2022 Code of Practice for Revenue Compliance Interventions

Revenue Audits or Interventions are a fact of life and can be a traumatic experience for the unprepared. On 11 February 2022 the Revenue Commissioners published a new Code of Practice for Revenue Compliance Interventions (‘Code’). Many aspects of the Code are now supported by legislative measures up to and including Finance Act 2021.  While the new Code sets out how Revenue will conduct interventions, it is also intended to inform taxpayers of the process and there is no doubt that it will have a major bearing on how audits and other interventions are conducted in practice. The new document replaces previous iterations of the Code of Practice for Revenue Audit and other Compliance Interventions, which have operated since 1998. The new Code of Practice is published on the Revenue’s website – www.revenue.ie. This Alert outlines the most significant changes.

Executive Summary

The key changes from the previous Code are:

• Three tier designations of Revenue interventions,
  
• Introduction of the Risk Review category of intervention.

Of note under the new system, and particularly the new Risk Review, is the more limited opportunity for taxpayers to make unprompted qualifying disclosures than existed heretofore. This is a significant change in the context of penalty mitigation.

The new Code applies to all taxes other than Customs. Information on the procedures for Customs Interventions is set out on the Revenue’s website.

The new Code comes into effect on 1 May 2022 and applies to interventions notified from that date.   The previous Code will apply to interventions notified before then.

Three Tier Interventions

As to be expected the interventions become more serious as the levels increase but Revenue does reserve the right to commence an intervention at whatever level it considers appropriate.

Level 1 Interventions

The Level 1 interventions occur where Revenue has not engaged in any detailed examination of the particular matter of concern. It may still be possible for a taxpayer who receives notice of a Level 1 intervention to self-correct (without penalty) subject to prescribed time-limits set out in the Code.   Otherwise, a taxpayer may avail of the unprompted qualifying disclosure process after a Level 1 intervention from Revenue.  An unprompted qualifying disclosure must disclose the tax defaults for the tax heads and periods that are the subject of the disclosure and as is presently the case it must also include all previously undisclosed tax defaults in the ‘deliberate default’ category under any tax head or period.

The new Code states that any activities conducted through Revenue’s Co-operative Compliance Framework are classified as Level 1 interventions.

Level 2 Interventions – Risk Review

One of the more significant changes is the introduction of the ‘Risk Review’ as a Level 2 Intervention. It is intended to be a focused intervention limited to a small number of risks. It appears broadly similar in focus to Aspect and Assurance queries under the existing Code.  However, unlike the position for Aspect and Assurance queries, an ‘unprompted qualifying disclosure’ will not be available to a taxpayer who receives notice of a Risk Review in respect of the specified tax head and period. Otherwise, the matters of note in respect of Risk Reviews are:

• Risk Reviews will generally be carried out by correspondence,
  
• Written notification will be issued to the taxpayer,
• The notice will specify the scope of the review and request certain information to be furnished within 28 days,
• The review formally commences 28 days after the date of the notice,
• Where a prompted qualifying disclosure needs to be made, it must be made (plus the tax and interest paid) before the expiry of the 28-day period,
• Such a prompted qualifying disclosure must also disclose any tax defaults for the tax head and period referred to in the notice and not just the particular matter specified in the notice (Note as is presently the case any qualifying disclosure needs to also include all previously undisclosed tax defaults in the ‘deliberate default’ category under any tax head or period),
• If required, a taxpayer may within 21 days of the date of the notice request a 60-day period to prepare the prompted qualifying disclosure,
• Failure to respond to the Risk review notice may lead to on-site visits by Revenue or escalation to a full Revenue Audit.

The Revenue emphasises in the new Code that ‘there is only one opportunity to make a qualifying disclosure in respect of a given tax/duty type for a given period’. As such where a Risk Review specifies only a particular aspect of tax head for a period, the taxpayer would need to consider all aspects of that tax head in order to ascertain if a prompted qualifying disclosure needs to be made within the 28 days.

Level 2 Interventions – Revenue Audit

In general, the operation of a Revenue Audit remains broadly the same under the new Code and can be summarised as follows:

• Pre-Audit meeting, where necessary, to determine nature and availability of electronic records,
  
• Physical audits at the taxpayer’s business premises though virtual audits may continue to occur,
• Notification of audit will set out the scope and the start date – 28 days from the date of the notice unless otherwise agreed with Revenue,
• Where a prompted qualifying disclosure needs to be made, it must be made (plus the tax and interest paid) before the commencement of the audit, i.e., 28 days from the date of the notice unless otherwise agreed with Revenue,
• Taxpayers may within 21 days of the notice request a 60-day period to prepare the prompted qualifying disclosure,
• At the beginning of the opening meeting of the audit Revenue will offer the taxpayer the opportunity to make a prompted qualifying disclosure,
• Revenue commences the audit – interview, review of records, review of any prompted qualifying disclosure,
• Meeting with taxpayer to outline findings,
• Request for written settlement offer,
• Letter to close out audit – summary of findings,
• Actions to recover any disputed liability – assessments.

