The New Audit Code of Practice has now been with us for almost two years. As yet no statistical information regarding its operation is available although all of us with experience in this area of practice recognise that the system opens both the taxpayer and adviser to considerably increased risks.

In this talk I will:

• Highlight the key developments which impact on the operation of Voluntary Disclosure, the increased risks for all concerned due to the changes introduced by the 2002 Code and the related risks associated with a Voluntary Disclosure arising from the reporting requirements introduced by the plethora of non-tax legislation (e.g. corporate law enforcement, the new Audit & Accounting Act 2003 and Money Laundering Legislation).
• Suggest some steps, which might be followed by advisers to minimise the risk of exposure to negligence claims in the context of a Voluntary Disclosure based on current best practice.
• Provide the facts of recent negligence claims against advisers in the UK (provided to me by a leading UK Practitioner Karen Eckstein CTA who specialises in tax-related professional indemnity litigation for UK Accountants and Solicitors).

1. What are the most common issues, which arise in practice in the context of making a Qualifying Voluntary Disclosure under the 2002 Code?

• What now triggers an Audit under the 2002 Code?
• If my client/I fail to recognise the opportunity to make a full disclosure, what alternatives are open to me/my client?
• Will I be liable for any increased costs suffered by my client if the opportunity has been missed?
• Who is my Client? This is particularly relevant in the context of a company or a trust/fiduciary structure (which could encompass a wide variety of entities such as Share Schemes or Investment Vehicles).
• Who is entitled to make or indeed should make a Voluntary Disclosure where an audit notice relates to a company?
• What if the company is a member of a group or associated with other companies? What is the position of shareholders/directors?
• Will a director of a company be deprived of an opportunity to make a Voluntary Disclosure where the audit notification relates solely to the company?
• In the context of a deceased taxpayer, whose estate is fully wound up, who (if anybody) is responsible for or is entitled to make a Voluntary Disclosure?
• What exactly is the Revenue entitled to audit? Is it an accuracy check of a return if the matter is not covered by a filed return, who and what is being audited? What authority have the Revenue got for the concept of a transaction audit?
• When exactly is a taxpayer precluding from making a Voluntary Disclosure? For example, if the Revenue has begun an investigation into the tax affairs of a company, is a non-proprietary director precluded from making a Voluntary Disclosure?
• How can you protect against a situation where the Revenue may reject a voluntary disclosure on the basis ?that they had become directly or indirectly aware of the likelihood that the taxpayer had underpaid tax?
• When can I/my client self-correct?
• When am I/my client allowed to make technical adjustments thereby avoiding penalties on the underpayment of tax?
• What are the criteria, which must be met to prove to the Revenue auditor that the position taken was reasonable and should therefore fall within this category?
• In what circumstances will the Revenue be willing to accept that an innocent error has occurred? What are the criteria, which will be used to verify the error, thereby avoiding a penalty?
• How should I proceed if my client merely wishes to avoid publication?
• How far do I have to go as an adviser in ensuring that a Voluntary Disclosure is complete and correct? What is the position if I am a new adviser? To what extent can I rely on my client's assurances? How much of the history do I need to verify independently as a new adviser? What if the business is now carried on by a different entity that that being audited? How can I be sure this is a first time disclosure by the client?
• In the absence of any clear definitions or guidelines how do I know which category of penalty applies? What if I get it wrong and it is not accepted by Revenue? How best should I cover this eventuality with my client?
• In the absence of any definition of "co-operation", which under the 2002 Code is an entirely subjective matter at the discretion of the Revenue official conducting the audit -how do I deal with a situation where the Revenue auditor argues non-cooperation with the consequent reduction in penalty mitigation? Who is responsible for this loss? Does my client have a right of appeal?
• Is there any right of appeal if a voluntary disclosure is rejected by Revenue?
• Can Revenue use the information they have obtained in a subsequent criminal prosecution? What if my client was not advised of this eventuality? Will my position be different if I sought assurance from Revenue that they would not use any disclosure in criminal proceedings against my client?
• What is my position if I actually signed the disclosure on behalf of my client?
• Where Revenue decides to treat the matter as an investigation, which may lead to a criminal prosecution, did you advise your client to seek legal advice?
• What if the amount of the cheque in respect of the underpaid tax, interest and penalties is incorrect?
• What if I/my client fail to meet the time limits set out in the 2002 Code? Is an extension possible? What if this is refused?
• What if Revenue fails to accept or reject the Voluntary Disclosure within a reasonable period?
• What if my client decides not to proceed with Voluntary Disclosure and I am aware that there has been an underpayment of tax? Can I continue to act for him if he fails to disclose? To what extent am I obliged to make a report to any third party of this fact?
• Where a corporate client fails to make a Voluntary Disclosure in relation to a material breach of the Taxes Acts, what are my reporting requirements under non-tax legislation such as the Companies Law Enforcement Act 2001 or the Companies (Auditing and Accounting) Act 2003
• Is the Revenue under an obligation to disclose information provided way of Voluntary Disclosure to other official agencies such as the Director of Corporate Enforcement?
• What advice to your client are you covered to provide to your client under the terms of your professional indemnity insurance?
• To what extent are discussions with my client protected by Professional Privilege?

