THE recent controversy over Target Transport serves as a reminder that tax difficulties can bring about the rapid decline of a business. For this reason, it is important to understand the Revenue Commissioners' audit process. Revenue audits are not only stressful, they can prove very costly too.
Those businesses whose tax affairs are not in order can end up paying interest on any unpaid tax, penalties for failing to comply with the tax code, a surcharge for failing to file returns, and they risk publication in a list of tax defaulters and, sometimes, even prosecution.
There are many reasons why you may come to Revenue's attention. You may simply operate in a business sector where there is a risk of non-compliance. Revenue may also use their experience in a particular area. So, if there is a culture of non-compliance prevalent in your industry, you are more likely to face an audit.
In 2011, Revenue targeted construction, bars and restaurants, landlords and professionals. You can, of course, just be unlucky: Revenue randomly selects businesses for audit and you might well be one of them. So, what happens if you are picked? Revenue will give you 21 days' warning and will outline the taxes involved and the years being considered.
If the taxpayer is a director-owned company then the affairs of that director will also be audited. If you receive a notice you should review your accounts and tax returns immediately.
If there are discrepancies you should contemplate making a disclosure. If the tax default was the result of deliberate behaviour, you could be prosecuted. However, if it was the result of carelessness or recklessness and a full disclosure is made, prosecution can be avoided. Incentives are provided for taxpayers to self-correct any mistakes both before and after an audit notice is served. After a tax return is filed, a taxpayer has a limited period (usually a year) to "self-correct" any mistakes made in a tax return. Any overdue tax must be paid together with interest, but no penalties will apply if the mistake was not deliberate.
If you fail to self-correct, you can still receive a reduction in penalties by making a "qualifying disclosure" to Revenue. That is a complete disclosure of all facts relating to a tax liability before an audit begins. The size of the reduction will depend on:
• Whether the disclosure was before or after an audit notice was served.
• Whether the tax default was deliberate or as a result of carelessness.
• Whether it is a first, second or third disclosure to Revenue.
By making a qualifying disclosure to Revenue, you can also avoid publication in the list of tax defaulters and prosecution. If you decide to make a disclosure, it is important to do so as soon as possible.
Revenue will visit your place of business to view the nature and size of your operation. The audit will be carried out there or in the Revenue's offices.
The person assigned to deal with your case will hold an initial interview with you outlining the scope of the audit, the possible sanctions and the benefits of making disclosures.
He or she will then review your accounts, records and tax returns and will make any inquiries necessary. Nowadays, Revenue uses software to check electronic records. Those who cooperate fully with Revenue auditors will receive a reduction in any penalties imposed.
It is worth remembering that it is a criminal offence to obstruct a Revenue auditor. If the audit extends beyond three months, you will be given an estimated completion date.
When complete, Revenue will inform you of any tax liability and seek to reach a settlement (ie, agree a total amount of tax, interest and penalties). The auditor may waive penalties where there has been an innocent error or a difference in legislative interpretation.
The settlement will take into account any disclosures, whether you co-operated and whether the default was deliberate or the result of carelessness. Penalties alone can equal 100pc of the tax due.
If you receive a penalty greater than 15pc or €30,000 and did not make a qualifying disclosure, you will be included in the published list of tax defaulters. Phased payments are allowed in cases of proven financial hardship. The Revenue Commissioners will not rush to terminate a viable business. Commercial rationale is applied -- will the exchequer see a greater return by allowing the business to continue?
If an individual can establish that he or she is genuinely unable to pay a liability, Revenue may take account of this and postpone payment until such time as he or she is able.
Full disclosure of the individual's personal financial position would be required. At a minimum, those who cannot pay will face a 30pc-plus penalty and publication of their name in the list of tax defaulters.
When it comes to Revenue audits, it is clear time is of the essence and making disclosures can be crucial. If you become the subject of an audit, remember that you can always consult your tax adviser who can liaise with Revenue on your behalf.
Paul Brady is a Chartered Tax Adviser and founder of TaxandLegal.ie