A revised Code of Practice for Revenue Audits and Other Compliance Interventions has been published by the Revenue Commissioners recently. This outlines how Revenue will deal with certain infractions of the law by taxpayers. The new and improved Code will take effect for compliance interventions notified on or after 1 May 2022. For “interventions”, read when Revenue comes knocking.

I was chatting with Feargal Kenzie and Sandra Brennan in our Tax Controversy team and they agree that the changes that are being implemented will represent the most significant changes in the last number of years in terms of Revenue’s approach to compliance interventions. Let that sink in for a minute.

Under the new Code a taxpayer will not be able to make an “unprompted” disclosure in a Risk Review scenario; they will only be able to make a “prompted” qualifying disclosure. The difference between “prompted” and “unprompted” is the level of tax-geared penalties that can apply and the quantum of penalties will depend on such circumstances as the category of default (either careless or deliberate behaviour) involved, the level of co-operation shown throughout and the presence of any prior infractions.

A “qualifying disclosure” requires outlining complete information in relation to all matters giving rise to a tax liability. It is made in writing, signed by or on behalf of the taxpayer and accompanied by (a) a declaration, to the best of that person’s knowledge, information and belief that all matters contained in the disclosure are correct and complete; and (b) a payment of the tax and interest on late payment of that tax. Penalties are considered once any additional tax liability is agreed.

Under the current Code, other than for Revenue investigations, there are two approaches to compliance intervention, namely, non-audit (including aspect query, profile interview, E-verification, assurance check) or audit. Under the revised Code, Revenue interventions will be 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 level of mitigation 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 refers to a ‘Risk Review” and will also include a Revenue audit; there is no change with the “old” Code here in that only a prompted qualifying disclosure is possible for the scope and period of the audit.

A Level 3 Intervention comprises of 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.

As mentioned earlier, one of the most important changes is that in the future a taxpayer will not be able to make an unprompted qualifying disclosure in a Risk Review scenario. 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. A key point here is that taxpayers will need to consider the entire scope of the respective tax head for the relevant period or periods and not just the specific risk area or areas identified. Failing to do that may result in the opportunity to make a prompted qualifying disclosure being missed which in turn can lead to higher tax geared penalties and crucially potential tax defaulter publication.

Take a taxpayer company who receives a Level 2 Risk Review intervention with Irish rental income being the area of risk identified for the 2020 tax year. The taxpayer can’t afford to limit their review to Irish rental income as in order to consider if any disclosure would be treated as a qualifying disclosure. This could lead to a disclosure in an area other than Irish rental income. A situation could arise whereby a taxpayer limits their review to Irish rental income and makes a disclosure, which is accepted by Revenue at the time. However, if a future Level 2 Revenue audit identifies other underpayments of tax in the 2020 tax year, then this could lead to potentially higher tax geared penalties and tax defaulter publication considerations.

Also of note, is that the revised Code affords taxpayers 28 days to respond to Revenue, after which the intervention is considered to have commenced. Once the intervention has commenced the opportunity to make a prompted qualifying disclosure (relating to the scope of the intervention) is denied. The Code sets a fairly high bar in terms of flexibility in moving the 28-day period by the reference to ‘exceptional circumstances’. So taxpayers will need to ensure they carefully manage any Risk Reviews under the revised Code given the short time period to prepare and respond.

So what does all this mean? Taxpayers should self-review their affairs on an ongoing basis and conduct regular tax health checks to identify any tax risks. Such approach would allow for self–correction and unprompted qualifying disclosures to be made which can mitigate penalty and publication exposures. The management of the risks associated with Revenue intervention selection will be crucial and even more so into the future. There are mitigations available to the taxpayer and it’s important that they are correctly taken advantage of to minimise exposure.

Please note this article first featured in the Business Post on Sunday,. 6 March 2022 and was re-published kindly with their permission on our website.