These are just some of the problems, which have come across my desk since the Code was introduced fully and which practitioners have to grapple with in the context of voluntary disclosure and related issues under the new Code. There are no simple answers, the fundamental difficulty being that as the Code is non-statutory, the normal appeal procedures under the Taxes Acts do not apply to the determination of penalties or indeed any impasse, which arises as part of the process. No appeal may be made to the Appeal Commissioners or the lower Courts, as the matter is outside their jurisdiction. The only mechanism available under the current Code to resolve a dispute between the taxpayer and Revenue is by way of a Judicial Review to the High Court, with the attendant costs and risks but it may be that this is the only course open to your client.

In my experience the fundamental problem with complications in relation to Voluntary Disclosure today is not confined to the interpretation of the Code but usually is exacerbated by "the human factor", where the relationship with the Revenue auditor is problematic. The current avenues available to an adviser or taxpayer do not provide an effective mechanism to resolve any such impasse within the requisite timeframe. This is a highly unsatisfactory situation since Voluntary Disclosure is part of the normal business of each and every practice throughout the country.

The Revenue Powers Group, of which I was a member, considered a number of the difficulties both legal and practical, which have been experienced since the new Code was introduced and have made a number of recommendations to address these concerns. These recommendations will be considered by Mark Redmond as part of his presentation on the Revenue Powers Group Report later today.

2. How best can the risk of potential negligence claims against advisers associated with Voluntary Disclosure be minimised?

There is no easy solution to the question of how to avoid claims.

Claims experience indicates that more claims seem to arise out of using the wrong approach and/or incorrectly implementing the advice you have given the client rather than getting the tax rules or the amount of tax underpaid/due wrong. Recent UK tax related negligence claims, as highlighted by Karen Eckstein in her article to be published in the May 2004 issue of the Irish Tax Review (a copy of this Article is attached for ease of reference), support this view.

By getting the tax rules right, it means being aware of potential problem areas, taking specialist advice where required, keeping up to date.

The following are important areas, which if given the right level of attention can help to minimise your exposure to potential claims:

• Always take care to define the scope of your role.
• Engagement letters are not boring formalities.
• Think about whom your client is, what are his instructions, what are the objectives of the client.
• In particular, make sure that any exclusion to the scope of your advice is set out clearly.
• This engagement information is in addition to the client identification procedures, which now need to be followed for money laundering legislation purposes -client engagement and identification information also assists in defending negligence claims as they show that the adviser from Day 1 sought to become fully informed of the client's full circumstances.
• Although not easy in practice, make records of everything said and done -ideally in typewritten file notes. This is particularly important where there may be a number of meetings and telephone calls. This helps to clarify, in the event of a problem, the advice actually given and the state of the client's knowledge.
• Make sure that clients know what is in you power to deliver and what you can and cannot advise him on.
• In the context of a qualifying Voluntary Disclosure, it is critical to carry out a risk/reward analysis making a client fully aware of the pitfalls.
• Files need to be retained for longer than was previously the case due to the possibility of cases being commenced later than was previously the case.
• It should be very clear who is entitled to rely on the advice you give.
• Advice given by junior members of the firm should be monitored. A four-eye approach is also advisable for all fee-earners in a more complex case.
• Make sure you professional indemnity insurance covers all of the work undertaken by the firm.
• Have a diary system, which is accessible by more than one person, to cover situations where the key adviser may be away from the office. Many claims arise simply because deadlines are missed.
• Always be ready to decline work if you cannot cope with it and make sure you know the extent of your limitations. Seek specialist advice when you feel that the problem is outside your comfort zone in terms of relevant experience. Otherwise, it could prove to be a very costly learning experience.

3. What are the key issues in relation to implementation of the Code of Practice, which have been raised during 2003 with Revenue through the TALC process?

