Bogus Non-Resident Accounts

Background

1.1 In May 2001 Revenue announced in Statement of Practice SP-GEN 1/01 “Underlying Tax” on Funds Deposited in Bogus Non-Resident Accounts that, having addressed the DIRT liabilities of financial institutions, it had moved on to Phase 2 of its response to bogus non-resident accounts. The Statement of Practice set out a voluntary disclosure scheme for bogus account holders which gave favourable treatment to account holders who made a full disclosure and payment to Revenue by 15 November 2001.

1.2 In the months prior to the 15 November deadline, there was extensive advertising by Revenue of this opportunity for settlement by account holders. Many took the opportunity being afforded to them and payments of €227m. (₤179m.) were made under the voluntary disclosure scheme.

Purpose of this Article

2.1 The Statement of Practice set out the consequences of failure to disclose by 15 November 2001. This article confirms the position set out in the Statement of Practice and provides further detail in relation to the consequences of failure to avail of the voluntary disclosure scheme.

2.2 As was the case in S.P. - Gen 1/01 references in this article to bogus account holders do not include account holders who come, or may come, within the scope of

• The Ansbacher investigations, or
• Any investigations arising from, or related to, the Moriarty or Flood Tribunals.

Treatment under the Voluntary Disclosure Scheme

3.1 There were three elements in the treatment of bogus account holders set out in the Statement of Practice which were only available until 15 November 2001:

• The identities of the account holders concerned were not published
• The sum of interest and penalties due was capped at 100% of the unpaid tax, and
• Revenue gave a general assurance that it would not investigate the cases concerned with a view to prosecution.

3.2 Account holders who did not avail of the voluntary disclosure scheme by 15 November 2001 are not entitled to its benefits.

Treatment after the 15 November 2001 Deadline

Publication

4.1 Revenue gave notice in the Statement of Practice and subsequent publicity that, immediately after the 15 November 2001 deadline and as the first step in our enquiries concerning account holders who had not availed of the voluntary disclosure scheme, we would use our powers to identify those who had been holders of non-resident accounts. Revenue’s enquiries began immediately after 15 November with the use of powers as promised. All subsequent settlements with bogus account holders will, therefore, involve publication of the identity of the persons concerned (see Paragraph 6.1) where the settlement exceeds €12,700.

Interest and Penalties

4.2 The aggregate amount of interest and penalties payable is not limited to 100% of the unpaid tax - there is no cap on interest and penalties payable:

• Settlements will involve payment of statutory interest
• Penalties will be payable in accordance with standard practice. But, there will be no mitigation as regards voluntary disclosure, as Revenue’s enquiries and investigations have already begun.

Prosecution

4.3.1 The third element of the treatment of those disclosing by 15 November 2001 was the general assurance that Revenue would not initiate the investigation with a view to prosecution as regards any matter that was disclosed by the account holder. The deadline for availing of that general assurance has passed and “non-disclosers” are now liable to be selected for investigation with a view to prosecution.

4.3.2 In addressing any case of non-compliance with tax law, Revenue must decide whether it is more appropriate, taking account of all the circumstances, to investigate the case with a view to prosecution or with the objective of arriving at a monetary settlement covering the tax, statutory interest and penalties due. Enquiries in relation to the majority of account holders must, necessarily, be with a view to monetary settlement. Nevertheless, a significant number of bogus account holders will be investigated with a view to prosecution and Revenue is advancing its consideration of selected account holders for that purpose.

4.3.3 In the selection of cases for investigation with a view to prosecution, Revenue will distinguish account holders who are now cooperating fully, although belatedly, from those who are not. It is Revenue’s intention that, so far as possible, selecting cases for investigation with a view to prosecution should not impede the settlement of other cases, where account holders are now willing to proceed, without delay, to make a full disclosure and settle their liabilities with full payment of all tax, interest and penalties.

