How to survive a Revenue audit: Top tips to help your business

A letter arriving from Revenue notifying you of an Revenue audit will probably make your heart pump a little faster.

However, for most businesses there is nothing to worry about.

All the same, it’s important to understand the process and how best to manage it.

Read this article to find out what’s involved and what you have to do.

Here’s what we cover:

• What is a Revenue audit?
• What’s in the Revenue audit notification letter?
• Why were you picked for a Revenue audit?
• Honesty is always the best policy
• How many years does a Revenue audit cover?
• Examples of issues uncovered in a Revenue audit
• Revenue’s code of practice
• Final thought on surviving a Revenue audit: Don’t panic

What is a Revenue audit?

This is a process where Revenue will check your company’s tax returns and compare them to your tax records.

Therefore, it’s important to keep good business records, so if Revenue does come calling with an audit request, you have the required details to hand.

It also helps to make sure your returns are accurate and you don’t miss any filing deadlines.

Using good accounting software can help when it comes to maintaining your business records.

What’s in the Revenue audit notification letter?

The notification letter informs you that a Revenue official will visit your office on a certain date to carry out an audit.

If you have a tax accountant or agent, they’ll also receive a letter of notification at the same time.

In general, you are given 21 days’ notice. However, if the date doesn’t suit, Revenue is amenable to changing the date, if you get in touch promptly.

The letter will also provide details on the years that will be audited, as well as the type of tax that will be focused on (what Revenue calls ‘tax heads’).

Why were you picked for a Revenue audit?

There are three main reasons why you may have been chosen.

1. Random audit

You may have been selected as one of the random audits that Revenue carries out each year.

2. Industry-specific focus

Your business may be in an industry sector that Revenue is focusing on because of a high rate of non-compliance.

3. Specific information from Revenue

Lastly, Revenue could have specific information that resulted in you being chosen for an audit.

In fact, it’s Revenue’s Risk Evaluation Analysis and Profiling (REAP) system that is the chief originator of audit letters.

REAP is an intelligent, automated risk, evaluation and profiling system that probes and throws up items of interest for a Revenue official to look at.

The official then has several options:

• Decide to issue an audit notice
• Decide it’s not an issue at all
• Choose to issue an aspect query – which is a possible precursor to an audit.

With an aspect query, Revenue sends out a letter seeking clarification on a tax issue. If you can answer the query satisfactorily, then no further action is taken.

Honesty is always the best policy

Once you know you have a Revenue audit coming up, it’s important you use the time to prepare.

And if you uncover tax discrepancies, it’s critical to make a prompted voluntary disclosure and pay the tax and interest due.

Paul Mee, a tax partner at accounting practice Mazars in Galway, explains how the process works: “A lot of clients will get their accountant or tax adviser to come in and look at the particular area that Revenue is focusing on.

“For example, if the Revenue audit is focused on VAT, the client will engage us to review a couple of VAT periods in the year selected for audit to see if they’re OK or not.

“The purpose of this pre-audit health check is that when the actual audit starts, you have an opportunity to make what is known as a prompted voluntary disclosure.

“Basically you say to Revenue, ‘we’ve done some groundwork and we’ve picked up these problems.’ You will then have to provide a cheque to cover the tax and interest. The penalties that will be incurred will be assessed at the end of the audit.

“The importance of a prompted voluntary disclosure is that it minimises penalties and means that you won’t be published on the list of tax defaulters, even if your liability exceeds the threshold, which is the amount above which publication is automatic.

“And not being published is the end objective for a lot of people.

“The writing of the settlement cheque is painful, but what they really don’t want is to be published. So if you make a prompted voluntary disclosure at the start of the audit that is a full and fair declaration of the issues in the tax period that Revenue is looking at, then you are fine.

“The Revenue official handling the case does will not think any less of you as a taxpayer; Revenue is well used to getting prompted voluntary disclosures.

“I would say that 95 times out of 100, there is some form of prompted disclosure in an audit.”

How many years does a Revenue audit cover?

An audit will generally focus on one year and not necessarily on all tax heads.

However, Revenue is legally entitled to go back four years in selecting a period for audit and even further if it believes there is fraud or neglect by the taxpayer.

Paul says: “The definition of fraud or neglect is not well-defined in the legislation; there’s leeway for interpretation.

“And it’s fair to say that taxpayers and their agents might take a different view on what constitutes fraud and neglect compared to Revenue.

“But if Revenue do pick up significant areas of tax risk consistently during the audit period and if Revenue believes this has been replicated in the earlier years, then they can go back beyond the four-year rule.”

Companies are obliged to keep financial records on file for six years.

Examples of issues uncovered in a Revenue audit

As Paul points out, there are typical errors that Revenue pick up in an audit.

VAT

He says: “In terms of VAT, a standard error is VAT not being put into the right period, either on sales or purchases.

“If you claim the VAT in the wrong period and if it’s a small amount, Revenue might say don’t do it again.

“But if it’s significant, they might say that whilst there’s no net loss to Revenue, it is significant enough to pursue an interest cost.

“An error can even be as simple as when an invoice is addressed to you instead of sending it to your company and you then claimed the VAT.

“Technically that’s not correct because it should be addressed to the company. The solution to that is you go to your supplier and tell them to send you the invoice addressed correctly because you’re being denied a VAT input.”

Goods and services from other EU countries

“Another common one is that if you’re taking in goods or services from other EU [European Union] countries, you have to self-account for the VAT and this is often not done correctly,” says Paul.

“Also, if you’re invoicing to other EU countries, you can only charge a zero VAT rate if the customer in that country gives you their VAT number.

“And you should also check that the VAT number is valid.”

Employee expense system

Lastly, Paul says a company’s employee expense system often throws up errors.

“You should look at your expense systems to make sure that when employees are claiming expenses that it’s all done correctly and the forms are filled in correctly,” he says.

“Sometimes those procedures get lax and Revenue can say that the expenses that were paid out were really remuneration, in which case the company also has an obligation to pay PAYE, USC and PRSI.

“The most frequent example of this is claiming mileage expenses for travelling from home to work.”

Revenue’s code of practice

In order to fully get to grips with an audit, the key document to look at is the code of practice for Revenue audits.

Paul says: “It’s a big document, about 100 pages in all, and it’s fairly tortuous stuff.

“But if you are having an audit and particularly if you have nagging concerns of some particular treatment of items in the accounts or in a VAT return, then reading this document – lengthy and quite a difficult read as it is – will leave you fully informed of how a Revenue audit works.

“Most clients leave it up to us though.”

Final thoughts on surviving a Revenue audit: Don’t panic

However, most importantly, Paul’s key advice is don’t panic.

He says: “The vast majority of taxpayers are fine. Do your groundwork and if you pick up a few errors, don’t worry about that.

“Revenue will expect people to have made a few little mistakes here and there and just make sure to disclose them before the audit starts.

“If you have significant tax issues, don’t panic either.

“Of course you need to be concerned about it. But the most important thing is you need to make sure it’s captured in the prompted voluntary disclosure at the start of the audit.

“And if you don’t have the cash available to pay the settlement amount, you’ll need to enter into a phased instalment plan with Revenue and this should also be made clear in the prompted voluntary disclosure letter.”

Editor’s note: This article was first published in August 2020 and has been updated for relevance.