COMMITTEE OF PUBLIC ACCOUNTS debate -
Thursday, 11 Dec 2003

Vol. 1 No. 36

2002 Annual Report of the Comptroller and Auditor General and Appropriation Accounts.

Vote 9 - Office of the Revenue Commissioners-

Chapter 2.1 to 2.6, inclusive (resumed), and Chapters 2.7 to 2.10, inclusive.

Mr. Frank Daly, (Chairman, Revenue Commissioners), called and examined.

Chairman

Witnesses should be aware that they do not enjoy absolute privilege. As and from 2 August 1998, section 10 of the Committees of the Houses of the Oireachtas (Compellability, Privileges and Immunities of Witnesses) Act 1997 granted certain rights to persons who are identified in the course of the committee's proceedings. Those rights include the right to give evidence, produce or send documents to the committee, appear before the committee either in person or through a representative, make a written and oral submission, request the committee to direct the attendance of witnesses and the production of documents and the right to cross-examine witnesses. For the most part, those rights can be exercised only with the consent of the committee. Persons invited before the committee are made aware of those rights and any person identified in the course of proceedings who is not present may have to be made aware of them and provided with the transcript of the relevant part of the committee's proceedings if the committee considers it appropriate in the interests of justice.

Notwithstanding that provision in legislation, I remind members of the long-standing parliamentary practice to the effect that members should not comment on, criticise or make charges against a person outside the House or an official either by name or in such a way as to make him or her identifiable. Members are also reminded of the provision under Standing Order 156 that the committee shall refrain from inquiring into the merits of a policy or policies of the Government or a Minister of the Government or the merits of the objectives of such policies.

I welcome Mr. Daly and I ask him to introduce his officials.

Mr. Frank Daly

I am accompanied by Mr. Christy Clayton, director general of revenue strategy and accounting general; Mr. Paddy Molloy, head of our statistics branch; Mr. Paddy O'Shaughnessy, principal officer who liaises with the Comptroller and Auditor General; and Mr. Tom Dowling, assistant principal and administrative budget manager. Mr. Dave Coleman, senior press officer, is in the press gallery as an observer.

Chairman

I call Mr. Hurley from the Department of Finance.

Mr. David Hurley

I am principal officer in the organisation management and training division and I deal with the revenue administrative budget.

Chairman

I call Mr. Purcell to give an over-view of chapters 2.1 to 2.6, inclusive.

Chapters 2.1 to 2.6 of the Report of the Comptroller and Auditor General reads:

2.1 Revenue Account

Basis for Audit

An account showing all revenue received and paid over to the Exchequer by the Revenue Commissioners is furnished to me annually. I am required under Section 3 of the Comptroller and Auditor General (Amendment) Act, 1993 to carry out such examinations of this account as I consider appropriate in order to satisfy myself as to its completeness and accuracy and to report to Dáil Éireann on the results of my examinations. The results of my examinations have been generally satisfactory.

I am also required under Section 3 of the Comptroller and Auditor General (Amendment) Act, 1993 to carry out such examinations as I consider appropriate in order to ascertain whether systems, procedures and practices have been established that are adequate to secure an effective check on the assessment, collection and proper allocation of the revenue of the State and to satisfy myself that the manner in which they are being employed and applied is adequate. Sections 2.4, 2.5 and 2.8 to 2.10 refer to matters arising from this examination.

Revenue Collected

Revenue collected under its main headings in 2002 is shown in Table 2.1.

Table 2.1 Revenue Collected

	Gross Receipts	Repayments	Net Receipts	2001 Net Receipts
	€m	€m	€m	€m
Income Tax	10,983	2,004	8,979	9,318
Value Added Tax	11,375	2,531	8,844	7,907
Excise	4,734	139	4,595	4,213
Corporation Tax	5,129	325	4,804	4,144
Stamps	1,177	38	1,139	1,223
Customs	154	20	134	165
Capital Acquisitions Tax	157	7	150	168
Capital Gains Tax	636	17	619	876
Residential Property Tax	1	-	1	1
Total	34,346	5,081	29,265	28,015

Of the net receipts of €29,265m, a total of €167m was paid during 2002 under Section 3 of the Appropriation Act, 1999 from the proceeds of tobacco excise to the Vote for Health and Children.

€29,283m was paid into the Exchequer which represented a prepayment of €316m. The amount prepaid at the end of 2001 was €131m. Most of the prepayment is due to the transfer into the Exchequer of moneys received from taxpayers as deposits and payments on account pending final settlement of tax liability. Such amounts are rarely repaid to the taxpayer and will subsequently be included in the relevant tax receipts figures as and when liability is finalised. From 2004, payments on account will be recorded and processed as tax receipts.

2.2 Tax Written Off

The Revenue Commissioners have furnished me with details of taxes written off during the year ended 31 December 2002. Details of the total amount written off and the distribution according to the grounds of write-off are shown in Table 2.2 and Table 2.3.

