Mr. Seamus McCarthy:

I thank the Chairman. As the Chairman has said, before the committee today are the 2012 accounts of the receipt of the State and the 2012 Appropriation Accounts for Vote 9 - Office of the Revenue Commissioners, as well as a number of chapters examining specific aspects of Revenue activity and performance. The account of the receipt of revenue of the State and the appropriation account both received clear audit certificates.

Chapter 23 reviews the key trends in the amounts collected over the period 2007 to 2012. Exchequer tax revenue increased in 2012 by around €2.4 billion, or 7%, to €36.5 billion. There was a significant shift between PRSI and income tax receipts in 2011 and 2012, following the introduction of the universal social charge.

Chapter 24 reviews Revenue’s debt collection function and the trends in the value, status and age of outstanding debt arising from assessed tax liabilities. The overall debt at the end of March each year from 2010 to 2013 remained stable at around €2 billion. Revenue has improved its debt management system through the introduction of an arrears case analysis tool, which now provides better information on the level and composition of debt. At the end of March 2013, more than 40% of the debt was regarded by Revenue as being currently non-collectible, mainly due to the debt being under appeal. Around a quarter of the debt was subject to enforcement action, and payment agreements were in place for a further 6%. The remaining 29% was deemed collectible, but was not subject to enforcement or collection efforts at the end of March 2013. For 2012, Revenue set itself a business target to reduce the level of collectible debt by 22%. We found that this was an overly ambitious target. The actual reduction achieved in 2012 was just 2%. The target set by Revenue for 2013 was a reduction of 4%.

Corporation tax losses are dealt with in Chapter 26 which outlines matters relating to trading losses used by companies to obtain relief from the payment of corporation tax on other profits. Prior to 2011, Revenue did not have a record of the trading losses accumulated by companies. Revenue amended the tax return form for 2011 to require companies to provide additional information on losses carried forward from earlier accounting periods. Arising from this change, Revenue now has better information to use in its tax forecasting work.

The total losses and allowances of around €205 billion available for offset in 2011 were highly concentrated in a small number of companies. Financial institutions participating in NAMA accounted for around a third of the total, or about €67 billion. There are restrictions on the rate at which these losses may be used to reduce future tax liabilities. Seven other companies in the financial and insurance sector accounted for a further €31 billion, or 15% of outstanding losses and allowances.

Revenue estimates that losses and allowances of around €23 billion were used in 2011 resulting in a reduction of around €2.8 billion in corporation tax receipts in that year. It has estimated that a further €183 billion of losses and capital allowances remained unused at the end of the year. The extent to which the amount carried forward will have an impact on future corporation tax receipts depends on the profits earned by the companies.

Chapter 25 outlines Revenue’s approach to monitoring and managing taxpayer compliance. Revenue undertakes a range of compliance interventions, including two tax audit programmes. Under its random audit programme, Revenue carries out around 400 audits of randomly selected individual taxpayers and business annually. The results of the audits for the years 2008 to 2011, almost all of which have been completed, show that, consistently, around one third of taxpayers under-declare their tax liability. The average yield for completed 2011 audits where the taxpayer was non-compliant was over €11,000 per case. The 2012 audits had not all been completed, so final outturn figures were not available for that year. The Revenue’s overall losses as a result of non-compliance by registered taxpayers is referred to as the audit gap. Revenue does not produce estimates of the gap.

We have pointed out in the past that the results of comprehensive random audits can be used to provide an estimate of the audit gap, by comparing the yield from the random audits with those taxpayers’ full assessed liabilities. The 2011 random audits suggest that registered taxpayers may have underpaid their liabilities by an estimated 3.1% in the reference year. It should be noted that this does not include any losses of revenue from activity by agents that are completely outside the tax system, operating in the black economy.

Revenue’s main compliance work is its programme of risk-based tax audit. The results of this programme indicate that Revenue’s detection work is generally well-targeted. In 2012, almost 70% of the risk-based audits resulted in identification of additional tax due – that is about double the non-compliance rate for the random sample. The average yield from risk-based audits was just under €60,000 per case. However, we noted that the number of risk-based audits fell by around 20% in 2012 compared with 2011, continuing a downward trend in the level of audit activity.

Chapter 27 notes that 20% of a sample of tax settlement cases reviewed by my office had been incorrectly classified as audits, and were in fact other non-audit interventions. As a result, it is likely that the reported total audit yield of €359 million in 2012 was significantly overstated. Revenue has pointed out that it began refining the classification of its compliance interventions during 2012.

Chapter 27 focuses on audit settlements reached by Revenue with taxpayers. The review examined in detail the process applied in reaching settlements in 45 audit cases closed by Revenue in 2012. The sample comprised the four cases with the highest settlements in the year, and 41 cases selected at random. As stated earlier, nine of the cases, including one of the largest cases, had been incorrectly recorded as audit interventions. The remaining 36 cases involved audits that resulted in a yield of €41.4 million.

For most of the cases reviewed, the examination found that Revenue had followed its published settlement procedures and that interest and penalties had been applied in accordance with legislation. However, there was insufficient evidence on file to indicate how the taxpayer’s liability had been calculated in 18% of the cases examined. Interest had been incorrectly applied or not applied at all in a small number of cases. In a third of the cases examined, the level of penalties imposed was lower than the files indicated they should have been. Analysis of all audit settlements reached in 2012 showed that interest and penalties were applied in just over half of the cases managed by the large cases division. In contrast, interest and penalties were charged on over three quarters of the settlement cases managed in the regions. The Accounting Officer stated that the nature of the taxpayers managed by the large cases division, mainly large corporates, means that the issues identified which gave rise to the settlement can often relate to technical adjustments which do not result in a penalty.

The chapter recommended that Revenue should review the mechanisms it has in place to ensure that interest and penalties are quantified in accordance with legislation and with the code of practice for Revenue audit.

The highest audit settlement in 2012 was for €15 million. In that case, Revenue raised an assessment of tax due of €22 million but did not notify the taxpayer of interest due or possible penalties. As part of our examination, we calculated that interest of over €10 million had accrued at the time the assessment was raised. In addition, penalties could range from 15% to 100% of the tax liability. As a result, the taxpayer’s total liability in this case could have been in the range of €36 million to €54 million. Revenue could have added rigour and transparency to its approach to negotiating the settlement by making the taxpayer aware of the full potential liability and clearly documenting on file its assessment of the probable outcomes of litigation. Its records indicate that this approach was used in another large settlement case.

The chapter makes a number of other recommendations about the negotiation and settlement process. The Accounting Officer will be able to brief the committee about progress on the implementation of these recommendations.