OPINION: Over-estimating non-compliance among those who should be paying tax can make life more difficult for the compliant, writes Brian Keegan

THE PUBLICATION of the Annual Report of the Comptroller and Auditor General for 2007 focused attention again on the issue of tax compliance, with headlines in this newspaper and political reaction suggesting that the problem remains as entrenched as ever.

The reality, I think, is somewhat different and the publication of the report is a timely opportunity to make that argument. And, for the record, it is not the case that arguing that tax compliance is high and non-compliance extremely low represents being soft on evasion. Rather, public policy debate informed by an erroneous perception never makes for good policy making.

Part of the problem may be that special investigations help create the impression that there is a substantive problem out there. For example, the CAG reports that Revenue special investigations into bogus non-resident accounts, offshore assets and the like have yielded €2.4 billion.

By any means it is a considerable sum of money, yet this large amount of money relates to tax defaults over more than 15 years. Nor is all of it tax, in fact most of it is interest and penalties. The actual tax collected is just over €1 billion-still a significant amount.

But let's think about the context. Revenue collects nearly €57 billion annually. The total tax recovered from anti-evasion activity for a 15-year-period is less than 2 per cent of a single year's take. Again let me repeat that this is in no way to condone tax-evasion, which is always wrong. However, it does imply that tax-evasion is not a major problem in this country.

This is further borne out, again to draw on the CAG's report, by the ongoing attempts by Revenue to corral recalcitrant taxpayers with its audit programme. This programme attracted significant political comment last week and therefore is worthy of consideration.

These audits yield about €400 million in tax, along with interest and penalties, or less than 1 per cent of the total take. Perhaps even more significant is the number of “assurance checks” which Revenue conducts each year. Revenue largely ignores the PAYE sector in carrying out such checks-they are focused on companies and the self-employed.’

If you are self-employed, you run a one-in-two chance of being asked an awkward question by an inspector of taxes. That's every year. Death and taxes may both be certainties, but at least death only comes once.

These aren't bad findings for a single arm of Government, and Revenue is so successful because it outsources. The responsibility for PAYE rests with employers, for VAT with traders, for Dirt with the banks and so on.

In recent years, at least as far as business is concerned, the office of the Revenue Commissioners has largely become a counting and enforcement house.

As a consequence, taxpayers generally and businesses in particular have had to become more geared up towards dealing with the tricky business of tax compliance.

More than 90 per cent of self-employed taxpayers and a similar, though slightly lower proportion of companies, use the services of accountants and other agents in dealing with their compliance responsibilities. This division of roles between Revenue and the private sector may well be the most appropriate way forward for a modern economy with an established tax system. From the State's perspective, it certainly results in cost-effective high levels of compliance and tax collection.

None of this is reflected in the CAG report. He focuses on debts collected and forgiven, taxpayers audited and money collected.

Over the years, the report has had a significant bearing on the conduct of Revenue.

The size and complexity of the return of income has largely arisen from queries in his reports as to the amount of tax data available to Government.

There is a danger that by overestimating non-compliance that we render the system more difficult for compliant taxpayers. For example, even sectoral investigations are little better than an enforcement approach based on what the taxpayer does for a living, rather than on how they conduct their tax affairs.

Revenue has more than adequate screening tools and powers to target businesses and individuals with tax problems; it does not need to apply scattergun tactics on particular business sectors which only create unnecessary grief for the innocent operators within the sector.

Similar thinking, though, may explain why the self-employed return of income has been allowed to get so complicated. Is a return of income about the collection of the correct amount of tax or some form of supplementary fiscal census?

It is relatively easy to generate some noise about our tax system, clouding the light from view. Accountants are often targeted in this regard though no prosecution has been brought against any individual since “aiding and abetting” became an offence three years ago.

The real issue now in these more challenging times is how the tax system works for those who seek to be compliant. Collecting revenue in prosperous times is challenging but rewarding. In more difficult times it is a much different issue. Perhaps now it is time to turn the focus of our attention to the needs of the tax compliant and those who act for them.

After all, we are in the majority.