Table 2.2 Taxes Written Off

Tax	2002 €’000	2001 €’000
Value Added Tax	80,197	29,476
PAYE	42,657	12,790
Corporation Tax	6,094	11,270
Income Tax	23,707	68,092
Other Taxes	2,600	6,401
PRSI	22,843	12,263
Total	178,098	140,292

Table 2.3 Grounds of Write Off

Grounds of write-off	2002 No. of Cases	2002 €’000	2001 No. of Cases	2001 €’000
Liquidation/Receivership/Bankruptcy	360	31,137	382	26,942
Ceased trading - no assets	2,236	42,765	578	16,945
Deceased and Estate Insolvent	251	2,813	52	1,631
Uneconomic to pursue	152,543	75,047	35,173	82,552
Unfounded Liability	167	2,547	37	830
Cannot be traced/Outside Jurisdicton	510	7,427	117	4,096
Compassionate Grounds	234	2,185	70	1,545
Uncollectable due to financial circumstances of taxpayer	954	14,177	243	5,660
Examinership	-	-	2	91
Totals	157,255	178,098	36,654	140,292

The write off in 2002 included the write off on an automated basis of 145,797 cases totalling €51m in respect of VAT, PAYE, PRSI, Income Tax, Corporation Tax and Capital Gains Tax. 117,000 of these cases were from periods back to 1966 and the amounts involved were less than €100. The remaining cases were pre-1993 and no amount was greater than €32,000. Cases under general investigation, potential Ansbacher cases, and cases under the control of the Criminal Assets Bureau are excluded from all write off procedures.

The Internal Audit Branch in Revenue undertakes an annual examination of tax write offs. Its 2002 audit examined file papers and computer records for a sample of 153 cases, representing approximately 17% of the value of non-automated write offs. In addition, the computer files relating to each of the sixteen automated write off runs were examined to confirm that the authorised selection criteria were applied. The internal audit found no instance where tax was improperly written off under the current instructions, procedures and guidelines.

2.3 Outstanding Taxes and PRSI

Table 2.4 was prepared on the basis of information furnished by the Revenue Commissioners and reflects the activities and transactions in the twelve month period ended 31 May 2003 - the latest date for which data was available at the time of finalising my Report. Table 2.5 sets out an aged analysis of the balance outstanding at 31 May 2003.

Table 2.4 Outstanding Taxes and Levies

Balance at 31May 2002	Tax or Levy	Charges/Estimates Raised	Paid	Balance at 31 May 2003	Estimate of amount likely to be collected
€m		€m	€m	€m	€m
119	VAT (Declared Liabilities Net of Repayments)	8,322	8,315	126	101
207	VAT (Estimates)	53	54	206	166
169	PAYE (Declared Liabilities)	7,159	7,182	146	117
27	PAYE (Estimates)	747	759	15	12
198	PRSI (Declared Liabilities) PRSI (Estimates)	5,259	5,292	165	133
19	Income Tax (Excluding PAYE)	464	472	11	8
443	DIRT	1,511	1,627	327	263
-	Corporation Tax	199	199	-	-
189	Capital Gains Tax	3,765	3,807	147	118
111	Capital Acquisitions Tax	674	633	152	123
18	Abolished Taxes	158	157	19	13
8		1	1	8	-
1,508	Total	28,312	28,498	1,322	1,054

Table 2.5 Aged Analysis of Debt at 31 May 2003.

Tax	Total tax outstanding at31 May 2003 €m	Amounts outstanding for 2002 €m	Amounts outstanding period for 30/4/01-31/12/01 €m	Due for periods1990/91 to2000/01 €m	Due for earlier periods €m
VAT	332	122	68	140	2
PAYE	161	67	23	65	6
PRSI	176	82	25	64	5
Income Tax	327	10	53	246	18
Corporation Tax	147	31	10	86	20
Capital Gains Tax	152	11	14	125	2
Capital Acquisitions Tax	19	1	1	17	-
Abolished Taxes	8	-	-	8	-
Total	1,322	324	194	751	53

The balance outstanding at 31 May 2003 of €1,322m is €186m less than at the same point in 2002. It is estimated by Revenue that €1,054m or 80% of the total outstanding is likely to be eventually collected. This compares with an estimated collection ratio of 71% at May 2002. The estimation of the amount likely to be collected takes into account such factors as anticipated reductions of estimated amounts brought forward, the level of liquidations and business closures and historical business patterns.

2.4 DIRT Investigations

There are two distinct aspects to Revenue activity in the area of DIRT investigations. The first relates to the Look-Back Audits of the operation of non-resident accounts by financial institutions which were completed in 2000. Following on from that investigation of the institutions, Revenue commenced a further investigation in 2001 that focused on the issue of the 'underlying tax' which may be due by individuals in respect of the funds deposited in the bogus non-resident accounts.

DIRT 'Look-Back' Audit of Financial Institutions

As a result of the original DIRT look-back audit of 37 financial institutions completed in October 2000, a total of €220m was collected in tax, interest and penalties for the years of assessment 1986/87 to 1998/99.

