Mr. Seamus McCarthy:

As the Chairman outlined, before the committee today are the accounts of the collection of revenue for 2011, the Revenue Commissioner's appropriation account and a number of chapters examining specific aspects of Revenue activity and performance.

Chapter 8 examines key trends in the amounts collected over the past five years. Having fallen in each year since 2007, the net revenue of the State increased by 7.3% to just over €34 billion in 2011. The €2.3 billion rise was principally accounted for by the introduction of new taxes in the form of a universal social charge and a levy on pension schemes, partially offset by decreases in corporation tax and VAT.

The Revenue Commissioner's assist the Department of Finance in preparing forecasts of annual Exchequer tax receipts. Net receipts in 2011 were below the forecast by almost €900 million. Overall, Revenue forecasting has been relatively accurate in recent years with actually receipts being in the range of 2.3% above to 3.9% below the forecasts. A Department of Finance-led tax forecasting methodology review group concluded in 2008 that the level of forecasting error in Ireland had been high by international standards. The group noted that of the four biggest tax heads, corporation tax receipts recorded the highest forecasting error between 1999 and 2006.

The difficulty in accurately forecasting corporation tax receipts has increased as a result of the emergence of very significant losses which businesses can use to offset against reported profits. Revenue estimates that €119 billion of unused losses and capital allowances were available at the end of 2010 to carry forward for offset in future years. The concentration of accumulated losses in a relatively small number of companies suggests that information of use for forecasting purpose could be obtained by Revenue through analysis carried out on a case-by-case basis.

Given the level of change in national output and the structural change in the economy in recent years, the chapter recommended that the Department of Finance should review the effectiveness of its tax forecasting methods and the reasons for divergence from tax forecasts. I understand a review is under way.

Chapter 9 reviews the performance of Revenue in regard to the collection of debt arising from assessed tax liabilities. The estimated value of tax outstanding increased significantly between 2008 and 2010 but dropped marginally over the past two years. The total tax outstanding at the end of March 2012 was just under €2 billion. One third of the outstanding debt at March 2012 was under appeal and, consequently, not available for collection. Approximately one quarter was at some stage of enforcement but the remaining 40% or so of the debt was not subject to enforcement proceedings.

Revenue set a target to reduce the level of outstanding collectable debt by 14% between March 2011 and March 2012. While progress was made, the actual reduction achieved, at just over 5%, fell short of the target.

The age of debt is also an important measure because the likelihood of collection decreases over time. Without specifying a target, Revenue set itself an objective of reducing the overall age of the debt outstanding during 2011 but this was not achieved. Approximately 70% of tax debt at March 2012 related to tax periods prior to 2010.

Given the complexities of the factors underlying debt levels, it was recommended that Revenue should develop more specific performance measures in regard to its debt management function, including, for example, separate outstanding debt targets for fiduciary and direct taxes and separate age profile targets for collectable debt and debt under appeal. It was also recommended that Revenue should develop its debt management system to enable the generation of timely management information reports analysing the characteristics and status of outstanding debt and to support the generation of relevant debt collection performance measures.

Chapter 10 reviewed Revenue's approach to monitoring and managing taxpayer compliance. In order to effectively manage compliance, Revenue needs an understanding of the underlying tax gap. This is the level of non-compliance by all individuals and businesses liable to pay tax, including unregistered activity. Revenue collection authorities in other countries have developed methodologies to estimate the tax gap. For example, figures compiled for the UK suggest that the tax gap there is in the order of 8%.

Revenue does not currently produce an estimate of the tax gap in Ireland because of concerns around accuracy of estimates and concerns regarding its usefulness at an operational level. Some work has been done in regard to the links between relevant economic variables and tax collected but this does not provide Revenue with reliable indications of the level of non-compliance.

The audit gap is a more limited indicator of revenue collection performance. It measures Revenue losses as a result of non-compliance by registered individuals and businesses. Revenue does not estimate the scale of the audit gap but it carries out a programme of random audits which has the potential to generate broad estimates of the amount of tax not collected from registered individuals and businesses. Approximately one third of all taxpayers examined under the random audit programme each year are found to have underpaid their tax.

The chapter recommended that Revenue should amend the methodology for its random audit programme to capture additional information on those audit cases, including the amount of the original assessed liability and the value of the tax under declared. Revenue has indicated that since July 2012, this additional information is being captured.

Revenue is relatively successful in targeting higher risk and higher value cases for audit. Excluding large cases and special investigations, the average yield from risk-based audits in 2011 was substantially higher than the average yield for random audit cases. The non-compliance rate for risk-based cases was 73%, which indicates very effective selection of cases for audit.

While targeted audits and assessments result in high value detection of unpaid taxes, Revenue's overall success rate in detecting non-compliant taxpayers is not known. Deployment of additional resources to carry out more audit and assurance work could be cost effective but better information about the effectiveness of detection of non-compliance is needed to conclude on this.

Revenue employs a wide range of measures designed to have a deterrent effect on individuals and businesses that might consider evading their tax obligations. This includes publication of the names and amounts of settlements following audits, levying interest and penalties and legal action to recover unpaid taxes. However, the effectiveness of these measures cannot be assessed in isolation from the perceived likelihood of detection of non-compliance. Ultimately, taxpayers who may consider not paying their due taxes are likely to be deterred only if the likely adverse consequences outweigh the more immediate benefits of non-payment.