On 6 July last year, Michael Schmidt, Washington correspondent for The New York Times, who covers national security and federal investigations reported that “The former F.B.I. director and his deputy, both of whom former President Donald J. Trump wanted prosecuted, were selected for a rare audit program that the tax agency says is random”. Those individuals were James Comey and Andrew McCabe respectively. Mr Schmidt makes the following comment in that piece “Among tax lawyers, the most invasive type of random audit carried out by the I.R.S. is known, only partly jokingly, as “an autopsy without the benefit of death””. Okay this is the US tax code and US tax authority, but the audit-autopsy comparison made me pause.

Coming back home, Deloitte’s CFO Survey conducted in Spring 2022 suggests that one of the greatest concerns for Irish indigenous enterprises and groups may be in managing increasingly complex audits and Revenue interactions.

I was chatting with Fiona McLafferty, who leads our Tax Controversy practice, on this stuff recently. She was previously a Tax Appeal Commissioner. Fiona admits that (in her previous role) she was someone you probably didn’t want to have to meet, because it meant you thought you had been overcharged tax and you needed her to make the first call whether you were or not. I say “first call” because you or Revenue could appeal her decision to the higher courts.

I’ve written in these pages previously about Revenue audits in Ireland and Revenue’s “new” (brought about in May of last year) code of practice. Then last year’s Budget came along and announced that Revenue would conduct a range of targeted projects which will include PAYE compliance interventions involving a focus on share schemes. The accompanying documents to the Budget speech explained that these projects were expected to yield €80 million in additional exchequer receipts.

Fiona puts that Budget announcement into some perspective. Revenue’s Annual Reports provide statistics on the level of compliance interventions conducted by the tax authority. There is a distinction between audit and non-audit interventions, that lingo is discussed further below. Let’s say the average yield per audit is roughly €100,000 (€73,489 in 2019, €85,742 in 2020 and €334,568 in 2021). Similarly, let’s say the average yield per non-audit is roughly €1,000 (€577 in 2019, €605 in 2020 and €2,161 in 2021). Revenue’s most recent annual report notes that 2021 was “the biggest annual compliance yield recorded to date”.

If you consider the Budget’s announcement, this means that, using averages, in and around 800 audits or 80,000 non-audits would have to be conducted to yield €80 million. The total number of audits in 2021 was 1,160. Let that sink in for a minute with the caveat that these are average numbers.

I’ve referred to “audit” and “non-audit” interventions above and there is now a lingo change here. Under the previous Code, other than for Revenue investigations, there were two approaches to compliance intervention, namely, non-audit (including aspect query, profile interview, e-verification, assurance check) or audit. Under the new Code, Revenue interventions are classified under one of three risk levels with the type of disclosures available to a taxpayer varying at each level. The Revenue document colour-codes the respective levels with Level 1 being green, Level 2 being amber and Level 3 being red reflecting the corrective options, disclosure position and penalties applicable at each level.

A Level 1 Intervention allows for an ‘unprompted qualifying disclosure’. Under a Level 2 Intervention the ability to make an unprompted qualifying disclosure is gone and only a ‘prompted qualifying disclosure’ is available. Level 2 means either a Risk Review or a Revenue Audit. The level of tax-geared penalties that can apply is different for unprompted and prompted qualifying disclosures. The quantum of penalties will depend on such circumstances as the category of default involved (either careless or deliberate behaviour), the level of co-operation shown throughout, and the presence of any prior infractions.

A Level 3 Intervention comprises a Revenue Investigation and there has been no change with the “old” Code in that no disclosure will be accepted for the matter(s) under investigation. A ‘Revenue Investigation’ is an examination of a taxpayer’s affairs where Revenue believes, from a review of available information, that serious tax or duty evasion may have occurred, or a Revenue offence may have been committed and may lead to a criminal prosecution. So you can see why this is in the red category.

Fiona points out in her conversations with taxpayers that under the new code a taxpayer will not be able to make an unprompted qualifying disclosure in a Risk Review scenario. A Risk Review is described as a focused intervention to examine a risk or a small number of risks on a return. Under the “old” code, an ‘Aspect Query’ was described as a short, targeted intervention for the purpose of checking a particular risk. They may sound similar; however, an ‘Aspect Query’ was a non-audit intervention, meaning the taxpayer could make an unprompted qualifying disclosure; a ‘Risk Review’ is a Level 2 Intervention, meaning the ability to make an unprompted qualifying disclosure is not available. Therefore, where Revenue conducts such a review, it will be important that taxpayers review their affairs in detail to establish whether there is a requirement to make a prompted qualifying disclosure to address any underpayment of tax or incorrect tax treatment of income, gain or expense.

Fiona notes that a key point here is that taxpayers understand what is required in making a prompted qualifying disclosure, because if the opportunity to make a prompted qualifying disclosure is missed this can lead to higher tax-geared penalties and crucially potential tax defaulter publication.

On top of that it is important that taxpayers do not wait for Revenue to ring the doorbell. It’s important to carry out a self-review or health check to examine how the business is managing its tax obligations. In particular become familiar with new code of Compliance Interventions in that if you’ve had an audit before then what you knew then is different now. In short, let’s be careful out there.

Please note this article first featured in the Business Post on Sunday, 15 January 2023 and was re-published kindly with their permission on our website.