Further audits were finalised in 2002 at 10 of those financial institutions in respect of the later tax years of 1999/00 and 2000/01 which resulted in an overall yield of just over €1m. In 2001, DIRT look-back audits resulting in an overall 'nil' yield were carried out on 47 other financial institutions, none of which had a retail branch network.

Underlying Tax on Bogus Non-Resident Accounts

The approach adopted by Revenue to the issue of moneys deposited in bogus non-resident accounts which may not have been declared for tax purposes involved setting a deadline of 15 November 2001 for depositors to make a voluntary disclosure and pay tax, interest and penalties. Under the 'voluntary disclosure' scheme, interest and penalty charges were capped at 100% of the tax due, a credit was allowed for DIRT paid by the depositors bank, prosecutions would not be taken and settlement details would not be published. 3,675 bogus account holders availed of voluntary disclosure and paid €227m in respect of 8,380 accounts. Of these, 599 account holders declared a nil liability. All returns were checked by tax districts for basic eligibility. 30 cases were deemed ineligible as they were already under enquiry or came within the scope of the Ansbacher enquiry or other tribunals of investigation. The underlying tax project team selected 140 cases randomly for liability review by tax districts. Tax districts selected a further 115 cases based on risk. A nationwide report of the eligibility assessment and liability review has not yet been completed. I have carried out some audit work on the voluntary disclosure phase and my examination will be completed when the overall Revenue check on this first phase of the DIRT underlying tax project is finalised.

In February 2002, investigations commenced into the bogus non-resident account holders that had been identified in the look-back audits of financial institutions and who had failed to avail of the voluntary disclosure scheme. Details on 1,800 cases were passed to tax districts for investigation in March and August 2002. Information on non-resident account holders was sought from 26 deposit takers on foot of High Court orders. The information received under the orders was examined and enquiry letters were issued to 30,000 individuals in October 2002. Those who cooperated were liable to full penalties and interest and publication of the settlement but would not be prosecuted. Those who failed to respond to the enquiry letter are being examined for follow up and some are under investigation with a view to prosecution. A further 90,000 enquiry letters (see Table 2.6) have issued as information under the court orders is received and examined.

Table 2.6 Underlying Tax Enquiry - Letters Issued

Date	Number of Account Holders	Number of Accounts
October 2002	30,000	13,500
January 2003	40,000	21,500
May 2003	10,000	6,000
July 2003	40,000	20,000

€220m has been received to-date from bogus non-resident account holders who failed to avail of the voluntary disclosure scheme. Information is continuing to be received as a result of the court orders and it is expected that investigations will continue for several years.

2.5 Understatement of DIRT Liability

Arising from an examination by my staff in September 2001 of Revenues DIRT Look-Back audits of financial institutions, I enquired at the time about the nature and extent of the Revenue audit carried out in a particular financial institution. In reply, the then Accounting Officer outlined the justification for the type of audit undertaken and affirmed that Revenue staff were fully satisfied that the 400 non-resident accounts examined were authentic and belonged to genuine non-residents. He stated that the financial institution in question had produced evidence in relation to the genuine non-resident status of the sampled cases to the Revenue team, including those accounts where there were declaration deficiencies. As a result of that Revenue audit, the Revenue report on the DIRT Look-Back audits to the Committee of Public Accounts had concluded that no amount of tax was due from the financial institution in question.

It was subsequently noted in June 2003 during a review by my staff of the pre-15 November 2001 "voluntary disclosure" phase of Revenue's pursuit of the underlying tax due in respect of funds deposited in bogus non-resident accounts that declarations were received from 62 persons which admitted to a total of 230 bogus non-resident accounts of which 102 were stated to be held in the financial institution in question. The payments to Revenue which accompanied the 62 declarations totalled €8.7m.

In regard to the reconciliation of Look-Back Audit information with the bogus non-resident declarations received, it was also noted that:

The 62 voluntary disclosures included five individuals who had their accounts examined during the Look-Back Audit

A listing of all non-resident accounts held with the financial institution as at October 1998 was supplied by the financial institution to Revenue at the time of the Look-Back Audit. The audit sample was selected from this list. Excluding the five selected in the sample, the list only included a further eight of the 62 individuals who subsequently made voluntary disclosures.

As this information raised renewed concerns about the quality of the Revenue Look-Back audit in the financial institution in question and the possible implications for the Look-Back audits generally I sought the views of the Accounting Officer.

He informed me that officers from the Underlying Tax Project office met with representatives from the financial institution on the 12 February 2002 to discuss the implications for the institution and its customers, of the application for a High Court Order under Section 908 Taxes Consolidation Act, 1997.

The fact that some of its customers had come forward during the 15 November 2001 incentive scheme and disclosed bogus non-resident accounts, which they held with the financial institution was also made known to them. The Order was obtained in March 2003 and the financial institution is supplying information on foot of it on a phased basis over the period 30 June 2003 to 31 October 2003.

