Revenue audit – how to avoid the pitfalls

Caroline McGrath on Revenue audits and how best to deal with an audit.

The Irish taxation system is based on a self-assessment system. It is the responsibility of the taxpayer to calculate their tax liability and to ensure tax returns contains a true and complete disclosure of all relevant facts. Equally, Revenue has a responsibility to verify the accuracies of tax returns. Revenue’s approach to audits has become more focused as a result of analytic technology used to collate and analyse data from a wide range of sources.

Revenue still undertakes some random audits, however, the majority of cases are selected based on results from the analytic technology. For example, a VAT enquiry resulting from the omission of the EU sales/acquisitions data on the VAT eturn where Revenue has information from other EU Revenue authorities that the taxpayer is selling/purchasing goods in the EU. Revenue’s  advancement in technology and analytic tools enables it to make more focused enquiries and in future taxpayers can expect more enquiries into their tax returns.

Revenue interventions

The interventions from Revenue will normally fall into the following categories:

Aspect/Assurance checks

This type of enquiry usually seeks to clarify a particular expense or transaction. For example, a request to submit supporting documentation for a VAT claim or a reconciliation of the wages and salaries as disclosed in the corporation tax or income tax return to the P35 return. This type of enquiry is normally undertaken by way of correspondence, but can be accelerated to a Revenue
audit where the taxpayer doesn’t engage with Revenue. If an error is discovered as a result of the enquiry, the taxpayer has the option of making an unprompted disclosure to Revenue. Such a disclosure should attract the lowest tax penalty and avoid publication for the taxpayer.

Revenue Audit

The taxpayer will receive a letter advising that they have been selected for a Revenue audit. The letter will make reference to the taxhead(s) and the year(s) that will be subject of the audit.  Taxpayers normally get 21 days’ notice to prepare for the audit, however where Revenue perceive there may be an abnormal risk involved, they may arrive at the business premises unannounced and commence a review of the business records. Prior to the commencement audit, a taxpayer who has discovered errors as part of the audit preparation has the opportunity of making a
prompted qualifying disclosure which attracts a minimum penalty of 10%. Once the audit commences, the taxpayer will be exposed to penalties from 15% to 100% depending on how the audit
progresses. Statutory interest is applied on any taxes underpaid. The Revenue Code of Practice, which is available from the Revenue website, details the options available to the taxpayer on penalty mitigation.

Revenue audit notice – what to do next?

The key steps are:

• Review the proposed date and acknowledge the receipt of the letter. If the date is not suitable, you need to contact the auditor to see if an alternative date can be agreed.
• If the taxpayer intends to make a disclosure in advance of the audit, they may seek a time extension of 60 days which must be agreed in advance with Revenue.
• In preparing for the audit, all supporting and linking documents for the periods and taxheads under audit should be reviewed. Where technical issues arise, seek professional advice from your taxation adviser.
• Where Revenue have indicated that the audit will be carried out using e-auditing techniques, consult your IT team to make sure that data can be extracted from the accounting systems.
• If errors are discovered as part of the review process, consideration should be given to making a prompted disclosure with a view to penalty mitigation and to avoid publication.
• Where the audit settlement exceeds €35,000 inclusive of tax, interest and penalties or the penalties applied are in excess of 15%, the taxpayer together with the details of the settlement will be published on the tax defaulters list, which is reproduced in the national papers on a quarterly basis. Publication does not apply where the taxpayer makes an unprompted or prompted qualifying disclosure in respect of the underpaid taxes.

Conclusion

In light of the available analytic tools now being employed by Revenue in reviewing taxpayers’ returns, it is fundamental that taxpayers ensure the accuracy of their tax returns when filing them with Revenue.

In the event of a Revenue audit, please consult your accountant/ tax adviser for assistance and guidance.

Caroline McGrath is a Tax Director at Byrne Casey & Associates. She specialises in advising corporate and private clients on all aspect of taxation including corporate restructures, succession planning and Revenue Audits.

This Business Support article featured in the May/June 2017 edition of The Hardware Journal.