• Audit Notification Letters - Clarification was obtained concerning the status of letters requesting supporting documentation following filing of returns. Such letters will not prejudice a taxpayers right to make an unprompted Voluntary Disclosure for that period in the future subject to a limited exception.
• Increased number of Comprehensive Audits-Revenue intends to increases the number of Comprehensive Audits. Whereas practitioners see this process as being the audit of an identified tax return, Revenue are now of the view that it is an audit of the taxpayer as an entity. This raises a number of concerns for the taxpayer, particularly if it is not clear what returns are to be audited, preparation for the audit may be unfocused and the time and cost of compliance will be greatly increased without any ensuing benefit. Indeed, there is a greater risk of incomplete Voluntary Disclosure where a comprehensive audit lacks clarity.
• The Scope of the Code has been extended since originally published to include Customs and Excise. (Capital Acquisitions Tax and Stamp Duties being the other new taxes in the 2002 Code) These are taxes which are more likely to fall outside the normal areas of expertise of practitioners and which do not fit neatly into the Code. Practitioners have suggested that an addendum be made to the Code rather than modification of the Code to deal with this difficult area.
• Concluding Audits-Concern was expressed about the number of audits, which have been unresolved where there is no apparent reason. Practitioners have suggested that a new procedure be put in place whereby Revenue would issue a letter to the advisor within a certain timeframe of the last movement on the audit case to advise whether the audit remains open and if so why or alternatively can the audit be considered closed?
• Accounts Menus-Revenue provided certain assurances regarding the possible application of surcharge on returns where the related accounts menus turn out not to be 100% correct. The possibility of a change in the accounts menus has been raised by Revenue, which would give rise to significant concern for practitioners. To ensure accuracy and with a view to maintaining reasonable compliance costs, it was expressed as a prerogative that Revenue do not modify the menus for a period of years after their introduction following Revenues commitment at the time the menus were first introduced.
• Audit Selection-The Eskort System. -95 % of all audits are non-random i.e. there is a reason. Revenue has traditionally relied on manual screening of returns and accounts to select cases for audit. The move by Revenue to use sophisticated software to assist them select cases for audit represents a major change. Experience has shown that technology alone is no substituteor human judgement. Revenue have indicated that: " all taxpayers will be scored based on a set of complex rules. There will be a tolerance limit and no risk will apply to those under certain level. There is human intervention at the end of the risk analysis process and it will be up to the audit manager to make a decision based on the score. Using this method, any errors should be picked up by the audit manager /selector before an audit starts. Revenue will compare like with like by means of setting ratios based on gross profit rates".

It has been indicated to Revenue that Practitioners would strongly welcome a move by Revenue to undertake the following:

• Publish the rules Revenue are using in order to select cases for audit
Advise practitioner bodies of any particular rules that are giving rise to additional tax yields in the course of the audit programme
• In the case of individual audits, to advise the client/adviser of the particular issue that is giving rise to concern and that triggered the audit selection. This would be without prejudice to Revenue expecting the taxpayer to completely prepare for the audit in its entire scope
.
• Advise a taxpayer of the "risk-rating" allocated by Revenue to them, including any change in the risk rating and the contributing factors to these decisions.

4. Is Voluntary Disclosure the most valuable compliance tool available to Revenue?

Set out below is a summary of the number and value of audit settlements reached during 2002 and the period to June 2003.This is the only published information³ available since the New Code was introduced.

Audit Settlements Published / Unpublished Published / Unpublished
2002                   272    11,667        €35.1m    €159.94m
2003 (6 months
to\end June            704    7,558         €65.55m   €141.4m

It is safe to conclude that a substantial proportion of the yield from unpublished cases involved Voluntary Disclosure. Hence the system is working from a fiscal collection viewpoint and assuming the remaining six months of 2003 match the results for the first six months, the number and value of Voluntary Disclosures has increased significantly thereby maximising tax revenues for the State with minimum input of Revenue resources. This is all the more reason why Revenue should be open to reasonable requests from Practitioners to address the areas of the Code, which give rise to significant concern.

What is less clear from the minimal published information from Revenue is whether the Code is applied consistently throughout the districts. In the absence of hard statistics, it is impossible to comment definitively, however, practitioner feedback suggests that a more lenient approach to the application of the Code may be adopted depending on the individual district/Revenue official/relationship of adviser with district/Revenue official.

Whilst a more pragmatic approach is to be welcomed from Revenue, this tends to create a bias in favour of certain advisers/taxpayers, giving rise to inconsistencies, which cannot be measured in the absence of any accurate measuring tool. This masks some of the real problems, which would be encountered if the Code were applied on a consistent basis. This is not an ideal solution for any stakeholder. The core difficulties fail to be highlighted and thus are difficult to address.

Through the medium of TALC Audit Group,³ the following information concerning the Revenue audit programme has been requested from Revenue on a district-by-district basis:

• Number of field and desk audits conducted
• Number of qualifying disclosures made
• Number of qualifying disclosures rejected and why
• Number of penalty re-categorisations undertaken by Revenue
• Number of incomplete disclosures considered for prosecution.

Until a comprehensive review is carried out by Revenue covering the key areas as detailed above it will be impossible to comment on the effectiveness of the New Code and to assess the associated risks for Practitioners and taxpayers in any meaningful way.

Julie Burke
Solicitor
April 2004