Both the Department of Finance and the Central Bank were aware there was a significant problem with bogus non-resident accounts, even before the introduction of DIRT in 1986.
But they were afraid that any significant move to tackle the problem could trigger a flight of capital from the State at a time when the economy was much weaker and more vulnerable than at present.
The report of the Comptroller and Auditor General also found that although the Revenue Commissioners identified a number of bogus non-resident accounts, there were areas in which they could have been more proactive in their approach to DIRT administration and control.
Although no studies or investigations were undertaken into the level of bogus non-resident accounts, for fear of scaring off genuine non-resident accountholders, the report found that official circles were well aware of the extent of the problem.
Files in both Merrion Street and Dame Street are liberally sprinkled with references such as "half the non-resident accounts are thought to be bogus" and "at least £1 billion of non-resident deposits are thought to be held by Irish residents".
One Central Bank paper, prepared in August 1983, noted: "There is a suspicion that part, perhaps the major part, of the recorded non-resident Irish pound deposits (£1,198 million at December 31st, 1982) may, in fact, represent liabilities to residents using accommodation addresses abroad."
The report found that the information available was based on anecdotal and circumstantial evidence which it was exceedingly difficult, if not impossible, to substantiate.
Official Ireland was also faced with the competing demands of guarding against the potential flight of capital out of the State at a time when economic conditions were far from buoyant and at the same time creating an effective tax regime for DIRT.
"In that context, the bogus non-resident accounts were seen as the lesser of two evils, and for that reason any action could only be taken at the margins," the report says.
A provision in the 1983 Finance Bill that all notices by non-residents requesting that interest not be returned to the tax authorities be accompanied by a sworn affidavit attesting to the truth of the declaration was amended during its passage through the Dail. Instead, banks were required to obtain the affidavit only where they were not satisfied that the person who made the declaration was non-resident.
A report of an inter-departmental group on withholding tax on interest noted that the section had been amended and made subject to the banks' discretion, so as not to "seriously impede our ability to attract foreign investment".
The issue arose again when DIRT was introduced in 1986, when exchange controls were abolished in 1992, and at the time of the tax amnesty in 1993.
But the report found that the efforts to tackle the issue had only very limited effect because they all fell short of implementing a regime of full disclosure to the Revenue of interest payments by financial institutions and also because they did not give the Revenue access to bank accounts except in very restrictive circumstances.
The Revenue uncovered a number of non-resident bogus accounts. But the report identifies areas where it could have been more proactive.
It suggests it could have adopted a code of practice and provided more guidance on how the DIRT system should be operated. An early attempt in 1984 to draft a standard of conduct was not followed up.
The report points out that the Revenue did not exercise its power to examine the declarations of non-residence which financial institutions were obliged to obtain until 1998, when the issue of bogus accounts came into the public domain. The Comptroller and Auditor General suggests there could have been high-level approaches to the financial institutions, including the State banks. A 1992 paper, written by a tax inspector who had worked in the field, said "the non-resident proportion of ACC accounts was by any standards extraordinary".
A spokesman for the Revenue Commissioners said yesterday they were still examining the report.