How to navigate Revenue’s traffic light compliance checks

Everyone feels trepidation when opening that harp-adorned brown envelope from the Revenue Commissioners, said head of tax controversy, Deloitte Ireland, Fiona McLafferty.

With effect from May 1, 2022, the Revenue Commissioners published a new Code of Practice for Revenue Compliance Interventions.

“The new code reflects the intention of the Revenue Commissioners to expand real-time compliance checks and to adopt a risk-focused approach to selection for a compliance intervention,” she said.

“This is being driven, in part, by technology and the ability to cross-reference across multiple data sources to improve risk profiling for more targeted interventions. In modern life it is practically impossible but to create an electronic footprint. Also, the influence of the EU is boosting increased co-operation between tax authorities across borders.”

So, one year on, what has been the impact? McLafferty said that if you receive a letter from the Revenue Commissioners to examine your tax affairs it will be described as a compliance intervention. The interventions are classified under three levels of risk levels.

The Revenue Commissioners have adopted a traffic light system for each level: Level 1 is green, Level 2 is amber and Level 3 is red.

“There are different options available to correct your tax position depending on the level. Also, the type of qualifying disclosure varies between the levels. In general, discussions with the Revenue Commissioners are considered in terms of tax, interest, penalties and publication,” McLafferty said.

Green

The new code describes a Level 1 compliance intervention as being aimed at supporting taxpayers by reminding them of their tax obligations and providing the opportunity to correct errors without the expense and stress of a more in-depth examination.

“It forms part of the support compliance approach of the Revenue Commissioners aimed at reinforcing their view of the importance of voluntarily reviewing your tax affairs – and the choice of green is a visual reminder of this view,” McLafferty said. “A Level 1 compliance intervention affords the opportunity to make an ‘unprompted qualifying disclosure’, which, if accepted, means no publication on the tax defaulters’ list and lesser penalties.”

For large corporate groups, the Revenue Commissioners operate a policy of voluntary compliance through a Co-operative Compliance Framework (CCF). McLafferty said that the new code specifically provides that engagements under the CCF are Level 1 interventions.

“This classification in the new code may not have translated to encouraging participation, as at the end of 2022 there were 121 qualifying groups in CCF compared to 125 at the end of 2021,” she said.

Amber

A Level 2 compliance intervention is either a Risk Review or a Revenue Audit. “This is different from the previous code, which described the equivalent intervention by reference only to a ‘Revenue Audit’,” she said. “A Level 2 intervention affords the opportunity to make a ‘prompted qualifying disclosure’, which, if accepted, means no publication on the tax defaulters’ list but greater penalties than under Level 1.”

“A Risk Review is described as a focused intervention to examine a specific risk. Under the previous code, an ‘Aspect Query’ was described as a short, targeted intervention for the purpose of checking a particular risk. This may sound similar; however, an ‘Aspect Query’ was a non-audit intervention, meaning a taxpayer could make an unprompted qualifying disclosure; a ‘Risk Review’ is a Level 2 intervention, meaning the opportunity to make an ‘unprompted qualifying disclosure’ is no longer available.

“Although a Risk Review examines a specific risk, in order for any prompted qualifying disclosure to be considered a qualifying disclosure it must provide complete information of all matters occasioning a tax liability for the tax head and tax years under review.”

Therefore, if you receive a Risk Review, it actually requires a broad review of your tax affairs, she said.

“In practical terms, it seems there is little difference between a Risk Review and a Revenue Audit for a taxpayer, but it introduces a new layer of review for the Revenue Commissioners which will significantly impact the future tax position of the taxpayer.”

Red

A Level 3 compliance intervention means a revenue investigation which is described in the code as focusing on tackling high-risk practices and risks of suspected fraud and tax evasion, said McLafferty.

“There is no opportunity to make a disclosure under a Level 3 intervention,” she said. “If a revenue offence has been committed, this may lead to criminal prosecution.”

100th Annual Report

On April 26 last, the Revenue Commissioners published their 2022 Annual Report – the 100th such report. The report includes statistics for compliance interventions under the new code which were completed between May 1 and December 31, 2022.

McLafferty said that in that period, there were 50,608 completed Level 1 interventions with an average yield of €692 and 167 completed Level 2 interventions with an average yield of €18,144.

“As the new code has only operated for a short period of time, the complete view of the compliance intervention activity in 2022 shows that, in addition, there were 376,372 completed ‘non-audit’ interventions with an average yield €1,174 and 1,169 completed ‘audit’ interventions with an average yield of €285,372.”

