In what is seen as a gamechanger for tax administration in this country, Revenue has invested heavily in its IT and data analytics capability, bringing a new level of sophistication to its confrontation of non-compliance. This increased capability has been accompanied by important structural changes that have seen Revenue move to a more risk-based approach when it comes to scrutiny of tax returns.
“Revenue has become much more advanced and sophisticated in its use of analytics and e-audits in recent years,” says Danielle Cunniffe, a director in PwC’s Tax Risk and Controversy practice. “Taxpayers can see it for themselves when they are filing returns and paying their tax online. Ireland has ranked very highly in the world for ease of paying taxes and Revenue’s online tax filing system is very good. That also makes it easy for Revenue to collect data for further analysis. Revenue is very innovative and very good at it.”
Structural changes are also playing an important role, according to fellow Tax Risk and Controversy director Aidan Lucey.
“Revenue is now better positioned to tackle non-compliance,” he says. “Revenue can’t scrutinise every tax return submitted so has to focus on those returns which pose a higher risk of non-compliance. It is using data to determine which returns are higher risk and realigned its operating structure in 2018 to complement that.”
The new structure aligns resources to risk, he explains. “Revenue is focusing its resources on those cases which it believes will most likely deliver a yield on an audit. It has moved resources from smaller taxpayers and reallocated them to medium and larger taxpayers.”
This has seen a move from a geographic to a more sectoral approach. “By realigning resources, it no longer matters what part of the country Revenue staff are based,” Cunniffe notes. “It can audit any taxpayer anywhere. For example, both Medium Enterprises Division (which deals with taxpayers with a turnover of between ¤3 million and ¤190 million) and Large Corporates Division (which deals with corporates above that turnover level) operate nationally across a number of sectoral branches.”
Cross-checked
Revenue also employs a highly sophisticated risk-evaluation tool known as Reap (risk evaluation analysis and profiling) to identify potential tax defaulters. Reap leverages information gathered from numerous separate data sources, ranging from property transaction details in stamp duty returns to interest payments reported by banks. That data is cross-checked against tax returns filed, and a risk ranking is attributed to each taxpayer. The higher the ranking, the more likely the taxpayer will be selected for audit.
Revenue has become much more advanced and sophisticated in its use of analytics and e-audits in recent years
Cunniffe adds, “Revenue keeps refining the process and adding more data sources. It’s not static. Revenue has become very advanced. It analyses all the information and asks what it is telling it and not telling it.”
There is an international dimension as well, according to Lucey. “There is a lot more transparency now,” says Lucey. “Ireland has been at the forefront in adopting initiatives to facilitate the cross-border sharing of information between tax authorities. So, Revenue now gets information relating to Irish taxpayers such as foreign bank accounts, overseas properties and so on. That’s been another game changer.”
Revenue’s data analytics systems can dissect all of this information, making it very easy to identify trends and inconsistencies that could indicate an underpayment of tax and that can trigger an audit.
“Once Revenue detects an issue, it will initiate an intervention, often an audit,” Lucey notes. “If you go back 10 years, an audit involved an examination of a sample of paper records. Today, Revenue instead carries out e-audits of companies’ electronic records and that allows for an interrogation of larger datasets.”
And it can drill right down to the individual transaction level. “For example, Revenue’s data analytics tools can identify incorrect VAT rates applied to certain product sales or possible anomalies in respect of employee expense claims. In some cases, these anomalies can be explained, but they will be detected by Revenue and questioned.”
E-audits are now the norm, according to Lucey. “When you have large amounts of data, e-audits allow Revenue to spot trends and discrepancies very quickly. Over the coming years we can expect to see a further evolution in e-audit testing. Companies will have to change their approach to pre-audit preparation. Records that once may have withstood a paper-based audit will now be exposed to the full rigours of data testing.”
And the system keeps learning and evolving. “Every time Revenue identifies a new risk area on an audit, it is fed back into the system and it may trigger further audits of other companies or industries.”
Appeals
The tax appeals process has also been made more efficient. “The Tax Appeal Commission’s commitment to a streamlined appeal process and ambitious targets to clear the backlog of appeals cases has not been impacted by the pandemic, moreover, as a result, they quickly adapted to a virtual process,” says Cunniffe. “The pace of the appeals process, including judgments, has increased in recent months.”
An ongoing good relationship between the company and Revenue is very important
Lucey points out that the majority of discrepancies uncovered by audits are not deliberate. “Corporates want to be fully tax compliant,” he says. “They want to be confident that they can stand over their returns. That is in line with the whole ESG (environmental, social and governance) agenda and companies wanting to pay their fair share of tax.”
Companies don’t want to run the reputational risk of appearing on a public tax defaulters’ list. “Reputational risk is really climbing up the board agenda,” Cunniffe points out. “But tax at the corporate level is complex and can sometimes lead to disagreement on how something is interpreted. An ongoing good relationship between the company and Revenue is very important so that both parties can continue to engage and have an open dialogue with a view to resolving the matter being disputed.”