Revenue Audits – current trends

Given the state of the public finances, it is not surprising that there is considerable pressure on the Revenue Commissioners to maximise tax collection. One of Revenue’s methods of pursuing this aim is through its Revenue Audit Programme. This article highlights some current trends in the Revenue audit process and approaches being taken by Revenue to detect non-compliance with tax legislation.

Computer audits

One of the most significant developments in the Revenue audit process in recent years has been the increasing use by Revenue of computer or e-auditing techniques. In the carrying out of Revenue audits, Revenue are utilising a sophisticated data interrogation programme named IDEA. The use of this software enables Revenue to interrogate accounting records and to extract information that would be impractical to access using traditional manual methods. Examples of issues which the use of IDEA brings to Revenue’s attention are sales deleted from accounting records, payments to employees without deduction of tax and incorrect VAT rates being applied.

Where Revenue intend to carry out a computer audit, they will often suggest a pre-audit meeting to familiarise themselves with the taxpayer’s IT systems. Any such pre-audit meeting is not part of the formal Revenue audit process, and the taxpayer still has the opportunity to make a prompted qualifying disclosure before the formal commencement of the audit.

Employee v. self-employed

An area of major concern for Revenue currently is the tax status of individuals providing services and being treated as self-employed by those engaging them. In these situations, payments are made to the individuals without deduction of PAYE/PRSI/USC and Revenue are concerned about the consequent loss of tax. To date, Revenue attention has focused mainly on medical and dental locums and pharmacists. However, it is certain that Revenue attention will spread to other sectors.

Anybody paying individuals for services without withholding tax/PRSI/USC and having any doubt as to the tax status of those individuals should consider seeking professional advice. If, in the event of a Revenue audit, Revenue were to successfully argue that the individuals were employees, persons paying them would be liable to Revenue for tax/PRSI/USC which should have been deducted from those payments. Factors to be considered by persons paying for such services include the degree of control they exercise over the individual, e.g., do they dictate where and when the services are provided, whether or not the individual has other clients or customers, and whether they expect the individual to accept all work offered. In general, the greater the degree of control exercised, the more likely it is that an employment is involved.

Not for profit organisations

Until recently, Revenue did not pay a great deal of attention to “not for profit” organisations, but in recent times, that has changed. Revenue now have reason to believe that there is significant non-compliance with tax legislation in organisations such as semi-state bodies, sporting organisations and schools. Their main concern would be in relation to the operation of PAYE on payments to employees and, to a lesser extent, non-compliance with VAT and Relevant Contracts Tax legislation. Therefore, it is recommended that organisations in the not for profit sector who might have any concerns regarding their compliance with tax legislation should seek professional advice.

Research & development tax credit audits

As there are significant amounts involved, it is not surprising that Revenue are paying particular attention to R&D tax credit claims. A significant number of claims have been selected by Revenue for audit. Statistics provided by Revenue suggest that following an audit, adjustments were made to a large number of R&D tax credit claims. Some of these adjustments resulted in significant repayments to Revenue, along with interest and penalties.

In preparing for an R&D tax credit audit, it is essential that appropriate documentation be prepared and retained in order to support the claim and to pass Revenue’s stringent testing procedures.

Self-review

An interesting new concept in the Revenue audit process has recently been introduced by Revenue. Rather than notifying a taxpayer that they will carry out an audit, Revenue will request the taxpayer to “self-review” its tax compliance procedures. On completion of the review, the taxpayer must report the findings to Revenue. The report to Revenue must also detail the scope of the review, i.e., tax heads reviewed, tests carried out, etc.

Any instances of tax underpayments/non-compliance arising from the review can be regularised by way of an unprompted qualifying disclosure. Based on the scope and findings of the review, Revenue will then decide whether to carry out an audit or not.

The benefit to the taxpayer of this procedure is that they are spared the stress and inconvenience of an audit if Revenue are satisfied with the scope and findings of the review. It is advisable that taxpayers obtain professional advice when carrying out a review and reporting the findings to Revenue.

Be prepared!

If, during the course of an audit, Revenue discover tax underpayments, the consequences can be both expensive and embarrassing. In addition to paying the tax due, interest at the rate of 10% p.a. and possibly penalties of up to 100% of the tax underpaid may also be applied.  In addition, details of the settlement may be published by Revenue in its tax defaulters list. In anticipation of a Revenue audit, taxpayers should ensure that complete and accurate records of all transactions are maintained. It is not unusual for taxpayers to be forced to make settlements with Revenue not because they have done anything wrong, but simply because the records maintained were not capable of substantiating the taxpayer’s explanation of a particular transaction or transactions.

Taxpayers should also consider having a review or “health check” of their tax compliance procedures undertaken. A health check will identify weaknesses in their procedures and enable them to be rectified before Revenue undertake an audit. At Deloitte, we have a dedicated tax risk management team specialising in carrying out tax reviews under all tax heads. When carrying out such reviews, we often identify areas where changes to procedures could result in tax savings.

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