Section 91 and Schedule 5 of the Bill make significant changes to the current regime for civil penalties in Revenue audits. Given the importance of these issues to the profession, we are bringing you a Special TaxFax to highlight the key changes to the regime. All other Finance Bill developments, including enhancements to R&D, introduction of the income levy and removal of the midnight rule for residence, will be covered in detail tomorrow in Finance Bill Special TaxFax Part 2.

Outline of the new regime

For the Revenue Explanatory Note issued on these penalty changes click here

1. Current Revenue practice regarding “tax-geared penalties” in audits or investigations is to be put on a statutory footing i.e. the Revenue Audit Code of Practice will be codified into legislation with some significant amendments to the current code e.g. terminology such as “deliberately” and “carelessly” will replace the previous language of “fraudulently” and “negligently”.

2. In future situations where the taxpayer refuses to agree and pay the level of civil penalties sought by Revenue, Revenue can issue a formal opinion setting out:

• the provisions of the legislation under which the penalty arises
• the circumstances in which the person is liable to the penalty and
• the amount of the penalty

The taxpayer then has 30 days to agree the opinion in writing and pay the penalty or Revenue can make a court application to the District, Circuit or High Court to determine whether the person is liable to the penalty. Note the application will not be made to the Appeal Commissioners and therefore issues of publicity and taxpayer confidentiality will arise.

This provision regarding a liability to pay a penalty will apply to existing unsettled cases and new cases and to tax geared and fixed penalties.

3. Under a newly inserted Section 1077C TCA 1997, if a court finds that a taxpayer is liable to pay a penalty, it will be collected and recovered in the same way as tax is collected and recovered.
4. Where a second qualifying disclosure is made within a 5 year period, and where the nature of the default is in either the “deliberate behaviour” or “careless behaviour with significant consequences” category, the legislation will provide that the level of mitigation will be reduced as per the Code of Practice.
5. A new Section 1077D deals with the recovery of penalties from the estate of a person after death on a statutory footing. e-Brief 15/2008 was Revenue’s first communication on this issue.
6. A wide range of fixed penalties which had not been increased in previous years have now also been updated and increased somewhat.

Why?
Revenue have stated that the new legislative regime for civil penalties was necessary because the existing civil penalty regime may have contravened Article 6 of the European Convention on Human Rights. Article 6 provides citizens with the right to a fair and public hearing.

Who is affected?
The new legislation will apply to existing open audit cases as well as new cases and will be effective from the date of passing of the Act. A new revised Code will have to be published to reflect the legislative position which differs from the current Code but it is very unlikely that this new Code will be in place by the effective date.

Revenue stated that they will continue to seek settlements in audit cases under a Code of Practice regime and they would expect most audits to be unaffected by these changes unless stalemate is reached on penalties.

What are the issues for the profession?

This new legislation represents one of the most significant and complex changes to the penalty regime in many years and was introduced without any consultation with the profession. A number of issues will need to be addressed over the coming days and weeks and we will be making representations on matters of concern through the appropriate channels.

Practical issues for the profession and taxpayers to consider

1. The role of any Code of Practice for Revenue Auditors, once the new penalty regime legislation is in place.
2. The lacuna that will be created if the existing Code has to be revoked and there is no new Code by the date of passing of the Act.
3. There does not appear to be any new mechanism for speedy, independent, and non-costly dispute resolution of Revenue audit issues in general.
4. The significant costs which arise with a court action.
5. The issue of consistency between rulings on penalties and mitigation in the District, Circuit and High Courts across the country.
6. The potential negative impact that the new regime could have on achieving negotiated settlements with taxpayers.
7. The status of a Qualifying Disclosure if an amount of penalties is not paid.

Taxpayer rights to consider

1. The safeguards for taxpayers in the new regime. The options open to a taxpayer who disagrees with a penalty decision (or indeed any other aspect of an audit) seem to be limited to a judicial review in the High Court or Revenue internal/external review.
2. The significant level of costs for taxpayers
3. The rights of a taxpayer to confidentiality and the impact of open court proceedings upon this right
4. The question as to whether the new legislation will satisfy Article 6 of the European Convention on Human Rights

We are building a repository of FAQ’s on these issues which will be available on our website.

If Members have any representations issues they wish to have considered or suggested FAQ’s please forward them to Mary Healy at mhealy@taxireland.ie