4.3.4 While the general assurance in this matter in the Statement of Practice only applied to disclosures made before 15 November 2001 and any account holder may now be selected for investigation by Revenue with a view to prosecution, such investigations (whether of individuals or companies) will be initiated and continued in accordance with the following arrangements:

1. Cases to be addressed will be dealt with in tranches. Before Revenue enquiry letters are issued, each tranche will be considered for investigation with a view to prosecution. Enquiry letters will subsequently be issued to those cases in the tranche who have not, in the course of the prosecution review process, been selected for investigation with a view to prosecution. The standard enquiry letter [see Appendix A] issued to these cases will state that Revenue is prepared to settle the matter on a tax, interest, penalties and publication basis (that is, without initiating an investigation with a view to prosecution) where there is cooperation, resulting in full disclosure and payment by the bogus account holder within the 60 day period beginning on the date specified in the standard letter.
2. Where non-cooperation by an account holder persists after receipt of the standard enquiry letter, the status of the account holder will revert to being subject to (i) selection for investigation with a view to prosecution and (ii) loss of any penalty mitigation for cooperation.
3. Where Revenue selects account holders for investigation with a view to prosecution, the standard enquiry letter, referred to above, will not be issued to those account holders. Instead, steps consistent with the carrying out of a criminal investigation will be undertaken. However, where, before Revenue has contacted the account holder for the purposes of such an investigation, the account holder makes a written application to Revenue requesting time within which to make a full disclosure and payment, Revenue
   • Will issue the standard enquiry letter [see Appendix A] to the account holder requesting full disclosure and payment within 60 days with a view to monetary settlement and
   • Accordingly, will not initiate or continue an investigation with a view to prosecution in the 60-day period specified in the enquiry letter.

It should be noted that an application by a taxpayer, requesting time within which to make a full disclosure and payment leading to monetary settlement, will only be agreed where Revenue has not already made contact with the taxpayer for the purposes of an investigation with a view to prosecution.

The written application to Revenue requesting time within which to make a full disclosure and payment should be sent to the account holder’s local Tax Office. In the case of account holders who make their tax returns to Dublin Districts application should be made to:

Underlying Tax Project,
Revenue Commissioners,
5th Floor,
Hammam Buildings,
11-13 Upper O’Connell Street,
Dublin 1.

4.3.5 A number of enquiry letters in relation to non-resident deposit accounts have already issued this year before the publication of this article and the text of the standard enquiry letter. Those letters already issued will be treated for the purposes of this article as standard enquiry letters for which the 60-day period, within which full disclosure and payment is to be made, is deemed to end on 30 September 2002.

4.3.6 Where a disclosure in response to a standard enquiry letter is related to a bogus non-resident account that was held by a director of a company and funded from untaxed moneys extracted from the company concerned, the arrangements set out in paragraph 4.3.4 will extend to a full disclosure and payment by the company (see also paragraph 5.6).

Calculations

5.1 In calculating tax on the deposit interest, a credit will be given for the DIRT which should have been deducted and which has subsequently been accounted for by financial institutions as a result of the DIRT look-back audits.

5.2 The DIRT credit should be computed by applying the standard rate of income tax, for the year in which the interest was credited to the account, to the amount of interest actually credited to the account, that is, the interest actually received. The interest to be charged is the actual amount of interest credited to the account. The interest charged should not be regrossed to include the DIRT credit. Essentially, as regards previously undisclosed deposit interest of individuals, income tax is due at the difference between the higher or marginal rate and the standard rate for the years 1986/87 to 1992/93 - but is not due for later years.

5.3 For the purposes of computing liabilities and determining due dates for payment, liabilities (income tax, PRSI and levy) for years up to and including 1987/88 or, for VAT purposes, taxable supplies for periods up to and including March /April 1988 may be calculated on an aggregate basis, treating the aggregate amount as a liability of the 1987/88 tax year (or as taxable supplies of the March/April 1988 taxable period). A similar approach may be adopted as respects corporation tax liabilities for periods up to and including the company’s accounting period ending in 1987/88. In computing liabilities on an aggregate basis, care should be taken to ensure that a credit for DIRT is not claimed in respect of deposit interest paid in pre-DIRT years, that is, in 1985/86 or earlier years.