Until all of this information is received and reviewed, it will not be possible to form a clear view on the reliability of the DIRT Look Back Audit findings for the financial institution in regard to DIRT and the related interest and penalties.

As regards the wider implications for the Look-Back audits he stated that the methodology used in the course of the particular audit was based on the special circumstances encountered in the financial institution - no previous reclassification or redesignation exercise, no internal or external auditor evidence of bogusness, an October 1998 sample date and post 1994 growth in retail banking involvement. He also stated that there was no evidence at this point to suggest that the issues that arise in relation to the financial institution have implications in relation to any other DIRT Look Back audit settlements.

2.6 Special Investigations

Offshore Investments via National Irish Bank

The investigation into individuals who invested in an offshore investment scheme operated by National Irish Bank is continuing. By June 2003, settlements were reached in 373 cases totalling €40m including interest and penalties of €22m. Of these cases, 97 were settled with no liability. In addition, payments on account totalling €5m have been received in respect of other unresolved cases. Payments totalling €1m in respect of Capital Gains Tax have been received in 52 cases where National Irish Bank paid compensation to the investor.

Three cases have been prosecuted. In two of these the defendants pleaded guilty, one was fined €1,750 in the District Court and the other was fined €6,000 in the Circuit Court. Both cases settled their tax liabilities for €882,610 and €804,592 respectively, these figures are included in the overall settlement figures. In the case of the defendant who settled his liability for €882,610 an additional €767,898 settlement was received from his company as a result of the same investigation. In the third case the defendant also pleaded guilty and received a suspended sentence subject to the taxpayer being fully compliant for the next five years. The taxpayer settled his liability for €448,827. One other case is being investigated with a view to prosecution.

In 2001, National Irish Bank submitted to Revenue a list of 22 new cases. Of these, 15 involve relatively small sums and are thought unlikely to involve substantial tax evasion. None of these cases has been finalised to date.

Ansbacher (Cayman) Limited

A special project team is investigating the Ansbacher accounts. The team is investigating cases directly involving Ansbacher type arrangements as well as other cases involving offshore funds and deposits.

There are 289 cases comprising 179 cases on the High Court Inspectors' Report and 110 similar cases discovered by Revenue or listed on the Authorised Officers Report. Taking account of spouses and connected companies, these cases consist of 300 names. The number of connected entities in relation to cases under investigation is nearly 700.

To date, 44 cases have been settled including 25 cases named in the High Court Inspectors report which are non-resident and covered by the provisions of Double Taxation Agreements and are regarded as closed. Settlements of €2.8m, including interest and penalties of €1.7m have been agreed in the other 19 cases settled. These 19 cases include five cases with no additional liability and two cases covered by the 1993 amnesty provisions.

In addition, payments on account totalling €22m have been received to date in 64 cases as follows:

€15m from 56 cases involving Ansbacher-type arrangements

€7m from 8 cases involving offshore funds and deposits.

Revenue's application to the High Court to obtain unpublished documents gathered by the Inspectors was heard in November 2002. Judgment is expected shortly.

Pick-Me-Up Schemes

Pick-Me-Up Schemes involved expenses for goods or services incurred by a political party being invoiced by the supplier to another trader who paid the supplier as a means of supporting the party. Such payments were not deductible for tax purposes, the VAT was not reclaimable and the invoices issued were not in accordance with legal requirements. The investigation found a total of 71 cases that apparently avoided tax by engaging in picking up expenses which were proper to political parties. 42 cases have been settled for a total of €470,724 including interest and penalties. Revenue has decided not to settle 15 cases that have been mentioned at the Flood (now Mahon) and Moriarty Tribunals until those bodies have reported. €158,157 has been received on account from 6 of those cases. 14 cases are still under investigation some of which relate to payments in the eighties or early nineties and for which records are no longer available. As a result it is proving difficult to confirm liability. Payments on account of €90,340 have been received in 5 of the cases still under investigation.

Tribunals

Matters disclosed at the Moriarity and Flood (now Mahon) Tribunals that suggest that tax evasion may have occurred are being investigated as they come to notice and a considerable number have been looked at to date. Currently 17 cases are being investigated as a result of the Moriarity Tribunal. One case has been settled for €6,292,506 and a payment on account of €14,876 has been received in respect of one other case. Currently 22 cases are being investigated as a result of the Flood (now Mahon) Tribunal and payments on account of €17,572,640 have been received in respect of eight cases.

Mr. Purcell

I will not go over old ground. The committee, at its hearing on 16 October last, concentrated on matters arising from these chapters of the report. In particular, two issues were raised, first, the aftermath of the DIRT inquiry in terms of the financial outturn from the look-back audits of the financial institutions and the ongoing underlying tax campaign and, second, offshore accounts and the way in which Revenue is tackling the problem through its offshore assets group. The committee may initially seek an update from the Accounting Officer on each of these areas before moving on to the other parts of my report.

