Our tax system is policed by means of penalties and interest charges where tax returns and payments are not dealt with on time and also by random Revenue Audits. By now a lot of people have been audited by the Revenue and nearly everybody knows somebody who has had a Revenue Audit.
The forms of sanction imposed by the Revenue during the course of their audit consists of all or a mix of the following –
- Extra tax owed
- Interest charge for late payment
- Penalties on top of the extra tax due
- Publication of your details in the Tax Defaulters List
While many individuals receive a clean sheet from the Revenue following an audit, most people end up owing some additional tax together with interest and penalties thereon. Even innocent errors can give rise to additional tax liabilities upon which interest and penalties can arise.
Under self assessment we all have to manage our own tax affairs. For many small businesses this can involve very substantial amounts on money in the form of VAT and PAYE/PRSI deductions for employees. Even small errors in the operation of the VAT and PAYE/PRSI rules can give rise to substantial tax liabilities being owed.
What to do if you are notified of a Revenue Audit
The receipt of a notification of a Revenue Audit assuming your tax affairs are all in order should not be a matter giving rise to concern. You may have been selected on a purely random basis for verification of your tax returns.
On the other hand if you are aware of issues that may be queried by the Revenue auditor then you should consider obtaining professional advice for dealing with the Revenue auditor. We can provide this service for you but a charge will arise for same, which will depend on the complexity of your affairs.
We would recommend that you engage a tax consultant to review your books and records well in advance of the audit to identify any potential issues. You would agree the figures and approach to take with Revenue with your tax consultant who would also be present to assist during the initial meeting with the Revenue auditors. Generally, your tax consultant will act as a go between for you and Revenue in finalising matters during the weeks following the audit meeting.
We have provided this service for a number of paylesstax.ie customers and more details are available here.
Revenue audits are often instigated based on information the Revenue have obtained from other sources. A voluntary declaration of matters that may cause difficulties with the Revenue prior to the commencement of the audit should ensure that the audit is dealt with in a speedy manner and also helps to reduce penalties, which would otherwise be added to whatever additional tax is found to be due.
Interest and Penalties
If the Revenue auditor discovers additional tax owed then interest and penalties will be added to the actual tax owed.
The Interest charge is calculated on a daily basis from when the additional tax should have been paid. The interest charge works out at approximately 8% per annum.
Penalties of up to 100% of the additional tax can arise. The amount of penalties will depend on type of disclosure made to Revenue, the nature of the problem, the quantum of additional tax due, and the degree of cooperation received by the Revenue auditor.
In practice, the charge for penalties ranges from 3% to 100% of the extra tax owed. To qualify for the lower rates of penalty the amount of additional tax must be relatively small, the Revenue auditor must have been advised of the matter before the audit started and full cooperation must have been provided during the course of the audit.
Tax Defaulters List
Following a Revenue audit if you make a settlement with the Revenue your details will not be published in the Tax Defaulters List if –
- You made a qualifying disclosure to the Revenue Auditor before the commencement of the audit. No publication of your tax settlement details will be made regardless of the amount of the settlement.
- Where the penalty agreed does not exceed 15% of the tax included in the settlement.
- The amount payable to the Revenue is less then €33,000.
Revenue Audits for the Small Business
The owners of small businesses manage very high amounts of tax and are responsible to the Revenue for the proper operation of same and for the collection and payment of various taxes to the Revenue. Genuine errors can give rise to large tax bills with interest and penalties charged on top of the tax due making it substantially higher. Revenue audits will focus on the operation of VAT and also on how PAYE/PRSI is operated. In addition they will pay particular attention to business expenses claimed by the owners and also for employees.
VAT is an area where the Revenue collect substantial amounts of tax from audits. The use of incorrect rates of VAT and the reclaiming of VAT on costs which are specifically not allowed continues to be fertile ground for Revenue auditors. You are not allowed reclaim VAT on any of the following:
- VAT incurred on the purchase of cars, car hire or car leasing and on petrol (VAT on diesel is reclaimable).
- VAT incurred on entertainment which includes VAT on corporate entertainment.
- VAT on food, drink and accommodation for the trader and his employees or agents which includes the staff Christmas party and also VAT on water.
Where you have employees the Revenue will check the operation of PAYE/PRSI and also how you have dealt with expenses claims for employees and the application of benefit in kind which is also the responsibility of the employer. If you run your business through a limited company you will be treated as an employee of the company even though you own it and subject to the same rules and regulations as any other employee. The issue of PRSI for shareholder directors who do not own more than 50% of the company can be a contentious matter. If for example you own 20% of the company you could be liable for PRSI at the normal employee rate (if you have not received approval from Dept of Social Welfare for the application of the S rate) which also involves employers PRSI. This is known as the A rate. The employers PRSI is 10.75% of your total salary. If as is often the case you are paying PRSI on the S rate which does not involve employers PRSI then a significant amount of PRSI could be owed to the Revenue.
The claiming of business mileage and expenses is another area which gets a lot of attention from the Revenue Auditor. If full details of business mileage and expenses are not properly maintained, then problems can arise. The Revenue Auditor will always focus on such claims made by owners of the business and also examine what income the owners are receiving from the business. They carry out a lifestyle check to ensure that the assets and liabilities of the owners can be substantiated based on the income they receive from the business.
For those involved in the construction industry the operation of the subcontractors tax is another area that receives a lot of attention from the Revenue auditor.
We can provide detailed advice on how to deal with a Revenue Audit and deal directly with the Revenue on such matters on your behalf. We also provide a service which will examine your business to identify areas where issues may arise with the Revenue and will advise you how to deal with same to ensure that no difficulties arise in the event of a Revenue Audit. An extra charge arises for this service which will depend on what exactly is involved.