Dealing with a Revenue audit is a stressful time for accountants who face reputation and financial risk if client issues are not correctly identified and addressed. In most cases it is possible to predict the likely outcome and with this information to manage your client’s expectations. The cardinal rule is to make sure that there are no surprises and for this a good knowledge of tax law and the audit process is essential.
Why Did Your Client’s "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 client’s 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 you will first become aware of an audit of your client 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.
A common misconception is that tax issues were identified and rectified by the accountant during the preparation of the annual accounts. The reality is that many tax issues – especially VAT and PAYE – go undetected and these can lead to significant exposures in a Revenue audit. From a risk management perspective it is recommended that engagement letters make it clear that an audit sign-off or accountants report does not constitute a clean bill of health from a tax perspective.
Often Revenue will agree to conduct the audit at the accountant’s office rather than at your client’s business premises. 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 the accountant 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 the accountant present at the site visit will buffer the client 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 the client does 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 clients 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.
Do’s and Don’ts For Handing An Audit
The accountant may choose to handle the audit directly or to engage a tax advisor. If the accountant 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 brief your client on his/her 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
In the current environment many accountants will deal with Revenue enquiries directly to avoid the cost of engaging a tax advisor. The decision to deal directly with Revenue should be weighed against the potential tax saving that can be achieved by engaging an experienced tax advisor. An experienced tax advisor will limit the client’s “exposure” and reduce the time and stress of dealing with the audit
Less than 2 to 4 percent of the tax returns that are filed are audited. If your client’s number comes up, be prepared to get things organised and to present the 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 the accountant has these skills, he may want to handle the audit himself. If not, a tax advisor will have the skill and experience to manage the process.
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About Us
Andrews Tax Consulting is a leading specialist tax practice advising individuals and companies on tax management and business strategy. We assist multi-national companies, Irish indegineous companies and individuals implement innovative long term commercial structures for their businesses. Our clients depend on us to deliver value added results on time and on a confidential basis. We are committed to responding to our client's tax and business advisory requirements with creative, innovative and commercial advice tailored to each client's specific circumstances and needs.
Contact
Derek Andrews, Partner
181 Howth Road, Killester, Dublin
+353 (0)1 544 4434
Email: info@andrewstax.ie
Web: www.andrewstax.ie
