Google the term ‘fear of audit’ and you’ll get 46 million results! Being reviewed, examined, or investigated in any way seems to really trigger something in humans. While you may feel some natural anxiety at the thought of having your tax affairs under the microscope, our experience is that engaging early and fully with Revenue – and being upfront about any mistakes you may have made – usually leads to a good outcome for business owners.
Why you shouldn’t fear being audited
The first thing to remember is that Revenue isn’t “out to get you” but simply to get answers to questions that may have arisen about your business finances. In practice, we find Revenue very helpful and pragmatic when we’re dealing with them over a query or audit. If we need help with an issue or to put something right, they are typically very accommodating and solutions-oriented.
In fact, Revenue’s own Code of Practice for Revenue Audit states its mission as, “To serve the community by fairly and efficiently collecting taxes and duties and implementing Customs controls.”
Although audit teams have targets to meet, remember that having Revenue officers at your premises going through your books for the best part of a day represents a significant cost to them, so Revenue isn’t going to be auditing a company for the sake of a few hundred euros. That’s just not a good return on investment. I would say that if your turnover is below the €100,000 mark, there’s little chance that you are going to be audited.
What might trigger a Revenue audit?
The self-assessment tax system in Ireland, which we inherited from the UK, means that we actually have a pretty easy time of it when it comes to the administration of tax affairs. But self-assessment couldn’t exist without checks and balances, and that’s what enquiries and audits are all about.
Revenue has a few different ways of choosing who to audit:
The Risk, Evaluation, Analysis and Profiling system (REAP)
REAP is a risk-based system that combines predictive models and specific business rules to identify compliance risks by analysing transactions and behaviours. REAP uses Revenue data as well as third-party information to spot when something doesn’t follow typical patterns or trends and might therefore need investigating. One example might be if your business has a gross profit margin that is way outside the norm for your sector.
Revenue also has an evaluation tool to assess post-clearance risks in customs declarations, called the Customs Risk Intervention Selection Programme (CRISP).
Screening in this way is the most common method of selecting a business or taxpayer for audit.
Another way businesses are selected for audit is when they come within the scope of a special project, where Revenue focuses on a particular business sector, trade, or profession. They will often pick a sector where non-compliance is high, as this allows them to maximise their results.
A small number of audit cases are selected randomly each year. Any business could theoretically be investigated, not just those that have potentially done something wrong.
Where Revenue has found non-compliance in the past, it is likely to re-audit the company at a later date to make sure that lessons have been learned.
Revenue enquiries, audits, and investigations
A Revenue audit is an examination of your tax returns and records by a Revenue officer to ensure that profits, income, and chargeable gains are correctly calculated and that none are omitted from the return. An audit may also be carried out to check that tax credits, reliefs, etc., claimed are due.
There are different levels of audit. At the simpler level, there could be a situation where one of your filings is unusual (for example, all your previous VAT returns left you with a modest VAT liability and then suddenly you file a return where you are making a substantial VAT claim). When something like this happens, they are likely to send you a letter and ask you to clarify the anomaly.
All you’ll need to do if this happens is to explain why there has been a change to the usual pattern of things and this will be cleared up. These kinds of queries aren’t uncommon and are dealt with swiftly. Of course, it’s important that you don’t ignore such a request but engage with Revenue promptly and provide the information they are looking for.
A level up from this would be an aspect query. Again, Revenue will send a letter to explain what they are looking to clarify. An aspect query is by definition limited to a certain area of the business, so this is all you need to provide clarification for. Revenue will tell you which tax head is concerned (typically PAYE, CT, or VAT) and what period they are looking at. They’ll also let you know when they plan on visiting your premises to look at your records, so you have time to pull together the information they need.
If your business has received an aspect query, the key is to prepare well and prepare early for Revenue’s visit. When we help clients with this, we’ll start putting together physical files containing all the information requested. Rather than giving Revenue access to your entire accounts system, printing off only the relevant information is best for keeping the query on track. We’ll create ring binders containing all the documentation that relates to the specific issue the officers are looking into and no more.
Also, if the date indicated for an inspection doesn’t work for you, don’t hesitate to give Revenue a call and see if an alternative can be found. Build a personal relationship with the officer(s) handling your case and ask them questions about what they’d like to see when they visit, because this will help them see you’re not trying to hide anything. You’ll end up with a better result if you show you are working with them.
Our experience handling queries and audits
Generally speaking, we’ve had really good results from the investigations we’ve managed for clients. We’re always upfront about where mistakes have been made (this is called a “qualifying disclosure”), and with our fresh eyes looking over the accounts we may even be able to identify another area of the business where the client has overpaid/underclaimed, which can be offset against the liability. The client may have been worried about getting a huge bill for adjustments and fines, but once our information had been examined the final liability was actually quite manageable.
My advice if you are notified of an audit is to let your accountant liaise with Revenue on your behalf. Your accountant will understand exactly what Revenue requires to clear up the query and Revenue will see that you have a competent advisor working with you (which will count for a lot). The cost of having your accountant act for you will depend on the scope of the query/audit – typically from a few hours to a few days depending on what needs doing (factor in extra bookkeeping, reviewing accounts, putting together files for inspection, attending meetings, etc.). But if this takes a zero or two off the total owed to Revenue, it’s clearly worth it.
The danger of not being well-prepared for an aspect query – either you don’t provide the information needed or the information is wrong (fraudulently wrong or you simply can’t provide backup for it) – is that then Revenue is within its rights to launch a full audit, which can go back seven years. The cost of this to the business can be significant, both financially and for the huge amount of stress involved. And the liability due, plus interest plus fines (which are really high if Revenue decides you were deliberately non-compliant), could be enough to put you out of business.
Be prepared, be engaged, and be upfront
At the end of the day, it’s perfectly fine to run your business as efficiently as possible by maximising expenses and minimising tax liabilities. You are not expected to pay the maximum amount of tax possible, but to structure your tax affairs efficiently. Benefiting from reliefs, exemptions, and allowances is something we encourage all our clients to do – the key is to always do so within the “intended use of the legislation”.
In our experience, SME owners want to be able to sleep at night and are not deliberately falsifying their returns. Make sure you keep good records so that you can answer any questions that could potentially arise, always file and pay on time, and develop a strong relationship with your accountant so that you (a) know you’re managing your accounts correctly and (b) have a knowledgeable advisor on hand to act quickly should you come under scrutiny.