Penalties

Before a compliance intervention is finalised, there will be a discussion on penalties, which is linked to publication, said McLafferty. “As regards penalties, if you deliver an incorrect return or you fail to deliver a return, the Revenue Commissioners can pursue you for a tax-geared civil penalty. A penalty seeks to address your behaviour on the obligations with respect to the tax return.”

If you discover that you have delivered an incorrect return, there are significant benefits in being proactive in correcting the tax position. McLafferty said that if a taxpayer is proactive in reviewing their tax affairs by way of self-review, self-correction or making an unprompted qualifying disclosure, the benefits are a lesser penalty and reducing the risk of publication on the tax defaulters’ list.

“There are circumstances where no penalty will apply, for example, if a taxpayer avails of self-correction provided there is strict adherence to the conditions stipulated in the code; or for an innocent error.”

A penalty can be imposed for delivering an incorrect tax return or for failing to deliver a tax return. A penalty can range from 3 per cent to 100 per cent of the tax underpaid.

“There are a number of factors that have a bearing on the penalty percentage – whether you acted deliberately or carelessly; whether you provided full co-operation; whether you made a qualifying disclosure (prompted or unprompted); whether the tax underpaid exceeds 15 per cent of the correct tax. If the Revenue Commissioners form an opinion that you acted deliberately in delivering your incorrect tax return, the penalty is 100 per cent,” she said.

“If it is considered that you acted carelessly (defined as a failure to take reasonable care), the penalty is 40 per cent. This means that if the tax underpaid is €30,000, and you acted deliberately, the penalty would be €30,000; if you acted carelessly, the penalty would be €12,000.”

In order to be considered for a lesser penalty, you must have provided full co-operation and/or made a qualifying disclosure.

“In the example, if you acted carelessly, provided full co-operation and made an unprompted qualifying disclosure which was accepted, it would be a 5 per cent penalty, which calculates to €1,500, and your name will not be published on the tax defaulters’ list. The penalty moved from €12,000 to €1,500 by being proactive.”

Publication

There are certain circumstances when the law specifically excludes publication on the tax defaulters’ list – for example, where a qualifying disclosure is accepted; where the settlement does not exceed €50,000 in tax; or where the penalty does not exceed 15 per cent of the amount of the additional tax due, said McLafferty.

“A qualifying disclosure is a disclosure to the Revenue Commissioners which represents complete information in relation to all matters occasioning a liability to tax giving rise to the penalty, made in writing, signed by you, with a declaration that the disclosure is correct and complete and accompanied by a payment of the tax and interest,” she said.

“It remains to be seen whether the recent decision of the European Court of Human Rights in LB v Hungary puts the practice of the Revenue Commissioners publishing a quarterly tax defaulters’ list in jeopardy. The decision is currently being considered by the Revenue Commissioners.

“The judgment was delivered by Irish judge Síofra O’Leary. The court held that publication of the personal data of the taxpayer on a tax defaulters’ list was an interference with his right to respect for his private life and breached Article 8 of the European Convention. The court concluded that Hungary had not demonstrated that the legislature sought to strike a fair balance between the competing interest – the public interest in disclosure of the data, and the private interest in the rights protected under Article 8 – with a view to ensuring the proportionality of the interference.”

Publication on the quarterly tax defaulters list has been deployed by the Revenue Commissioners since the Finance Act 1983 as a way to encourage taxpayers to co-operate with the tax code.

McLafferty said that comments from the European Court about ‘shame’ and ‘humiliation’ associated with publication on a tax defaulters’ list may resonate with taxpayers. “As the obligation to publish the names of tax defaulters is prescribed in Irish law, any change would require a change in the law,” she said.

“If the practice of publication changed, it seems the Revenue Commissioners can achieve a form of publication other than the tax defaulters’ list. The tax-geared civil penalty regime operated by the Revenue Commissioners was overhauled in 2008 from a revenue officer imposing a penalty to a court application. This may have been driven by the view from the European Court that the imposition of a penalty should have the safeguards afforded by Article 6 of the European Convention, namely a fair and public hearing by an independent and impartial tribunal established by law.

“However, this could have been achieved by a hearing in the Tax Appeals Commission, which could have been heard in private. A court application for a penalty takes place in open court. It will be the judge who decides whether there is to be a penalty. If the judge decides there is no penalty, the taxpayer is not published in the tax defaulters’ list; but the taxpayer will have the publicity from the court application.”

Staying green

So, what has been the impact of the new Code of Practice in its first year? “If you are reactive to your tax affairs you will be sitting in ‘amber’ in the traffic light system of the new code, meaning fewer corrective options and less opportunity to manage penalties and publication,” McLafferty said.

“The new code makes it clear that if you want to stay in ‘green’, be proactive.”