5.4 Where records are not available for earlier periods, estimates which can be shown to be best estimates, based on reasonable assumptions by reference to the facts and circumstances of the case concerned, should be used.

5.5 Where the director of a closely-held company holds a bogus non-resident account, it may be difficult in practice to determine whether the undeclared moneys were originally owned by the company or the director. In general, in such cases the most practical way to calculate the undeclared liabilities, including VAT liabilities, will be to assume that the moneys and undeclared income belonged to the director, rather than the company, from the start.

5.6 Where, on the other hand, the moneys in a bogus account held by a director are treated as having been funded by untaxed moneys extracted from a closely-held company they should normally be regarded as additional remuneration of the directors. In addition to any VAT liability where the moneys concerned were undisclosed receipts, the company will have a PAYE/PRSI liability in respect of the moneys deposited in the bogus account from company funds. In such circumstances, no adjustment to the corporation tax liability will be treated as arising, whether to charge undisclosed receipts as profits or to deduct undisclosed remuneration from profits.

Full disclosure and payment

6.1 All undeclared liabilities must be stated and paid - not just tax liabilities related to bogus non-resident accounts. Disclosures in response to the standard enquiry letter must include the following:

1. particulars of all bogus non-resident accounts concerned, i.e. the name of the financial institution and the account number in respect of each account,
2. a statement of the sources, including capital transactions, from which the chargeable amounts not previously disclosed arose,
3. sufficient information to enable the basis for any estimates or assumptions made, or other matters crucial to the calculation of tax, interest or penalties, to be understood,
4. a statement on a year-by-year basis of the amounts of
   1. tax, duties, PRSI and levies due, and
   2. interest and penalties due, and
5. a declaration in the following terms [subject to Part (1) of the declaration not being required where the total settlement does not exceed €12,700]:
   “(1) I understand and accept that my name, address, occupation or description of business, the total tax paid, the total interest and penalties paid and the total amount paid in respect of what will be identified as a ‘bogus non-resident account case’ will be published by Revenue in accordance with Section 1086 of the Taxes Consolidation Act, 1997.
   (2) I declare that to the best of my knowledge, information and belief all statements that I have made in this disclosure are correct and complete."

6.2 The disclosure must be accompanied by a payment of the full tax, interest and penalties due.

6.3 While Revenue will be primarily focussing on account holders who refuse to cooperate and disclose the amounts of tax, interest and penalties due, auditors in each region will examine a representative selection of disclosures, made in accordance with Paragraph 6.1 in response to the standard enquiry letter. The computations, records and documents supporting disclosures must, therefore, be retained for inspection, on request, by Revenue.

Appendix A

Standard Enquiry Letter: Registered post

Tax Enquiry

Dear Sir/Madam,

I have information that you hold or have held a non-resident deposit account.ⁱ Please address the following urgently:

(1) Do you hold or have you held a non-resident deposit account?

(2) Have you any undeclared tax liabilities, whether related to the non-resident deposit account or otherwise, for any year of assessment or taxable period?

(3) If you hold or have held a non-resident deposit account and your answer to question (2) is “no”, please explain the basis for your claim that you have no undeclared tax liabilities.

Please let me have your reply to the above enquiries by DD MM YY [i.e. date of issue plus 30 days]. In the absence of a reply, Revenue officers may call to you without further notice.

(4) If you have any undeclared tax liabilities for any year of assessment or taxable period, please supply details of all those undeclared liabilities and the related interest and penalties within the 60-day period beginning on DD MM YY [i.e. date of issue plus 7 days] and ending on DD MM YY together with a remittance to cover

• those tax liabilities, and
• the related interest and appropriate penalties.

Where there is cooperation, leading to full disclosure and payment by you, Revenue is prepared to deal with any matters arising in relation to your undeclared tax liabilities on the basis that the tax, interest and penalties concerned are to be paid in a settlement to be published under Section 1086 (2)(c) of the Taxes Consolidation Act 1997.

Yours faithfully,
c.c. Agent