Are you ready for what happens when Revenue comes knocking?

Revenue suspended certain audit activities because of the virus and you could rightly ask what such a visit might look like into the future. I sometimes imagined drones swooping into taxpayer premises to take the necessary aerial photographs of books and records and then flying back to Revenue HQ for them to be examined. In that way, social distancing for Revenue at taxpayer premises becomes irrelevant once the drones are deep cleaned on arrival back at base. Thankfully, we’re probably not there yet given the health and safety risks of low flying aircraft in an indoor setting. That said audit activity at taxpayer premises will resume and are you ready?

A Revenue Audit is a legitimate intrusion into a taxpayer’s business and is provided for by law. There may or may not be tax issues within that business but that does not get around the fact that questions will be asked and taxpayer’s time, energy, effort and resources will be taken up answering them. There will be time for the taxpayer to make certain disclosures of circumstances giving rise to a tax liability at the opening audit meeting and this should continue in a socially distant or virtual world. This is a crucial part of the audit process as it impacts on the quantum of any tax geared penalties, tax publication and prosecution.

Ultimately, the result of that examination can end up with the taxpayer and Revenue disagreeing on the amount of tax payable with the taxpayer saying “see you in court” to Revenue and lodging an appeal within the prescribed deadline. There was a recently published decision of the Tax Appeals Commission on a specific issue highlighting the importance of appropriate books and records being kept; but it also gave some insight into the possibilities in the activity involved as part of dealing with such an audit or as I call it “the process”.

Before going on you have to understand that decisions of the Tax Appeal Commission are generally given on an anonymous basis so that the taxpayer’s identity is not included in the decision. The text of the decisions are available from the Commission’s website. In this case, the taxpayer operated a public house and had certain other income. The battleground between Revenue and the taxpayer related to the specific issue of the adequacy of records in relation to sales in the taxpayer’s business but you’ll see below how the matter evolved and the differing approaches taken.

Revenue audited the taxpayer’s business in early 2016 and concluded using a “mark-up exercise” that the tax returns were inadequate. That’s nearly four years ago and it related to tax periods 2013 and 2014 and demonstrates the time and effort that must have gone on between discussions with Revenue, ultimately ending up in the disagreement which lead to the “see you in court” moment. That’s some time to wait between issue and resolution and it’s something you would have to bear in mind if you want to disagree with a tax assessment and also interest may be clocking up. A taxpayer can take a matter further to the High Court and beyond but that’s on a point of law and a whole different ballgame.

Here, the taxpayer argued that the mark-up used by Revenue assumed that every keg of beer purchased converted to sales. The taxpayer argued that didn’t take account of wastage, free drinks or other factors in concluding that sales had been understated.

Now for the back and forth on both sides: Revenue wrote to the taxpayer explaining that its summary mark-up exercise on the drink sales concluded that it would expect a mark-up of 109% on drink purchases. That letter estimated the additional sales in the business for 2013 and 2014. The taxpayer’s agent responded reconciling Revenue’s expected mark-ups with estimated drink losses and free drinks supplied. The Agent calculated the value of these losses. Revenue came back offering to reduce its expected mark-up to 103%.

The taxpayer’s agent rejected that and subsequently asked for a local review of the audit. This process is outlined on Revenue’s website dealing with Revenue’s complaint and review procedures. In this case a senior Revenue official at Principal Officer level carried out an internal review of the conduct of its audit in this case. In another letter, the Officer acknowledged certain shortcomings in the conduct of the audit but ultimately supported the use of a business economics approach to estimate sales because of the lack of back up to accurately support the sales records presented.

All of the above happened well before seeing inside the courtroom. Revenue argued that in the absence of certain records, a mark-up analysis was carried out by Revenue’s Auditor to confirm the turnover of the business. It explained that the mark-up exercise was conducted using available purchases records and sales prices provided on the day of audit. In conducting the mark-up exercise, purchases were broken down into the following categories: kegs, spirits, bottled beers, etc. to arrive at a weighted mark-up. Revenue said they had excluded free kegs from suppliers and a number of missing invoices from a cash and carry supplier, when carrying out its mark-up analysis.

Revenue argued that their estimate was adequate and reasonable even though it omitted wastage, free drinks and other factors. It provided a computation in support of this that outlined its exclusion of the cash and carry invoices equated to allowing wastage and free drinks in the appeal periods. All of the above demonstrates the level of detail looked into and the time, effort, energy and resources that are necessary on both sides before taking a matter to appeal.

The Appeal Commissioner explained that where data is recorded electronically as in this case then it must be capable of being produced or reproduced at short notice. However, in the end, the Appeals Commissioner explained “The burden of proof in this appeal process is, as in all taxation appeals, on the taxpayer”. Let that sink in for a second. If you’re arguing with Revenue and you have to go to court then it’s up to you to demonstrate you’re right and they’re wrong. This isn’t innocent until proven guilty territory.

In this instance, the Appeals Commissioner said the taxpayer “in this appeal did not succeed in proving on the balance of probabilities that the [tax] assessments were incorrect and therefore did not discharge the burden of proof and thus I determine that the assessments shall stand”. This case was on a factual matter and not on the interpretation of a tax position taken by a taxpayer in connection with a transaction.

Are you or your business ready for the scrutiny in “the process”?

Please note this article first featured in the Busines Post on 5 July and was republished kindly with their permission on our website.