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Thursday, 25th April 2024 |
| A Revenue audit is rarely welcome even by compliant taxpayers. Part of the terror it inspires is fear of the unknown. The Revenue Commissioners have issued a draft code of practice in relation to Revenue audits which should help allay fears. |
Even the most compliant taxpayer will probably feel their heart stop for a moment when they get a notification of a Revenue audit. That is partly due to fear of the unknown. It is partly due to the disruption to their life that it will involve, and partly due to a perception that the auditor will not leave without money. The draft code of practice may help the taxpayer to put the audit experience in perspective.
Penalties
If a Revenue audit reveals that tax has been underpaid, most taxpayers will be reconciled to having to pay the tax. The question of also paying penalties is more sensitive. Penalties can lead to the taxpayer’s name being published.
The code of practice properly states that ‘Not every type of adjustment arising as a result of a Revenue audit will give rise to a penalty. Fraud or negligence has to be present before a penalty becomes due’ - -. In other words, an underpayment resulting from innocent error by a careful taxpayer cannot attract a penalty and cannot lead to publication of the taxpayer’s name.
Of course it is possible to take the view that any error is evidence of negligence. After all if proper care was taken, how could the error have occurred? The answer to that is the tax returns, accounts etc are largely prepared by humans and it is in the nature of humans, even when being careful, to commit errors. To err is human, but not necessarily negligent.
In the affairs of any large company, it would be astonishing if there were not some errors which impact on their tax liability. That is no evidence of negligence by the company. No system is capable of producing absolute accuracy in every circumstance. Indeed this is recognised by the draft code where it is stated that ‘Where it is clear that a taxpayer has broadly done his/her best to ensure that the tax returns for the various taxes are accurate, adjustments are not made for small inaccuracies on the basis that they may be attributed to innocent errors and may otherwise be balanced by minor errors in Revenue’s favour’.
Revenue matrix
Where penalties do apply they may range from anything from 3 per cent of the tax, to 100 per cent of the tax. A 100 per cent penalty would arise where the understatement of tax has been due to deliberate default by the taxpayer and where the taxpayer has not given full co-operation to the Revenue and has not voluntarily disclosed the problem. The 3 per cent penalty, at the other end of the scale, is where the underpayment arose through insufficient care on the part of the taxpayer and if the taxpayer made unprompted and voluntary disclosure of the problem to the Revenue and gave full co-operation in dealing with it.
The approach by the Revenue in setting out a matrix of penalties is probably quite sensible. It remains to be seen if Revenue auditors will be willing to accept the reality that error is no proof of negligence or of fraud and that therefore in the vast majority of instances in which error is discovered in a Revenue audit, no question of a penalty should arise. The Revenue matrix for the calculation of a penalty can almost lead one to be sucked in to a discussion of the size of the penalty, without consideration as to whether in fact any penalty is properly payable.
Prosecutions
Generally Revenue audits are directed towards encouraging compliance amongst taxpayers generally, and also towards raising revenue from the specific taxpayer being audited. In some cases however the Revenue audit may proceed with a view to the prosecution of the taxpayer for a Revenue offence.
It is interesting that whereas in general a voluntary disclosure by a taxpayer of his past faults will tend to avoid prosecution where it is full and complete, certain categories of taxpayers have no such comfort. Those who are one of a class being investigated by the Revenue (Ansbacher are specifically mentioned) or those coming within the scope of an enquiry carried on wholly or partly in public, or where the taxpayer is linked or about to be linked publicly with matters which may involve tax default, have to deal with the Revenue in the knowledge that they may be prosecuted. Revenue auditors are advised to give them appropriate cautions before taking statements from them.
It is easy to understand the Revenue’s view that they should not waive the right of prosecution in high profile cases, even where there is voluntary disclosure. The ultimate authority to prosecute or not to prosecute lies with the Director of Public Prosecutions rather than with the Revenue and in high profile cases the Director may well wish to involve himself.
However in principle it would not seem right that a decision to prosecute or not to prosecute would be dictated by a ‘lynch mob’ or by the prospect that the Revenue Commissioners would be subjected to criticism in the media or in the D?il for failure to prosecute a particular individual. The Revenue Commissioners have a tough job to do and it must be presumed that they are tough enough to do it even under criticism, once they are doing it properly. |
Jim Clery is a Tax Partner in KPMG.
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| Article appeared in the July 2002 issue.
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