As the collapse in the tax take continues, the Revenue Commissioners have swung into action with a range of new measures to recover unpaid taxes.
Exchequer revenues have fallen by almost 20p er cent in the first ten months of this year compared to the same period last year. At that rate, the tax take is well behind government targets that had already been revised sharply downwards.
In light of plummeting income, the Revenue is taking an aggressive stance on tax evasion.
In the past ten days, it has started sending letters to more than 7,000 people who sold properties last year, outlining the law in relation to capital gains tax (CGT).
There is no CGT liability on the sale of a principal residence, but the tax must be paid on disposal of a ‘non-principal’ residence - a second home or an investment property.
After an assessment of its records, the Revenue decided that a number of people had sold properties last year but had not declared the money for tax.
It is those people who have been targeted by the Revenue’s CGT team, which was established in 2007 to monitor tax compliance on the disposal of assets.
The move came after Revenue carried out a ‘evidence based trial’ last year, where it identified a random sample of property disposals. Letters were then sent to half of the sample ‘‘reminding them’’ that there maybe a CGT liability on the deal. Those results were monitored and compared with those who did not receive letters.
An analysis of the results revealed that a significantly higher proportion of those who received a letter from the Revenue filed CGT returns and met their liability on time.
Based on the success of that initiative, Revenue this year decided to pursue the beneficiaries of all identifiable disposals of non-principal private residences.
The tax authority now plans to use the same strategy in the enforcement of a range of other taxes, as it takes a strategic approach to combating tax evasion.
During the boom years, more than a quarter of all Revenue audit staff and resources were devoted to the construction industry. With the shrinking of the sector, the Revenue is instead focusing on what it describes as ‘‘the areas of greatest risk’’.
According to a Revenue spokesman, the current focus is on the ‘shadow economy’, where goods and services are traded but never declared for tax .Within the shadow economy, the Revenue said there was a ‘‘wide and varied range of areas being targeted’’ by its regional offices around the country.
These include:
* B*Bs
* kitchen fitters and tilers
* customers of builders’ suppliers
* ethnic traders
* trade fairs.
Other targets on the Revenue’s hit-list include language schools and hair salons. It is also taking a hard look at the leisure and entertainment sectors, with the target list including pubs, hotels and nightclubs, as well as concerts and other outdoor events.
The Revenue’s risk list changes each year, depending on economic circumstances and the success of its tax probes. Last year, for example, its areas of attention included barristers, security companies and publicans.
The Revenue said its compliance programmes were kept under ‘‘constant review’’. The latest review led to the move to target the shadow economy, which traditionally thrives in recessionary times. It was prominent in Ireland in the 1980s, and the signs are emerging that the shadow economy is returning.
‘‘Up until 2008, tax compliance - that is, timely tax payments and returns filed - were at historically high levels," said Brian Keegan, director of taxation with Chartered Accountants Ireland. ‘‘This was due to a whole range of factors, such as relatively low tax rates.
‘‘However, largely because of the economic downturn, the situation is now very different. Compliance levels are down as much as one fifth in certain sectors of the economy."
Faced with that situation, the Revenue has started to act - and it has some new weapons in its arsenal. Last year, for the first time, the tax authority used a new computer system as the main source for determining its audit selections.
The Risk Evaluation Analysis and Profiling (Reap) system, which was developed in house, involves cross-checking tax returns and third-party information against sectoral and industry norms.
About 40p er cent of Revenue audits carried out this year will be based on risk information provided by Reap. Crucially, the system does not just rely on standard tax returns.
‘‘Revenue has got much better in recent times at matching information from one part of its organisation with information from another part, or even from other government organisations," Keegan said.
‘‘As well as compiling information from returns of income, Revenue also matches up payments made by the Department of Agriculture, the Department of Justice and some, though not all, social welfare payments, for example rent subsidy. If those figures don’t feature on taxpayers’ returns, they can expect questions to be asked by the tax inspector."
The information hunt does not end there. The Revenue has established ‘special compliance districts’ around the country, which pursue intelligence and make inquiries about the hidden economy. As part of this process, the Revenue monitors all forms of media - local and national newspapers, radio, television and specialinterest publications - to check what companies and individuals are advertising for businesses.
Those ads are then crosschecked against tax records to ensure that all income is declared for tax.
‘‘Depending on the sector, those conducting or managing the enquiries will try to find as many ways as possible of identifying those operating in the sector," according to a statement from the Revenue.
It is not all science, however:
on certain occasions, it goes back to old-fashioned random audits. The Revenue routinely carries out what it calls ‘‘whole street’’ or ‘‘whole town’’ compliance programmes, aimed at cash businesses.
The main focus of these probes is companies that use cash registers, with the tax body checking till receipts against tax returns to determine if all income has been declared.
The programme also includes businesses where cash receipts are used, including professionals such as doctors, dentists and vets.
In other circumstances, the Revenue targets a particular bracket of tax, like its recent move on CGT on non-principal properties.
Last year, for example, it carried out a pilot risk analysis of the PAYE sector, while a second run was undertaken in the first half of this year. The feedback from this is currently being assessed. More such moves are likely.
‘‘I think we’ll see a number of initiatives like this capital gains tax inquiry over the coming months, as Revenue seeks to sort out dropping compliance levels," said Keegan.
‘‘There is a point, however, where any benefit from such enquiries is outweighed by the extra costs on taxpayers in dealing with Revenue enquiries where no tax is due."
With tax receipts in freefall and the government claiming that taxes will not be increased in the budget next month, Revenue may have to become even more aggressive to fill the exchequer coffers. The battle against tax dodgers will rage on.
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