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Fiona O'Shea: Wallace's frank admissions could lead to prosecution

The only reason the airwaves are buzzing with talk of whether or not Mick Wallace should be prosecuted for VAT evasion is because he said, publicly, that he had knowingly made a false declaration to the Revenue in order to save his company, MJ Wallace Ltd, which he believed to be insolvent.

Speaking ahead of the publication of Revenue's Defaulters' List, due next week, Wallace was obviously trying to manage the publicity his company's appearance on that list is bound to attract to himself and his company's Italianate principality on Dublin's Ormonde Quay.

If the company is on the list, then his name will also presumably be there as director.

But, far from managing the fallout, Wallace's interview added a whole new dimension when he said that he had knowingly made a false declaration to Revenue.

That information would never have come to light if he hadn't said it. The defaulters' list doesn't give that type of information.

All that the list will tell us is that there was a settlement, the amount of the tax, interest and penalties involved and that it is in relation to an underdeclaration of VAT.

In light of the severe jail sentences handed down in recent months to Paul Begley, of Begley Brothers Ltd, who got six years for describing garlic as apples in customs declarations, and to Barry McDonald, of McDonald Cleaning Services, who got three years with one suspended for filing incorrect VAT returns, repayment claims and corporation tax returns, many of us are wondering why Wallace should fare differently.

We might never know. Revenue will not comment on individual audit or investigation cases. And Wallace's admission has only served to muddy the waters.

Revenue investigations are conducted under the Code of Practice for Revenue Auditors. This sets out the type of rules and procedures followed by Revenue officials in dealing with audits and investigations. For example, it sets out the rules relating to a disclosure by a taxpayer of an understatement of income, VAT, PAYE or other default. Where an individual approaches Revenue, makes a full disclosure and pays the tax, interest and penalties due, the case will not be published and the individual will not be prosecuted.

It is possible that Wallace made a disclosure to Revenue, but if that is the case, you would not expect him or his company to be published. It may be because, again according to Wallace, his company cannot pay the tax. All bets would then be off and the settlement could be published and Revenue could consider prosecuting.

The alternative is that the company's default was picked up on a routine Revenue audit. Revenue's code of practice is clear about the distinction between going for a monetary settlement or for prosecution. Most cases are dealt with by way of monetary settlement. This is quicker and more convenient than prosecution and Revenue is working with limited resources.

However, there are certain circumstances where auditors are supposed to pull out of a case and hand it over to Revenue's Investigation and Prosecutions Division.

The types of features likely to call prosecution into play include deliberate omissions from returns, filing false returns or repayment claims, use of forged documents, using offshore bank accounts to evade tax and engaging in systematic schemes to evade tax.

Where an auditor finds any evidence of evasion, or where the taxpayer tells the auditor that he or she has been involved in any of these activities, the nature of the investigation changes and Investigations and Prosecutions Division should come into play.

Once the case is being looked at for prosecution, the taxpayer should be cautioned before he or she makes any further incriminating statements. The code of practice even includes the wording of the caution: "You are not obliged to say anything unless you wish to do so, but whatever you say may be taken down in writing and given in evidence."

Because of the strict rules of procedure and evidence attaching to criminal prosecutions, a decision has to be made early in an investigation to go down this route, because evidence can become compromised when conducting an audit for monetary settlement.

In the case of Wallace and his company, it looks as if Revenue won't even get the monetary part of the monetary settlement. Before last year's Finance Act, the case would not have been published because the tax had not been paid. In the old days, the negotiations could rattle on for years with no solution because the amount had been agreed but the tax had not been paid. It does somehow defeat the purpose of a monetary settlement, though, not to have any money paid.

And it is unlikely to be paid. Because the money is owed by the company, and liability is limited to the company, Revenue can only pursue the company for the tax. It looks as if the company is bust -- it went into receivership in May of last year.

If it goes the next step into liquidation, Revenue will have to take its place behind secured creditors, such as banks having a hold on the assets of the company. Who knows if anything will be left once the banks have picked over it.

Fiona O'Shea is a tax adviser and former Revenue Commissioners official

Sunday Independent