Dealing with a tax investigation or enquiry

A letter opening an enquiry into a tax return produces disproportionate alarm, and most enquiries are routine checks that conclude without penalty.

Why enquiries happen

Several reasons.

Random selection, which is a genuine feature of most systems.

Risk-based selection, where figures fall outside expected ranges for the sector.

Information from third parties, including banks, platforms, employers and international exchange of information.

Discrepancies between returns and other data held.

Specific campaigns targeting particular sectors or behaviours.

And third-party reports.

Which means receiving one does not imply that anything is wrong.

The types

Varying in scope.

Aspect enquiries, examining one specific item on a return, which are the most common and generally the quickest.

Full enquiries, examining the whole return.

Compliance checks on specific taxes or records.

And investigations where serious matters are suspected, which are different in character and where professional representation is essential.

The letter generally states the scope, which determines the response.

What to do first

In order.

Read the letter carefully, noting exactly what is being asked and by when.

Note the deadline, since extensions are generally available on request but must be requested.

Contact your accountant if you have one, before responding.

If you do not have one, consider engaging one, since representation generally improves outcomes and the fee is frequently modest relative to the amounts.

Gather the records requested.

And do not ignore it, since non-response leads to determinations, penalties and escalation.

How to respond

Practically.

Answer what is asked, accurately and completely, and do not volunteer material beyond the scope.

Provide documents rather than explanations where documents exist.

Be honest, since inconsistencies are damaging and since deliberate misstatement changes the character of the matter entirely.

Keep copies of everything sent.

Respond within deadlines or request extensions in advance.

And keep communication in writing where possible.

Your rights

Which exist.

Enquiries must generally be opened within a defined time limit after filing.

You are entitled to know why information is being requested and whether it must be provided.

You are entitled to representation.

You are entitled to appeal decisions and, in most systems, to independent review and to a tribunal.

Information notices can be appealed in some circumstances.

And there are limits on how far back the authority can go, which vary by behaviour — longer periods apply where carelessness or deliberate behaviour is established.

Penalties

Graduated by behaviour.

Most systems distinguish between errors despite reasonable care, carelessness, deliberate understatement and deliberate understatement with concealment, with penalties rising accordingly.

Penalties are generally reduced for disclosure, cooperation and assistance — frequently substantially, and more so where disclosure is unprompted.

Which means that where something is wrong, saying so early and helping to quantify it produces a materially better outcome than resisting.

And penalties can be appealed where there is a reasonable excuse.

If something is wrong

What to do.

Establish the extent with professional help before disclosing, since a partial or inaccurate disclosure causes problems.

Make a full disclosure, since most systems have facilities for this and treat voluntary disclosure considerably better than discovery.

Cooperate with quantification.

Negotiate payment terms if the amount cannot be paid immediately, since time-to-pay arrangements are available.

And take professional advice on how the disclosure is framed, since this affects penalties.

Prevention

What reduces the likelihood and the difficulty.

Accurate returns filed on time.

Complete records retained for the required period, which is what makes an enquiry straightforward rather than frightening.

Consistency between returns and other data, since discrepancies with third-party information are a common trigger.

Declaring all income, including platform and foreign income, which is increasingly reported automatically.

Reasonable and evidenced expense claims.

And professional preparation for anything complex, which reduces both errors and the likelihood of selection.

Insurance

A practical point.

Fee protection insurance covering professional costs of representation during an enquiry is available and is offered by many accountants.

Since enquiries can be lengthy and professional fees accumulate, it is worth considering for anyone with a complex position.

Some professional and trade bodies include it in membership.

General information only, not tax or legal advice. Rules vary enormously by country — engage a qualified accountant if you receive an enquiry letter.