Funds invested in life assurance products are in the spotlight this time, writes Bríd Munnelly

The Revenue Commissioners recently announced a major new investigation into undisclosed tax liabilities on funds invested in all life assurance products. This is wider than the investigation into single-premium insurance policies first mentioned by the Revenue last November.

The Revenue are targeting holders or past holders of life assurance products that were funded with monies not previously declared for tax purposes and are seeking to recover the unpaid tax, together with interest and penalties.

All life assurance products purchased from 1980 onwards will be covered and the Revenue will focus initially on individuals with aggregate investments of more than €20,000.

This will be the third investigation by the Revenue since 2001 into underlying funds held in what the Revenue consider to be "high-risk" products for tax evasion.

In the investigations into bogus non-resident accounts and offshore assets, a voluntary disclosure scheme was followed by a rigorous investigation of those individuals who had not availed of voluntary disclosure.

A significant feature in the success of the two earlier investigations was the Revenue's powers to get information from banks and financial institutions on who held funds in the products or accounts that were the target of their investigation. Similar investigation provisions have been provided for by section 140 of the Finance Act, 2005, in relation to the inspection of records held by an assurance company.

Voluntary disclosure

If an individual invested money that had not been declared to the Revenue in life assurance products, this investigation will apply to them. It will also apply to corporate policy holders where the policy was funded by untaxed monies extracted from the company.

A carrot-and-stick approach is being taken, with a short time being given for taxpayers to make a voluntary disclosure subject to certain conditions.

There are two phases and two deadlines to be met:

The disclosure form, together with details about the disclosure conditions, are available on the Revenue website (www.revenue.ie).

Those who are currently under Revenue investigation or who fall within certain excluded categories are ineligible for this voluntary disclosure scheme. The excluded categories include:

The benefits of making a voluntary disclosure are:

Those who make a voluntary disclosure will have two months, until July 22, 2005, to prepare:

While the Revenue will respond to queries, they will not assist in the calculation of tax. We have seen before that a very significant number of taxpayers and their professional advisers run right up against the deadlines imposed when providing their computations.

Gathering data

As soon as the deadline for voluntary disclosure passes, the Revenue will use their powers, including a new power in the Finance Act 2005, to inspect records held by an assurance company.

The initial focus is on investments in aggregate of more than €20,000. The Revenue are likely to seek information on the larger sums invested in the first instance and move sequentially to smaller sums.

Once the investigation gets under way and the scale of the investigation emerges from the information received, the Revenue may decide to lower the threshold.

In previous investigations, the financial institutions wrote to customers advising them of the Revenue investigation and subsequent court orders made allowance for this notification. The insurance companies, with the exception of Irish Life & Permanent, have agreed to comply with a Revenue request to contact customers who have or had life assurance policies to advise them of this investigation in advance of any court order being made.

Assessments

If the Revenue's subsequent investigation shows that a person with a life assurance product funded by undisclosed monies has failed to make a voluntary disclosure, that person will (a) be vigorously pursued for the unpaid tax plus interest, (b) face heavy penalties, (c) be named and shamed, and (c) face possible prosecution.

The onus is on the taxpayer to prove to the Revenue that the money invested was not taxable or was properly declared for tax purposes.

However, being able to produce paperwork to prove that money invested is not "hot" could be more difficult in this case, given that the investigation will span a period of 20 years. Not only may people not have retained all of their paperwork over such a period, but the shorter document retention periods of advisers, banks and others who may have documents may compromise an individual's ability to prove the source of funds invested in life assurance products.

In addition, where the individual who has invested has died, the onus for making a voluntary disclosure, and paying the tax and penalties, will fall on the relatives and representatives of the investors. In circumstances where they were unaware of the source of the funds invested in such products, the relatives and representatives may find themselves very surprised by the extent of the liability to the Revenue, especially if they do not make the deadline for voluntary disclosure.

Consequences

Revenue figures show that prosecutions of tax defaulters are increasing, albeit from a low base. To date, only a very small number have received custodial sentences from the courts.

Interestingly, while 3,675 people availed of the voluntary disclosure scheme for bogus non-resident accounts in 2001, the Revenue subsequently caught another 8,200 holders of such accounts. It remains to be seen whether the take up of the voluntary disclosure scheme in this instance will mean defaulters are fewer in number and, thereafter, whether the Revenue will consider it necessary, appropriate or proportionate to prosecute defaulters.

Widening the net

There have been calls upon the Revenue to prosecute those who aid and abet tax evasion and it has been said that the Revenue's inquiry into money hidden in insurance products should not be limited to those who took out the policies.

However, although there have been changes in the recent Finance Act (section 142) to make it somewhat easier to prosecute for aiding and abetting, a high level of proof is required to secure convictions and the evidential burden is high. At this stage, the focus of the inquiry appears solely to be on those who invested undisclosed funds in life assurance products.

The Irish courts have considered the question of whether an individual, advised by a representative of a financial institution that he need not make a voluntary disclosure under a tax amnesty, can seek to recover from that financial institution the additional penalties payable on a Revenue investigation over and above the amount that would have been payable on a voluntary disclosure. In the case of Gayson versus AIB, Justice Geoghegan in the High Court held that the bank had not advised Mr Gayson negligently in that it was not foreseeable that he would have relied on the "advice" given in an "off-the-cuff" conversation.

Unlike the environment that prevailed during the inquiry into bogus non-resident accounts (as occurred in Gayson), there do not appear to be any allegations made against banks/financial institutions that they are responsible and, accordingly, cases against them appear unlikely.

Proactive approach

The voluntary disclosure feature in respect of previous Revenue schemes has proved a sufficient incentive for defaulters to be proactive and come clean. If tax liability and penalties are otherwise likely to be incurred in relation to funds invested in life assurance products, there is likely to be a high take-up of the voluntary disclosure scheme.

Bríd Munnelly is a partner in the commercial litigation and dispute resolution department at Matheson Ormsby Prentice.