Self employed? How to handle a tax audit
Every self-employed person can be subject to a revenue audit at any time. Having had an audit does not necessarily mean that you are not likely to have another one for a considerable period of time.
Revenue audits are not an absolute certainty but they are a virtual certainty. Most people have a great fear of revenue audits and probably with justification if they have something to hide. Even if they do not have something to hide it can be a very stressful experience.
That said, revenue auditors are generally handpicked and trained to execute the task in a pleasant, calm but business-like manner and will at all times endeavour to avoid argument or aggravation.
The revenue auditor will generally insist on holding the audit at the farmer’s residence or farm office, which in itself will reveal a certain style and standard of living.
At the commencement of the audit the farmer will be offered the opportunity to declare any unrecorded sales, income or expenses inappropriately claimed.
A declaration at this stage may minimise the imposition of penalties.
Such a declaration is called a Qualifying Disclosure. The auditor will commence the audit with a long series of questions that will cover everything about the farm business to the personal circumstances of the farmer.
He/she will always have some work done on the returns submitted and will have targeted certain areas for particular attention.
He will require sight of all documents from which the accounts were prepared and will expect that all purchases and sales are supported by evidence of receipt or payment.
Assuming that the farmer has an accountant, he/she should be present for as much of the initial period of questioning as possible and also at the concluding stages.
A qualifying disclosure is a disclosure made to Revenue before the commencement of a revenue audit.
A qualifying disclosure should include details of tax owing as well as the interest due to Revenue. It should be in writing and signed by the taxpayer.
It should also be accompanied by a cheque for the tax plus interest. There is no requirement to calculate the level of penalty as this will generally be agreed at the completion of the audit.
Making a qualifying disclosure will generally result in a reduction in penalties and no publication.
PENALTIES AND INTEREST
Where, as a result of an audit, it is clear that the taxpayer has not made a full and true return, and an undercharge to tax arises, interest charges will apply at a equivalent of 8pc per annum.
In the case of penalties, the size of the adjustment required to the declared profits and the nature of the breach is taken into account in determining whether a penalty should apply or the amount of such penalty.
Penalties can amount to 100pc of the tax due but can be reduced by the Revenue Commissioners depending on what it deems appropriate to the circumstances of the case.
The table sets out the level of penalty that can apply and the amount of reduction that can also be applied.
Where it is established that you have underpaid tax and you have not made a qualifying disclosure, your name will be printed in the national press if the total amount due is in excess of €30,000.
If you have nothing to hide you have nothing to fear, as, in the main, the revenue auditor will be found to be fair minded.
However, you should never allow the revenue auditor to make groundless accusations or suggestions.
If s/he arrives at conclusions that you know to be incorrect, do not accept the situation and request that the matter be brought to appeal.
What the auditor may look for
Unrealistically low personal spending or any unexplained gaps in the pattern of personal spending.
Significant purchases of certain farm inputs such as fertiliser or feedstuffs in the last few days of the accounting year that could not realistically have been used up.
Evidence of loans, creditors, gifts, winnings or awards.
Motor vehicles present on the farm but not in the accounts.
Explanation of high repairs and maintenance claims.
Any bank deposits or savings accounts not present in the accounts.
Verification that lodgements made early in the accounting year relate to produce sold in that year.
Where wages are claimed as an expense in the accounts, are they supported by proper evidence of payment and PAYE/PRSI returns?
Does the herd register correspond with stock sales as declared and closing stocks?
Are Department of Agriculture payments all declared?
Have all capital gains been returned?
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