Mr. Daly

I will update the committee on three issues. I reported at the last meeting on the various special investigations that were ongoing, but the figures have slightly changed. The total collected as a consequence of those investigations is €922 million, a €30 million increase on the figure I reported in October.

We spent a good deal of time at the last session on paragraph 2.5, which deals with the audit of one financial institution on the Revenue's look-back programme for 1999-2000. Two principal issues arose from that discussion involving voluntary disclosures made later to Revenue after the audit was completed, with the two areas of concern being the possibility of an understatement of DIRT liability by the institution concerned and the possible implications for other DIRT settlements arising from the look-back programme in all the other banks.

I reported in October that we had obtained a High Court order requiring the particular institution to provide details of non-resident accounts. This order has been complied with and we are examining all the material we have received. Even though we have not completed the examination there is no indication that any issue, beyond those already raised, arises. As I promised the committee in October, we are making all necessary further inquiries into this institution. It is important to state this is being done with the full co-operation of the institution concerned. It will be a while before we complete those inquiries, which is the nature of an activity like this, and as they are now live I would prefer not to go into more detail at this point. I can confirm the view I expressed in October that nothing has emerged to indicate there were similar problems with any of the other audits. The circumstances in this case, as I explained in October, were somewhat unique.

The third item is the work of the offshore assets group, which the Chairman mentioned. Members will be aware that inquiries are under way in this area and as a consequence 325 individuals have paid €126 million, which is included in the figure of €922 million I mentioned earlier. Within that, 254 individuals have paid €102 million arising out of inquiries into the use of trust structures in the Bank of Ireland-Jersey Trust company.

In addition, in the second of those inquiries into offshore accounts held by customers of Irish Life and Permanent, Isle of Man, we have received over 1,200 voluntary disclosures from account holders. Payment is not due there until January so I do not have any money figure, but 1,200 people have disclosed voluntarily.

I will update the committee on one other item which has escaped the media, although it did not escape Revenue. We are having discussions with the chief executives of the major financial institutions. Last month I wrote to the chief executive officers of ten financial institutions, banks and building societies which have or had subsidiaries offshore in the Isle of Man, Jersey and places like that. I invited them to meet me to discuss the matter of tax evasion using offshore accounts. To date I have met five of those chief executive officers. I hope Deputies will appreciate that as we are in the middle of this process and discussions, I would prefer not to go into great detail, but I will outline Revenue's objective. It is to make clear that we will deal with the matter of evasion using offshore accounts and invite co-operation from the financial sector so that we can do this in the most effective, pragmatic and speediest way possible. I am trying to convince the financial industry that it is time this matter was dealt with once and for all. It is in everyone's interests - taxpayers, Revenue, the financial sector and the entire country - that we put this behind us once and for all. I emphasise we are not talking about any special deals here. We are talking about the tax, interest and penalties that are appropriate. We are in the middle of a process and I have more people to meet but I am very encouraged by the positive response I have received to this initiative so far.

Chairman

I am delighted Revenue has taken the initiative in meeting the relevant banks as it has a role to play in recovering unpaid taxes. The Committee of Public Accounts expressed an interest in the liability of banks for offshore accounts and I hope Revenue keeps us updated on the discussions and the likely tax gain which may arise.

Mr. Daly

I will, and the interest of the committee in this issue is of use to me in these discussions, if I can put it that way.

Chairman

Before I call Deputy Rabbitte, I raised the issue of VAT anomalies and assumed it was a de facto situation that when a person bought a house, irrespective of the 10% rule, the purchase price included the site element, which would be inclusive of VAT. I was alarmed when it was indicated in the Dáil last week that there is an €18 million liability on one development alone. To what extent has this scheme been used and for what length of time? Is there any possibility of going back over the files and getting that revenue back from developers? It appears that a select number of accountants, developers and builders operated a select niche market.

Mr. Daly

I acknowledge the fact that the Chairman brought this to our attention earlier in the year. I will not go into the details of the scheme, which were aired extensively in the Dáil last week, but the mechanism was that a separate contract governed the sale of the site and a separate building contract related to the house or apartment. Prior to the sale of the site to the ultimate purchaser, the site was let on a short-term basis to an associated company of the developer. That letting ceased or was caused to cease on transfer of the site to the purchaser. At the heart of the scheme is a claim that the short-term letting is an exempt activity which takes this out of the VAT net, so the consideration for the site is not charged to VAT.

This short-term letting scheme is an artificial mechanism and we will challenge it every step of the way. On budget night the Minister closed off the loophole, if there was one, with a financial resolution. That was to put everything beyond doubt. Our strong belief is that this was an artificial mechanism and we are confident we can challenge the schemes which used it and which have come to our notice. We have a developing inquiry which moves from day to day and we are aware that the scheme was or is being applied in six cases we have identified and those are under active investigation. One of those has progressed to the stage where we have made assessments and it is listed for appeal, while the other five are under investigation. We know the scheme was marketed in particular by a couple of accountancy firms or accountants and we have identified approximately 21 other developers which at one stage or other were advised by those accountants. I am very careful to say that we do not know if those developers availed of the scheme but it would have been brought to their notice by these creative accountants. Obviously those 21 schemes will be investigated by us as well though I have no information to confirm they would have used it.

