit Compliance Interventions (Mainly Assurance Checks, Aspect Queries and Profile Interviews);
- Revenue Audits; and
- Revenue Investigations.
Revenue Non-Audit Compliance Interventions
A non-audit compliance intervention is the lowest level of review that Revenue seek to carry out. Non-audit compliance interventions generally take the form of written aspect queries. Typically, an aspect query will generally arise in reply to a return that has been submitted to Revenue.
For example, you may receive a query from Revenue requesting additional information on a VAT return that has recently been submitted; typical information that would be sought by Revenue would be:
- Sales listing
- Purchase listing
- Copies of largest sales and purchase invoices for the period
Other typical aspect queries include queries on connected party transactions, queries on specific items included on tax returns and queries on returns that have not been satisfactorily completed.
In 2014, Revenue carried out 429,545 non-audit compliance interventions, which yielded a total of €272 million. While the questions raised by Revenue aspect queries may seem innocuous, it is important that taxpayers engage with the process and answer the queries in a timely manner. The amount raised by Revenue on foot of aspect queries is not insignificant and failure to deal with aspect queries can lead to a full Revenue audit.
Revenue audits are perhaps the best known type of Revenue intervention. Revenue audits can take the form of:
- Comprehensive (all tax head) Audits
- Multi-Tax Head Audits
- Single Tax Head Audits
- Single Transaction Audits
In 2014, the total number of Revenue audits amounted to 7,636 resulting in a yield of €338.8 million. A Revenue audit can be for a single year or, alternatively, can be a multi-year audit.
The question arises as to how a taxpayer is picked for a Revenue audit? Is there a shady man in a long trench coat following you around for weeks before deciding you're a Revenue audit candidate? Revenue have made significant advances in the use of technology, which means that the man with the long trench coat has become surplus to requirement.
There are three main ways in which you can be picked for Revenue audit, namely:
- Tax returns screening and statistical analysis;
- Revenue specific projects; and
- Random selection.
The majority of Revenue audits arise from tax return screening and statistical analysis. Revenue uses a technology known as REAP (Risk Evaluation, Analysis and Profiling) to select taxpayers for Revenue audit. Revenue collates information from more than 50 sources. With this information, together with information gathered through the tax network, REAP can identify businesses that are not registered, that are under-reporting income and/or present risks of fraud. Increasingly, Revenue is using Social Network Analysis as part of the risk profiling exercise. You should be cognisant that while Facebook is an excellent advertising platform, it does also aid Revenue in its risk profiling. Revenue also applies a combination of predictive models and specific business rules to transactions and behaviours, to identify compliance risks such as fraudulent refund or repayment claims.
Secondly, Revenue carry out specific targeted projects. Examples of specific Revenue projects carried out in recent years include:
- Self-employed contractors;
- Chinese restaurant operators; and
- Medical consultants.
Currently, the medical consultant's project is the main Revenue project. Revenue is engaged in an ongoing and significant programme of compliance work in relation to the tax affairs of medical consultants. The main focus of this programme, which originally was largely Dublin-centred and has now been extended nationally, has been to address the tax issues arising from the incorporation of medical consultants' businesses. At end 2014, Revenue had opened a total of 279 compliance interventions on medical consultants. 119 of these interventions had been closed, resulting in tax settlements of just under €16 million.
The requirement for pharmacies to operate PAYE on locum pharmacists stemmed from a Revenue project a number of years ago. There are currently no Revenue projects aimed specifically at pharmacies.
Revenue also carries out a number of random Revenue audits. In recent years, the number of random audits carried out by Revenue have decreased in favour of audits based on statistical analysis and specific Revenue projects. For 2013 and 2014, Revenue's random audit programme amounted to 400 cases.
A Revenue Investigation is an examination of a taxpayer's affairs where Revenue believes, from an examination of available information, that serious tax or duty evasion may have occurred or a Revenue offence may have been committed. It goes without saying, that a Revenue Investigation is the most serious type of intervention. A Revenue Investigation can arise where, in the course of a Revenue audit, Revenue finds that queries raised have not been dealt with sufficiently by the taxpayer. Revenue investigations typically involve multi-year reviews of a taxpayer's affairs.
Generally, at the outset of a Revenue intervention, the taxpayer will have an opportunity to make a voluntary disclosure. Making a voluntary disclosure at the outset of a Revenue intervention can significantly reduce the penalties associated with any tax settlement. Another key benefit of a voluntary disclosure relates to publication – if a taxpayer makes a qualifying voluntary disclosure at the outset of a Revenue intervention, no publication will arise. Without a voluntary disclosure, publication will arise if the total Revenue settlement exceeds €33,000 or if the penalty associated with the Revenue settlement exceeds 15%.
Reverting back to the Revenue audit letter which has just arrived in the post – do you still need to hop on a plane to Antigua? The key to dealing with Revenue is not to panic. I would strongly advise that you engage with your tax advisor to deal with any Revenue interventions that arise. While there will be an advisory cost to this, the ramifications of not dealing satisfactorily with a Revenue intervention significantly outweigh any professional cost.
Originally published by IPUREVIEW, July 2015.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.