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It’s critical that you prepare appropriately for a Revenue audit

Tom Maguire discusses preparing for a Revenue audit in his Business Post column

A decision of the Tax Appeals Commission (TAC) was published recently which held in favour of Revenue looking beyond the 4 year statute of limitations where the Revenue official had “reasonable grounds for believing” that there were irregularities in the prior years due to neglect or fraud. That “reasonable grounds” test sets a bar higher than a mere hunch but it’s still lower than concluding beyond a reasonable doubt. What is of note about that TAC case, which dealt with offshore accounts (and may be going to the High Court), was that Revenue had previously considered the matter closed but reopened the issue “based on a reconsideration or a further analysis of information and explanations which had not previously given rise to doubt or concern”.

Each TAC decision is based on its own facts and circumstances so that doesn’t mean that Revenue can go back to Adam and Eve’s time in every circumstance but it brings home the need to have tax affairs in order when Revenue comes knocking.

Revenue audits are legal intrusions into a taxpayer’s business. There may or may not be tax issues within that business but that doesn’t get around the fact that questions will be asked and taxpayer’s time will be taken up answering them. For example, employment tax audits are wider than payroll and a pre-audit review will require input from stakeholders across the business such as HR, Finance, Accounts Payable, Tax, Procurement and Legal, to name a few.

With the move to real time reporting Revenue now have up to date sector specific information making their interventions more risk targeted. If you have received Notification of a Revenue audit dealing with payroll matters then you can expect that Revenue will focus on a number of areas. These can include such areas as contractors and whether they are employed or self-employed; the taxation treatment of employee expenses; a review of directors’ remuneration and expenses; a review of short-term business travellers as well as the taxation of the various benefits your employees receive.

Taking a couple of the above. On contractors, if they are self-employed then there should be no PAYE exposure for the employer. Of course, the question turns on whether there is a genuine contractor relationship in place. This issue is topical, given the changing nature of the modern workforce. If the contractor is found to be employed rather than being a sole trader then there is likely to be an exposure to PAYE/PRSI/USC that should have been deducted, plus statutory interest and other penalties. You’d think that such an issue would be a relatively easy one to sort out in that you’d know an employee when you see one, but this is a matter that has been before the courts over the years. Therefore, the evidence backing up a contractor relationship needs to be well established.

On expenses, Revenue will look at their accuracy and whether they’re in line with Revenue guidance and or civil service rates and what is the employers’ policy on entertainment, recognition awards, tolls, the use of credit cards etc. A review will usually look at the types of directors engaged and the tax treatment of remuneration and expenses.

What about short-term business travellers? The question might turn to whether there are controls in place to monitor employee cross border movements so as to establish whether foreign tax obligations have been triggered e.g. where staff have been working outside of Ireland during Covid19 etc. Some particularly topical areas from a taxable benefits perspective include professional subscriptions, company vehicles, medical insurance, staff entertainment, the use of the small benefit exemption and the provision of third-party benefits.

Right now, when you receive a Notification of a Revenue audit you can still make a prompted disclosure, however timing is an issue as you typically only get 21 days notice prior to the commencement of the Revenue audit. However, this can potentially be extended by 60 days, where you provide Revenue with a notification in writing that you intend to make a qualifying disclosure before the expiration of the 60 days. It is possible, in limited circumstances, to apply for an extension to the audit commencement date and that would need to be agreed with the case worker (for example one or two week’s extension due to the unsuitability of the date). The commencement of an audit is an important date as it shuts the door for a “prompted disclosure” by the taxpayer and this can have significant onward reach to tax geared penalties and tax defaulter publication.

The tax landscape is evolving, and Revenue are changing and adopting to meet this evolution. Their current Statement of Strategy 2021 to 2023, in conjunction with their Corporate Priorities 2021, sets out their mission, vision and core values and their high-level objectives under their twin pillars of Service for Compliance and Confronting Non-Compliance. Their aim is to build on their advanced digital platform and PAYE Modernisation by designing innovative and dynamic systems which will position them as a leading tax and customs administration in the area of real-time activity and automated programmes.

Revenue audits are about all tax heads. In its annual report, Revenue outline other areas of Interest. For example, they explain that they “…continue to pro-actively address the challenges of the international tax environment, including carrying out risk driven transfer pricing audits and other transfer pricing compliance interventions. By the end of 2020, we had initiated 31 transfer pricing audits, 13 of which have been finalised resulting in a yield of €81.6 million and a restriction in trading losses of €31.9 million (tax effect: €4 million). Additionally, amended corporation tax assessments have been made with total underpaid corporation tax identified of approximately €482 million. The majority of the amended assessments are currently under appeal”.

As a result, the key to a successful outcome in any Revenue audit is to take a proactive approach to compliance by ensuring that everything is up to scratch before Revenue come knocking. This means doing regular self-reviews, not only for employment taxes, but under all tax heads and engaging with Revenue as needed on the output of that review (for example by submitting an unprompted qualifying disclosure if appropriate). In that way control deficiencies are identified early and rectified, along with any exposures and/or potential liabilities. In that way taxpayers have time to consider their options in relation to any historic liabilities identified and can benefit from the most favourable treatment provided for under the Code of Practice for Revenue Audit and Other Compliance Interventions.

Please note this article first featured in the Business Post on Sunday, 6 June 2021 and was re-published kindly with their permission on our website.

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