We have also initiated special compliance activities in our special compliance districts to identify other potential cases. We have advised those special compliance districts of the characteristics of the scheme so even as I speak they are actively pursuing the identification of possible schemes like this. In the new Revenue structure we have a large cases division which has a dedicated branch focused on the construction industry. Its sole purpose is to get a greater handle on what goes on in the industry which might be of interest to Revenue.

There is a specialist VAT avoidance unit in that large case of division. We have quadrupled the specialist expertise in this unit in the last few months. The essence of my message is that we will challenge these schemes. We will challenge them on the facts of the scheme. We do not believe that the creation of a short-term lease was anything other than an artificial device. If necessary, we will resort to the general anti-avoidance legislation in section 8(1) of the Taxes Consolidation Act, which enables us to form a view that any particular scheme is artificial, to assess tax and proceed.

I acknowledge that the chairman brought the matter to our notice and I assure him that we are actively investigating it.

Chairman

Apart from the illegality issue, anyone purchasing a home automatically presumes that the VAT is inclusive. In regard to the six cases, what volume are we talking about?

Mr. Daly

In one particular case identified, which appears to be the major one, the VAT at risk is approximately €18 million. We have not got to the stage in the other cases where we can quantify the loss or, indeed, how long the scheme has been in place. In the cases identified, we appear to be talking about a two or three year period. As our inquiries continue, perhaps we will be able to get harder facts.

Chairman

What about the accountancy firms? Do you recommend taking action in regard to the type of advice given?

Mr. Daly

The Revenue has very strong views about some of the advice given by some accountancy firms. They have contrary views. To my mind, this sort of scheme is a very good example of what is an unacceptable interpretation of the law. It is a tax avoidance scheme which is certainly at the margins of evasion. It is very difficult to prosecute these accountancy firms but we have very strong views on avoidance - we recently articulated these views.

Most accountancy firms are very responsible, but there are people who continuously test the system and pore over tax legislation to find the loopholes. We try to close them off. I am sure that on budget night, as we closed off this one, there were probably people poring over it to see if there was any weakness in it. It is a continuous cat and mouse game which we are engaged in.

Mr. Purcell

The chairman brought the issue to my attention and used me as the vehicle to bring the matter to the attention of the Revenue Commissioners. He has done the State some service and, I hope, people are aware of it. It concerns me that the issue has been going on for two to three years and, even with a VAT avoidance unit within the large cases division, the matter did not come to light. This must have been known about to some extent. I am aware that Revenue cannot be everywhere. It appears the issue should have come to the attention of the Revenue and it should not depend on public spirited individuals like the chairman to bring the matter to their attention. Perhaps this is being churlish. Perhaps we should look forward and give the VAT avoidance unit within the large cases division the opportunity to show its worth and hope the Revenue intelligence system and ear-to-the-ground system works.

In my 2001 report, I identified property development, particularly the matter of VAT in property development, as being a high risk area for Revenue. I hope the concentration of resources to high risk areas will pay dividends for the State in the long-term.

Deputy Rabbitte

I concur with the remarks of the Comptroller and Auditor General in respect of the chairman's actions on this matter. Will Mr. Daly tell us more about the special unit set up to look at the construction area?

Mr. Daly

We have restructured Revenue in the past year or so. Apart from a prosecutions and investigations division, we have created a large cases division. The purpose of this division is to concentrate on large corporate and high net worth individuals of which there are hundreds of cases. It is designed to service these areas and, because they are liable to so much tax, we regard it as quite a high risk area for Revenue. They also employ much specialist expertise which we feel we must match. It is a highly sophisticated and specialist area. If we spread it throughout the country, we probably could not match the expertise or advice of people in that area.

There are sectoral branches within the large cases division. One of the branches will deal with the construction industry while others will deal with the financial sector, the drinks industry and so on. We have appointed people with much experience in audit. We have successfully brought in people from the sector itself to talk to us about the type of activity that goes on in the sector to get to know the sector. On the point the chairman and Comptroller and Auditor General made about this activity going on for a number of years, we want to get closer to the industry itself so that we know exactly what is going on.

I mentioned the special compliance district. We have introduced the concept of a special compliance district in each of our regions. These are people whose main function is not to sit in the office but to get out around the district and region, be our eyes and ears, know what is going on, read the newspapers, look at construction sites and big developments and feed that back to our central areas.

Deputy Rabbitte

What is the number of areas of criminality? Deputy Perry referred to this type of scam being talked about in a pub, people shrugging their shoulders and saying it was exaggerated. One hears stories about bogus invoices being made for building sites, some of the proceeds ending up with paramilitary organisations and so on. Does this type of activity attract scrutiny?

