Ireland: Revenue Audits – One Year On

Last Updated: 4 April 2018
Article by Shane O'Donovan

A year has passed since the last article in relation to Revenue audits. The trend discussed in the previous article has continued throughout 2015 and into 2016. In 2015, Revenue carried out non-audit compliance interventions, which yielded a total of €314.6 million. This compares to 429,545 non-audit interventions in 2014, which yielded a total of €272 million.

In this article, the following will be considered:

  • The reasons behind the continued upward trend in non-audit compliance interventions; and
  • E-audits and, in particular, the development of the e-audit and its impact on the Revenue audit landscape.

Revenue non-audit compliance interventions

As outlined in the previous Revenue audits article, Revenue interventions can broadly be broken down into three categories, namely:

  1. Revenue Non- Audit Compliance Interventions (Mainly Assurance Checks, Aspect Queries and Profile Interviews).
  2. Revenue Audits.
  3. Revenue Investigations.

A non-audit compliance intervention is the lowest level of review which the Revenue seek to carry out. It will generally take the form of written aspect queries.

Typically, an aspect query will generally arise in reply to a return which has been submitted to the Revenue.

While the questions raised by Revenue aspect queries may seem innocuous, it is important that taxpayers engage with the process and answer the queries in a timely manner. Failure to deal with aspect queries can lead to a full Revenue audit.

What triggers Revenue non-audit compliance interventions?

The continued upward trend in non-audit compliance interventions is a clear indication of the Revenue's move towards a reliance on data mining information submitted on tax returns.

Revenue non-audit compliance interventions generally arise as a result of tax return screening and statistical analysis. The following errors generally attract Revenue attention:

  1. Filing an incorrect or incomplete tax return.
  2. Late filing of a tax return.

Generally, at the outset of a Revenue intervention, the taxpayer will have an opportunity to make a voluntary disclosure. Making a voluntary disclosure at the outset of a Revenue intervention can significantly reduce the penalties associated with any tax settlement. Another key benefit of a voluntary disclosure relates to publication – if a taxpayer makes a qualifying voluntary disclosure at the outset of a Revenue intervention, no publication will arise. Without a voluntary disclosure, publication will arise if the total Revenue settlement exceeds €33,000 or if the penalty associated with the Revenue settlement exceeds 15%.

In general, a taxpayer will receive a Revenue Aspect Query or Revenue may invite the taxpayer to make a voluntary disclosure or seek to call out to the taxpayer to discuss an aspect of his/her tax return. If serious errors are detected, this may result in a Revenue Audit.

How can you minimise the possibility of being selected for a Revenue non-audit compliance intervention?

The key to avoiding Revenue scrutiny is to ensure that you are fully compliant with tax legislation, i.e. you must ensure that:

  • All tax returns filed with Revenue are correct and contain the correct elections and sufficient disclosure.
  • Every aspect of your tax return is filled out properly and that your tax return is completed in its entirety.

For example, the following errors will attract Revenue attention:

  • Failure to fully and properly complete a VAT Return of Trading Details. This creates a problem for Revenue as it will not have all the statistical information required to meet its statistical reporting obligations to the EU.
  • Application of incorrect VAT rates in respect of the main activity of your business. For example, applying a 13.5% rate where the correct VAT rate is 23%.

We would recommend that you consider instructing your tax adviser to carry out a compliance health check of your business approximately every three years. This will ensure that any errors not identified in simple year-end returns are isolated at an early stage.

It is important to note that this health check is not part of your annual audit and preparation of accounts, and is not designed to look at minute details. However, it may be key to ensuring that you avoid selection for Revenue audit. It involves a two-day review, similar to the review carried out on a pre-Revenue audit check. Common errors identified in a compliance health check of VAT/PAYE returns submitted to Revenue include:

  • Accounting for VAT at a rate that is too high/low.
  • Incorrectly calculating motor expenses.
  • Placing employees or directors on the wrong PRSI rate.

In addition to ensuring that potential tax liabilities do not accrue, a health check may also identify potential savings, e.g. identifying that VAT should be accounted for at a lower rate or delaying the issuing of invoices to defer the time at which VAT is due thereby improving cash flow.

What is an e-audit?

An e-audit is similar to the paper audit that many of you are familiar with. It is an audit that consists wholly of, or includes, an examination of electronically-held records. It reflects the introduction of software management packages into small and medium sized enterprises, in addition to the larger companies.

Revenue currently use IDEA software (a data interrogation programme) in order to examine a taxpayer's electronic records. IDEA can quickly identify gaps in invoice numbers, incorrect VAT rates, weekend postings and large transactions in addition to industry-specific inconsistencies. It raises the level of interrogation of the material, allowing Revenue to direct attention to particular areas where there may be problems and to easily identify inconsistencies. Where a two to three-year period is under review, records may be analysed from year to year. It also allows Revenue to quickly identify relevant questions and reach conclusions in a shorter period of time than in a paper audit.

If you are selected for e-audit, a pre-audit meeting takes place before the actual audit commences. The purpose of this meeting is to save time at the audit by providing the auditor with the opportunity to identify the computer hardware and software in use in your business and the electronic records available. You can still make a voluntary disclosure on the day of the audit if necessary. Data may be interrogated off site and you may be required to deliver the electronic records to Revenue by secure email or other encrypted Revenue system.

Impact of the e-audit on the Revenue Audit landscape

From experience, it has been noted that Revenue tend to revert to clients with a list of pertinent questions following interrogation of electronic records.

In the retail sector, for example, Revenue is particularly interested in cash register and EPOS systems. Revenue will gather information prior to the audit and look for anything out of the ordinary. The auditor may also examine hard copy paper records linked to the system, e.g. invoices and credit notes. All records will be interrogated for their accuracy and completeness. The following aspects of the EPOS system will be of particular interest to Revenue:

  • The training button
  • The void button
  • Re-entered transactions
  • Codes imputed manually

As we all know, a computerised system not utilised correctly has the potential to succumb to human error. Interrogation of the data held in relation to the above will often bring to light incorrect VAT returns through errors in VAT rates on products, suppressed sales or pilferage in the system.

The e-audit will not be closed until the taxpayer provides sufficient answers to Revenue's questions. Depending on the type of electronic system in use in your business, it may well be the case that the data entry is either right or wrong. If it is wrong and a tax liability accrues as a result, it is unlikely that Revenue will allow you to fix the mistake and move on from it. It is more likely that Revenue will ask you to calculate the tax due as a result of the mistake and remit it to Revenue.

The future is electronic

Just as technology is now an integral part of our everyday lives, it also plays an integral role in assisting Revenue in the selection of taxpayers for Revenue audit and in the interrogation of the data under audit.

Through the use of the REAP (Risk Evaluation Analysis and Profiling) system, and through Joint Investigation Units, where Revenue works closely with other Government Departments and exchange data, Revenue can quickly identify non-compliant taxpayers.

Where non-compliant taxpayers are selected for e-audit, the IDEA platform allows Revenue to interrogate a much larger sample of records and to identify inconsistencies far more quickly than it could in a traditional paper audit.

There can be no doubt that Revenue will continue to develop and advance its technological capabilities and that e-audit will therefore play an ever-increasing role in the Revenue Audit landscape. The future is undoubtedly electronic. Prepare for the future by making regular compliance health checks an integral part of your business plan. If you don't identify the problem, it is almost certain that Revenue will.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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