It’s safe to say that nobody ever wants to be the subject of a Revenue audit. Even if you are 100% confident that your tax affairs are in perfect order, there is still the time and inconvenience of having to deal with Revenue as they conduct their review. And for most people there will always be the niggling worry that an error may have been made or something may have been forgotten.
Gaining an insight into how Revenue select their audits can be useful in helping to minimise your chances of being audited or to select the best strategy for dealing with an audit if and when it does arise.
There are a number of factors which can affect the likelihood of being selected for Revenue audit. The degree of control that individuals and business owners can have over these factors varies.
The Revenue are becoming more sophisticated in their selection techniques with the development of REAP, their ‘risk evaluation, analysis and profiling’ system. REAP first went live in 2007 but Revenue stated that 2008 was the first year that it was used in a “proper, sophisticated fashion”. As more and more data is collected and retained on REAP, it will become an increasingly powerful tool for Revenue.
REAP works by compiling a profile of each taxpayer based on past experience with that taxpayer. Data such as background, lifestyle, ownership of assets, tax residency history, tax returns and payments are just some examples of information entered to REAP and there are an increasing number of data sources being utilised. One example of Revenue working with third parties is obtaining information from banks and credit unions on the amount of interest earned on deposit accounts.
REAP interrogates all this gathered data by applying a set of rules to each user’s profile and assigning a score. Taxpayers are then ranked by their score. Depending on their score, certain follow up actions could occur, ranging from a follow up letter or phone call to a full investigation. According to reports there currently exist 220 rules which REAP uses to generate a score. Revenue have recently estimated that 60% all of their audits are based on the top 20% of risks identified via REAP.
Revenue have also stated their intention to extend REAP to cover PAYE workers. Their expected timetable for implementing this extension is the end of 2010. The main focus of REAP on PAYE tax payers will be to look at additional assets held by the individual.
So what can I do to minimise my chances of a Revenue audit?
There are certain factors that will be very much outside of your control. For example, Revenue regularly conducts audits on a sector specific basis. In recent years these have included retail jewellers, retail pharmacies and the construction industry. If you operate within a targeted sector you may find that you are selected for audit on this basis alone.
However there are a number of other factors which you do have a greater degree of control over. These include your compliance record i.e. if you have always filed tax returns and made payments on time. It also includes the accuracy of your records – if you have submitted a lot of amended tax returns, this can raise questions as to your internal control systems and why tax returns are not submitted correctly the first time.
Other factors that Revenue can look at are significant changes to your profit margins and turnover or other financial indicators. If these differ significantly from your previous year’s figures or even from industry averages, this could trigger the Revenue to look deeper into your affairs. If you are showing an unusual set of figures in one year, you may consider including a note on your tax return to explain the issues which impacted on the business for that year. This may give the Revenue the answers they seek without them contacting you or looking any further into it.
In summary, Revenue’s methods for selecting which businesses and taxpayers to audit are becoming increasingly sophisticated. With better use of IT systems, Revenue are gathering more and more data and also finding increasingly efficient ways of processing this data to their advantage. And with tax revenues at a severe low in the current economic climate, Revenue are coming under increasing pressure to identify errors and omissions in tax returns which will lead to higher returns on their audit investigations. Being mindful of this, ensuring a good compliance record and being pro-active in communications with Revenue over unusual transactions or trading histories will take you a step closer to minimising your chance of becoming the subject of an audit.