We had an enquiry from a partner in an accountancy firm who is concerned about the direction of a Revenue audit under his management.
The facts are as follows:-
The Revenue Commissioners is conducting an audit of his client for 2014.
In advance of the audit, acting on the accountant's recommendation, the client made a disclosure to the Revenue Commissioners for that tax year.
If the disclosure is accepted by the Revenue Commissioners, the client will make a settlement of €1.3m including interest and penalties.
One of the main reasons for making the disclosure was to access reduced penalties and to qualify for exemption from publication as a tax-defaulter.
The accountant is now concerned as the Revenue Commissioners have asked questions in relation to transactions in the previous year, 2013. From a high-level review it would appear that the client has a potential tax issue in 2013 (from an unrelated matter to that disclosed in 2014).
Risk of Publication and Exposure of the Accountant to Legal Action for Damages
For a voluntary disclosure to be accepted, and to qualify for the benefits of same, the Revenue Commissioners must be satisfied that it contains "complete information in relation to, and full particulars of, all matters occasioning a liability to tax".
The accountant is anxious that the Revenue Commissioners will reject the disclosure on the grounds that it is incomplete. Should this happen the client faces significant reputational harm through publication as a tax defaulter as well as increased penalties.
This outcome would in turn expose the accountant to an action for negligence and damages.
The Scope of a Voluntary Disclosure
In any Revenue audit, it is critical to identify the extent to which a client is legally obligated to make a disclosure to the Revenue Commissioners.
Fortunately for the accountant, in the absence of fraud (otherwise referred to as deliberate behaviour) the taxpayer was merely required to disclose all tax liabilities arising in 2014. He was not required to make a disclosure for any other tax-year.
There is no immediate threat of the voluntary disclosure being rejected for non-declaration of issues relating to 2013. The risk remains though and will become a reality unless the audit is properly managed going forward.
Extension of the Audit into Different Periods or Other Tax-Heads
An audit must focus solely on the years, periods or transactions indicated in the ‘Notification of Revenue Audit’.
Any enquiries outside the scope of the notification amount to an extension of the audit. It is stated Revenue policy that earlier years or tax periods will only be audited if there is a "sound basis" for believing that significant tax defaults have taken place.
In addition to Revenue policy, the Taxes Consolidation Act 1997 provides a right to taxpayers to challenge by way of appeal the right of Revenue to raise queries outside a certain period.
It is important to challenge the extension of the audit outside the original scope.
Making a Further Disclosure
Where the initial scope of the audit is extended to other years, periods and/or tax-heads, the taxpayer will usually have an additional opportunity to make a qualifying disclosure.
It is critical that no records are furnished to Revenue for review for 2013 before a follow-up voluntary disclosure is made for that year. Otherwise, there is a risk that the opportunity to make a disclosure expires leaving the client exposed to higher penalties and publication.
When dealing with a Revenue audit there are a number of steps that are often ignored by practitioners. This can expose clients to higher settlements, publication and lead to action for negligence against the practitioner concerned.
To minimise these risks, we would recommend the following steps:-
Carefully review the audit notification letter to identify the tax-periods and tax-heads under review.
Establish the scope of the disclosure required to the Revenue Commissioners.
Be sure to identify the reasons for any tax default especially where there is risk of deliberate behaviour, i.e. fraud.
Confine the initial disclosure to the tax-heads or tax-periods stated in the 'Notification of Revenue Audit'.
Challenge the basis for raising queries outside the scope of the audit, especially if the queries are unrelated to issues disclosed and in particular where the Inspector appears to be 'fishing'.
Be aware that certain steps must be sanctioned by the Inspector's line manager and the various rights of appeal.
If enquiries are raised outside the scope of the audit notification, consider seeking written confirmation that the audit is being extended and that this has been formally sanctioned within Revenue.
Request a further extension of time to prepare for the extension and to make an additional voluntary disclosure, if necessary.
Most importantly, it is critical that the audit is managed (on a background basis if necessary ) by a competent tax advisor.