High penalties and interest await the deliberate tax dodger
Paying the right tax is hard on the wallet – but it's cheaper than a lash on the knuckles from the Revenue.
This hasn't stopped people from taking chances with tax – hundreds of thousands of Irish could face massive fines after the Revenue Commissioners stepped up its investigation into offshore credit cards earlier this month. And more than 100,000 homeowners have not yet paid their property tax.
These people could be hit with tax penalties if caught – but they're not the only ones.
The shadow economy, which can include those of us doing nixers, is also firmly under Revenue's microscope.
"We focus on sectors that have traditionally been susceptible to shadow activity, particularly cash businesses, such as doctors, dentists, vets, accountants, and those involved in retail, hospitality, entertainment and the construction sector," said a spokeswoman for the Revenue Commissioners.
"Shadow economy activity is often carried out by people and businesses already in the tax system. It can include businesses and professionals who understate their sales or income, under-declare cash payments, or pay their employees off the books. It can also include individuals doing nixers either in addition to their normal taxed employment or while also claiming social welfare payments."
Understating your income, and winding up on the wrong side of Revenue as a result, is easier than you think. You might be a PAYE worker who invested in foreign shares on which you have earned dividends over the years. As you are used to having your employer pay your income tax on your behalf, it might never have dawned on you that you have to pay tax on your foreign dividends – and that it is your responsibility to do so.
"A large number of Irish people have been in receipt of foreign income for a number of years which has not been subject to PAYE," said Barry Flanagan, tax expert with contractors.ie. "For Irish residents and domiciled persons, this income is taxable here and should be declared to Revenue."
"Accidental" landlords who bought pricey properties during the boom which they have since been forced to rent out, could also be hit with tax penalties and interest for underpaying tax, warned Flanagan.
One of the biggest financial headaches that comes with renting out a home is the tax bill, which could easily run into several thousand euro a year. Many accidental landlords don't know how to calculate the amount of tax they should pay on rental income and are confused about the expenses which can be written off against tax, according to Flanagan.
Although you can write certain expenses off your tax bill for rental income, the full cost of the mortgage repayments on the property cannot be written off – even if the rent is barely covering the mortgage. Anyone new to the rental game may not understand that.
Landlords can, however, write 75 per cent of the mortgage interest off their tax bill – as long as the mortgage is on the property they are renting out.
"Many accidental landlords may mistakenly believe that they can write off the full cost of the mortgage interest on the loan, rather than the 75 per cent allowable," said Flanagan. "In addition, they may mistakenly believe that they can write off the full price of the new suite or any electrical appliances they bought for the property just before moving out, rather than claiming 12.5 per cent of the cost as a capital allowance each year. Their lack of experience in this area could lead to an under-declaration of the rental profits earned. They may get a demand for tax underpaid, with penalties and interest charges potentially payable too."
It can also be easy for contractors and the self-employed to make mistakes when paying tax – particularly when starting out, because they have yet to build up experience paying their own tax.
Revenue recently started to clamp down on contractors because it has concerns that some contractors are using expenses to dodge tax. So if you are contracting, ensure that any expenses written off against your tax bill are legitimate tax deductions – otherwise, you could be hit with a painful tax bill.
No matter what your line of work is, you could face severe interest, publication of your name, and possible prosecution if you underpay any kind of tax. You must also repay the amount of tax you originally owed.
The penalties you're hit with will depend on why or how you underpaid and on your tax record. You are unlikely to have to pay any penalties if you made an innocent mistake and have a clean tax record. Innocents still have to repay the tax owed – and it is important that this is done as soon as the error is discovered.
Sloppiness can cost you dearly with the tax man – even if you had no intention of dodging tax. You could face penalties of as much as 40 per cent of the tax owed if your messiness is the reason you underpaid tax. However, the penalties could be as high as 100 per cent of the amount of tax due if you have deliberately evaded tax. You will also face interest on the tax owed.
Penalties and interest faced by tax dodgers who are caught have run into the tens of millions. Bear this in mind before trying to dodge the Revenue.
Sunday Indo Business