Mr. Daly

It does. Deputies will be aware that a fraud in the construction industry was perpetrated over the past year or so in regard to relevant contracts tax. This has been referred to the Garda and it is under investigation. As people have been arrested, I do not want to go into the detail. There are risky areas which probably change from time to time. We regard the whole property development and construction area as one to which we currently need to pay attention.

While we get a good deal of information from good citizens, such as that which Deputy Perry brought to our attention during the summer, and that is always very welcome, Revenue should not have to depend on that. The key for us in the future is to get closer to what is going on in a particular industry. Whether regarding bogus invoices, RCT fraud or this type of scheme, we should be close enough to what is going on and should build contacts with people in the industry. Other sectors work in the industry such as trade unions with whom we can build useful contacts. That is our objective.

There is no doubt that the RCT fraud was highly organised and involved organised crime elements. I cannot go into more detail about it because it is under Garda investigation.

Deputy Rabbitte

Does Revenue know how far back the short-term leasing avoidance mechanism goes?

Mr. Daly

From the cases where there is factual evidence that it was used, they go back two or three years. There are approximately 21 other cases where we are not sure it was used but we know that the particular scheme was probably marketed.

Deputy Rabbitte

There are rumours that it goes back seven or eight years. Would Revenue be surprised to discover those rumours are true?

Mr. Daly

I would not be surprised. The VAT Act has existed since 1972. The particular sections used in this case were amended in 1995 or 1996. I do not know at what stage advisers or accountants pore over a particular section, but it might be reasonable to surmise that when the section was amended in 1995 or 1996 - it was just a technical amendment - they started examining it. I would not be surprised if it went back that far but I have no hard evidence to prove it.

Deputy Rabbitte

In terms of section 811 of the Taxes Consolidation Act, will Mr. Daly explain to the committee in layman's English what how Revenue makes a judgment on the difficult area of tax avoidance? What is legitimate and what is clearly spurious or artificial in terms of being deliberately contrived to minimise a tax liability? It must be a difficult area to deal with. Are there general principles laid down under section 811?

Mr. Daly

There are general principles set out in the legislation. Unfortunately, I did not bring the section with me. It is a general anti-avoidance provision. It is grounded on Revenue being able to take a view that a particular transaction is really an artificial transaction that has no basis in commercial reality. In other words, if you were not doing it solely for a tax advantage you would not do it at all. That is probably the basic principle on which we approach it.

The legislation works by Revenue forming a view and then formally putting it to the taxpayer. Then an assessment is made which leads to the normal appeal mechanism. Section 811 has never been tested in the courts. I know tax advisers who believe it has a very broad base. At present there is a case going through the courts that will test it. Recently we have used the section on very selective but important occasions. We have had quite a few successes with it. Sometimes people just cave in when we challenge.

Deputy Rabbitte

Will Mr. Daly tell us the character of the case before the courts?

Mr. Daly

I cannot recall it. Obviously I would have to be very circumspect.

Deputy Rabbitte

Is the conventional shorthand that tax evasion is evading tax and tax avoidance is always legal not necessarily accurate?

Mr. Daly

This is the subject of much debate, not only in Ireland but in other administrations. Where do you cross the line when tax avoidance becomes unacceptable and drifts into tax evasion? There are no black and white rules. The Oireachtas makes legislation and generally we try to draft it as tightly as possible. In most cases there is little doubt in the minds of accountants and taxpayers as to the intention of the legislation. It seems that some of the schemes that have been marketed and challenged by Revenue - this is not the first one that the Minister has had to close off - have drifted beyond the bounds of an acceptable interpretation of the legislation.

We had this debate with the professions and they maintain that the law is what is written in the law and that we must not seek to look beyond that. There are rules and regulations on the interpretation of legislation. Our view is that when you reach unacceptable tax avoidance, when you push the limits beyond what was intended, you are in effect challenging the tax base. If a group of people get away with a scheme which means they do not pay VAT or tax, ultimately somebody else must make up the shortfall whether through increased taxation rates or in some other way. This is an interesting area but one where there is a lot of disagreement between Revenue and the professionals.

Morality was introduced into the debate and the view was taken that tax law has nothing to do with morality, but I do not want to get into that. For the people who say "You can interpret tax law any way you want and fair dues to you if you get away with an unacceptable interpretation", if those people's houses were burgled or they were knocked off their bicycles and the perpetrator got away on a creative technical interpretation of the law, they would probably be the first to shout that it was wrong and would question the kind of system we have here. This is a philosophical debate.

Deputy Rabbitte

Is this particular issue geographic specific or has it been decentralised around the country?

Mr. Daly

We have not been decentralised. In so far as I am aware, the concentration is in Dublin, but I am open to correction.

Deputy Rabbitte

In terms of the particular scheme where the yield forgone may be in the order of €18 million is Revenue satisfied, based on examination of that, that it can unpick it?

Mr. Daly

We are very confident that we can unpick it. I would not like to go into the reasons because it might show our hand.

