Inside the mind of the Revenue
While some audits are completely random, there is a cold logic that the Revenue uses to target the majority of their audits.
This logic is based on a risk-analysis system. This rates taxpayers according to risk across all the main taxes. Vast amounts of data are analysed by the system. Some of the main items involved are as follows:
- Whether all tax returns (including VAT) are lodged and paid on time.
- Information from third parties, including Government departments, financial institutions, State bodies, fees and commissions.
- Information obtained from other Revenue audits.
- The system will also identify any unusual issues arising with the tax returns such as unusually high expense items and unusually low income, cash/capital introduced, wages paid, but not registered for PAYE/PRSI etc.
- Any off-farm income.
What will the Revenue auditor know about you before he arrives?
Underestimating how much homework the Revenue official has done before he or she arrives is a schoolboy error. They will have a lot of information, far beyond what was contained in your tax returns on even quite personal details such as the following:
- EU single payments.
- Your car, especially if you own a high-end car or 4x4.
- Property you own in Ireland (other than your farm). Typically they will know its location, when it was acquired and its cost.
- Details of foreign bank accounts you have.
- Details of money on deposit, including the bank, the account number and the interest paid.
- Property acquired or disposed of, including CPOs.
- Significant information relating to your purchase and sales. This information is usually obtained from computer audits of the merchants or factories that you deal with.
What should you do when notified of an Audit?
If you have an accountant, they will need to review your records for the year or years being audited. Remember, the Revenue is entitled to examine everything as far back as four years.
You are depending on the accountant to ensure that all of the income that you had for the relevant years has been correctly returned and that all the expenses claimed are properly claimable. They will also check the operation of PAYE and VAT if you were registered for either or both during the years in question.
But it's not all up to your accountant. You must also prepare for your initial meetings with the auditor. You'll need to be familiar with what was going on on your farm for the years being audited. Know the exact area of crops grown, livestock on hand and machinery in use during the period. If there are any unusually high items of expenses or low receipts, you will need to know the reason before the start of the audit.
When the Auditor arrives
The auditor will ask you to talk them through the following:
- Family details relating to the number of children you have, and even where they go to school or college.
- A description of your business regarding the acres of land owned, let or taken. They will also want to know how the land is being used. So you will need to have details on the number of acres in cereals, potatoes, pasture, silage etc.
- The number of employees on a full-time, part-time or casual basis. They will also want to know about family or friends' input into the day-to-day running of the farm.
- Machinery and vehicles owned or leased.
- Any work done outside the farm, such as contracting.
- Main sources of the supply of fertilisers, seed and sprays, and main outlets for the sale of goods or stock.
- Details of records maintained.
If there are any difficulties in your tax return or problems with what you paid or didn't pay in VAT, PAYE or any other tax, it is vital that you make a full disclosure to the auditor before the audit begins. Why? It will reduce the penalty imposed by the Revenue. But, perhaps more importantly for some, coming clean prohibits the Revenue from publishing your name in any list of tax defaulters.
However, confessing won't allow you to bypass the extra tax, interest and penalties due.
We'll have more on this crucial topic next week.
Michael Hough is a tax specialist in Balbriggan, Co Dublin, with Owen Sweetman & Co