There is no doubt that every accountant and tax advisor will have some experience from time to time with Revenue audits (be it for a valued client or God forbid, one's self). The large number of Revenue audits conducted and the significant levels of penalties and interest associated with even minor tax defaults mean that a detailed knowledge of Revenue audits and the associated issues is necessary for accountants. The Revenue audit area is largely driven by administrative practice rather than legislation. This administrative practice is mainly enshrined in the 2010 Code of Practice for Revenue Auditors which came into effect on 1 October 2010 and replaced the 2002 Code.

Revenue Audits – General Overview

The main point that every accountant, tax advisor or taxpayer faces when a letter from the Revenue is received informing the person that a Revenue audit is about to take place, is what issues do they have which may give rise to a problem with the Revenue. The first thing that will happen after a general examination of one's conscience is a review of the records in relation to the specific period and tax head which is the subject of the audit while being mindful of other issues relating to other periods and other tax heads which may need to be considered in crafting a prompted qualifying disclosure. In deciding how to address any issues, it is necessary to be familiar with the Code of Practice. In general, this provides that to get the maximum reduction in penalties, a qualifying written disclosure with tax computations and payment must be made, which is handed to the Revenue Auditor when he asks the question “Have you anything to disclose before I commence the audit”. Getting the disclosure right (if one is necessary) saves a lot of time, trouble, penalties and costs.

2010 Code of Practice for Revenue Audit

The 2010 Code came into effect on 1 October 2010 for audits notified from that day. When an audit is open at 1 October 2010, the taxpayer may choose whether the settlement is made under the terms of the 2010 Code or the 2002 Code. The 2010 Code runs to 86 pages and is available on the Revenue website.

The Revenue set the tone in the introductory paragraph of the 2010 Code:

• “It is a fundamental principle of self assessment tax systems that returns filed by compliant tax payers are accepted as the basis for computing tax liabilities. Revenue promotes compliance with the tax system by vigorous pursuit of those who do not file returns, by auditing selected returns and by taking appropriate action against tax evaders. Revenue challenges aggressive tax avoidance schemes and unintended use of legislation that threaten tax yields and the perceived fairness of the tax system”

The final sentence (in bold) was not part of the 2002 Code and reinforces the Mandatory Disclosure legislation in section 149 Finance Act 2010 which generally requires disclosure by taxpayers and professional advisors to the Revenue of transactions which bestow a tax advantage.

Main Changes

Below, I set out some of the main changes in the 2010 Code.

No Loss of Revenue

A fresh approach to “no loss of revenue cases” is to be found in Part 2.5 of the Code. “No loss of revenue” cases generally arise where an error has been made by the taxpayer but this error has not cost the Exchequer any money. Generally, if the taxpayer or his advisors can show to the satisfaction of the Revenue that “no loss of revenue” arises then the tax will not be sought, interest will be limited to any period during which there is a temporary loss of revenue and a reduced penalty will apply. The main point here is that it is up to the taxpayer or his advisors to produce all evidence, including third party evidence, the Revenue will not do any of the information gathering to help with a claim.

Inability to Pay

Revenue will consider claims that the taxpayer is unable to pay any tax due arising out of a Revenue audit up front. Again it is up to the taxpayer or his advisor to support the claim with documentary evidence. Once a proposal is put forward for an instalment arrangement based on the client's ability to pay, which is accepted by the Revenue, it will not affect the taxpayers ability to make a qualifying disclosure and receive the benefits of same (lower penalties).

Penalties

Since the 2002 Code new legislation has been enacted in relation to tax penalties. The 2010 Code incorporates the new penalty regime. The level of penalty depends to some extent on whether the default occurred on or after 24 December 2008 as well as on the number of previous qualifying disclosures, the category of behaviour, and whether the disclosure was prompted or unprompted.

Publication

The publication regime has not changed.

Qualifying Disclosure

The 2010 Code introduces a five year rule in relation to qualifying disclosures which effectively disregards any previous qualifying disclosures made more than five years before. In the 2002 Code there was no cut-off period and a previous qualifying disclosure was always counted against the taxpayer.

Under the New Code a qualifying disclosure in relation to one tax head (e.g. PAYE) will not result in a second qualifying disclosure in respect of another tax head (e.g. Income Tax) from being regarded as a first qualifying disclosure.

All qualifying disclosures must be made in writing and this is reflected in the New Code. The facility for making verbal voluntary disclosures was withdrawn as and from 24 December 2008 on the passing of Finance (No.2) Act 2008.

Parts 2.6 to 2.16 of the 2010 Code need to be carefully studied by all professional advisors to enable them to properly advise clients on the preparation of either a prompted or unprompted qualifying disclosure.

Conclusion

In conclusion, it is fair to say that the 2010 Code represents a step forward in that it brings the 2002 Code up to date to reflect changes in legislation and practice that have taken place in the last eight years. The provisions with regard to “no loss of revenue” and “inability to pay”, while very restrictive, are most welcome.

Before tackling a Revenue audit, careful study of the 2010 Code, especially the parts in relation to “qualifying disclosures” are a must for all accountants.

No Code of Practice can be expected to cover all matters. Where there are grey issues not covered by the legislation or the Code, it is advisable to engage with the Revenue auditor prior to the Revenue audit commencing to see if agreement can be reached on how such matters should be addressed in a formal written disclosure.

Gerry Higgins is a Tax Partner with Cooney Carey

Email: ghiggins@cooneycarey.ie

Cooney Carey
Chartered Accountants
The Courtyard
Carmanhall Road
Sandyford
Dublin 18