The notice period has been set at 28 days but as this is an extremely short period to prepare for a tax audit it is hoped the Revenue will continue their practice of deferring audit start dates to dates that are feasible for the taxpayer. The timeline to request a 60-day period to prepare a qualifying disclosure has been extended to 21 days of the issue of the notice. Previously this request had to be submitted within 14 days of the notice, so the extension is a welcome development.

Level 2 Interventions – Materiality

‘Materiality’ in Revenue interventions can often be a contentious matter and the new Code provides no further clarification than included in its predecessor. The new Code states that Revenue will withdraw from an intervention where it is clear during its early stage that the returns are substantially correct. The Code goes on to say that where it is evident that the taxpayer has made best efforts to ensure that returns are accurate, adjustments are not made for small inaccuracies. 

While ‘materiality’ is not defined in the new Code, in the context of considering what is an ‘innocent error’ without a penalty applying, it is stated ‘where the innocent error being corrected is immaterial in the context of the overall tax payments made by the taxpayer, or in the case of a company, a group of companies’. While this statement is helpful, discussions on ‘materiality’ are likely to still feature in future Revenue compliance interventions.

Level 3 Interventions – Investigation

These would generally be focused on suspected tax fraud and evasion. The opportunity to make a qualifying disclosure is not available to the taxpayer from the date of commencement (even if it is not notified to the taxpayer concerned) of the investigation. As the Revenue investigation may lead to a criminal prosecution, it is recommended to seek appropriate professional/legal assistance in such situations.

Interest and Penalties

The rules regarding the application of interest and penalties have not changed under the new Code. Statutory interest continues to be sought by Revenue in respect of all undisclosed/unpaid liabilities.

The application by Revenue of mitigation to penalties has remained and a table in the Appendix to this Alert sets out the details of tax geared penalty rates arising depending on the type of disclosure made (if any).  

It should be noted that penalties should only apply where the default arose due to careless or deliberate behaviour by the taxpayer concerned. In addition, penalties will not arise in a number of situations:

• Self-Correction (subject to time limits),
  
• Correction of innocent errors,
• Certain defaults of less than €6k,
• Technical adjustments.

In addition, reduced penalties apply in certain instances where the taxpayer can demonstrate there was ‘No loss of Revenue’. Details are included in the Appendix to this Alert.

Co-operation

The Code sets out that penalty mitigation is dependent on the taxpayer fully co-operating with Revenue whether in a disclosure or non-disclosure situation. In particular the Code emphasises that partial co-operation is not sufficient and that in such cases the taxpayer will be issued with a single notice where Revenue believes the behaviour does not constitute full co-operation. Mitigation will then be contingent on the taxpayer changing behaviour and fully co-operating for the remainder of the intervention.

Subsequent Disclosures

The Code sets out the rules regarding the limitation on penalty mitigation where a second or third qualifying disclosure is made within 5 years of a previous qualifying disclosure. This only applies in respect of repeat disclosures relating to the same tax head that fall in the ‘careless behaviour with significant consequences’ or ‘deliberate behaviour’ default categories. If there is a substantive change of ownership of a company a qualifying disclosure following that event will be treated as a first such disclosure.

Details of the impact of subsequent disclosures on penalty mitigation are set out in the table in the Appendix to this Alert.

Publication of Tax Settlements

The new Code reflects the change introduced in Finance Act 2021 regarding settlement thresholds for publication purposes. Tax settlements are published on a quarterly basis and effective from 1 January 2022, where the tax underpayment or refund incorrectly claimed in the settlement exceeds €50,000, the applicable penalty exceeds 15% of the tax amount and the taxpayer has not made a qualifying disclosure in advance of the Level 1/2 Intervention (from 1 May 2022). Where publication arises, it will include the tax amount, surcharge, interest, and penalties.  It will not include tax (and related interest) where the applicable penalty for that tax default does not exceed 15% of the tax amount. Lower publication limits applied in previous periods and the threshold was based on the aggregate of tax, interest, and penalties.

Timeframe for Concluding Interventions

The new Code reiterates the Revenue’s interest in concluding compliance interventions as quickly as possible. It provides that where the taxpayer has dealt with all of Revenue’s queries within a reasonable period of time and the intervention remains open for a further month (reduced from three months in the previous Code) that the taxpayer may request a status update. Revenue will then set out details of any outstanding issues and, where possible, provide an indicative timeframe for concluding the matter. The Code states that where there is no clear cause for the delay, the taxpayer’s entitlement to credits or refunds shall not be delayed.   

While the reduced timeframe for following up with Revenue is welcome, time will tell whether it will expedite the conclusion of tax compliance interventions.

Tax Avoidance Disclosures

The new Code sets out the separate rules regarding the treatment of Tax Avoidance disclosures in a manner broadly similar to the predecessor Code. As there are detailed rules and conditions to be considered please contact us if information is required in respect of same.

Conclusion

The Code of Practice is a Revenue document. However, it is an important document for taxpayers to consider in managing their tax compliance on an ongoing basis and any response to the receipt of a notice of an impending Revenue Intervention.

Appendix

Qualifying Disclosures – Penalty Mitigation