Deputy Rabbitte

Why should something as ingenious as this be confined to the Pale?

Mr. Daly

I am not saying it is. I am saying that, based on the schemes we have seen, the six cases being investigated seem to be concentrated in Dublin. There is another element to this in that traditionally in Revenue we have been much closer to the action in areas outside Dublin - it is simply a factor of size. Tax districts outside Dublin have tended to be in a position to obtain information much quicker than those in Dublin, perhaps because of the size and number of people with which we have to deal. I do not want to pronounce that this is not happening outside Dublin, it may well be, but the concentration, as far as we are aware, is in the Dublin area.

Deputy Rabbitte

It will be a year or so down the road before we can put a quantum on what we are talking about today.

Mr. Daly

Yes. Our next step will be to finalise the six cases currently under inquiry. We will then move on to the 21 cases where we know people were advised of the scheme but do not know if they took it up. We also want to collate the intelligence from our special compliance districts, some of which are outside Dublin.

Deputy Rabbitte

It appears this has been ongoing for a few years or more. What do you say in reply to the submission in terms of the quantum involved, about the requirement that Revenue might have been expected to pick up on this sooner?

Mr. Daly

The Deputy's question goes back over ground I have already dealt with. I would like to be in a position to tell the committee that Revenue picked up on it. With Deputy Perry's advice, we identified a scheme where we felt something was wrong and picked up on it. The reality is that people will not, in most cases, bring this information to Revenue's attention. We depend on people to bring such matters to our attention.

Deputy Rabbitte

In the case of a large developer who is required to make VAT returns and so on, is the paperwork not of such an order that it might lead the vigilant scrutineer to the conclusion that there is a great deal of VAT-exempt activity taking place in a big development?

Mr. Daly

Like everybody else, developers and builders are involved in the self-assessment scheme. They pay quite a lot of tax, including VAT. Perhaps we need to be more incisive in examining such returns. The construction industry is highly specialist. What we have done is created our own unit to mirror that area and it is hoped that the unit will become expert in the practices and procedures, acceptable and unacceptable, of the construction industry.

Deputy Rabbitte

What are the broad headings in terms of the €922 million recovered?

Mr. Daly

These are the so-called legacy cases. The NIBCMI scheme stands at €48.5 million; Ansbacher, €26 million; the Moriarty tribunal, €6.3 million; and the Mahon tribunal, €17.6 million. The figures for the tribunals do not include moneys paid to the Criminal Assets Bureau, which is a mutli-agency operation that includes nine people from Revenue who are expert in the area of tax and customs and excise. The figure for the offshore assets group is €126 million and the figure for DIRT and BNR is €697 million.

Deputy Rabbitte

On the figure for DIRT, is Mr. Daly saying that in so far as he can judge at this stage, even though it is not complete the investigation into the particular bank mentioned on the last occasion does not have any adverse implications for the look-back audit in the financial institutions generally?

Mr. Daly

Yes. I am quite sure of that. We have examined the correlation between what we determined from the look-back audits in terms of the subsequent High Court orders and what we received by way of voluntary disclosure in the pre-November incentive scheme and subsequent to it. We have no indication of problems. It is difficult to match voluntary disclosures with what we found in the look-back audit. We have no indication of difficulties arising.

Deputy Rabbitte

Did the Comptroller and Auditor General's report not state that about six of the actual accounts audited had subsequently been borne out to have had a DIRT liability and were given a clean bill of health at the time? Is it possible to explain to the committee how that could have happened?

Mr. Daly

Five people who made voluntary disclosures were examined during the course of the look-back audit. The question is how did we miss them during that process. Auditors were examining a great deal of accounts during that time. They queried one of the five people whose declaration was faulty. Even though the person concerned came to us by way of voluntary disclosure, he has no liability. The declarations for the remaining four people appeared to be in order and one of them may have no liability. Three of them have liability. They have paid, in the scheme of things, relatively small amounts. One has paid €9,900, the second has paid €1,300 and the third has paid €1,083.

There was no evidence of authenticity problems when the auditors examined the accounts. I referred earlier to the rather unique circumstances of the institution concerned. Members will remember that on the last occasion I explained that there was very little back-up documentation or records available to our auditors in that institution. At the end of the day, that is probably the only explanation for the problem.

Deputy Rabbitte

What does Mr. Daly have to say in reply to recent public comment from people who say they were operating on behalf of gullible citizens who were induced into this practice by hard sell by financial institutions?

Mr. Daly

It may be useful to summarise what has happened in terms of the DIRT inquiry. The first thing Revenue did following the inquiry was to conduct look-back audits of 37 institutions. Our purpose was to recover DIRT underpaid together with interest and penalties. We did so in 1999-2000 and reported back to the Committee of Public Accounts in October 2000. We collected €221 million. All DIRT liability due on the accounts was paid by the banks. They were not particularly happy about paying it. It was their view that it should have been deducted from the interest credited to the account holders. They paid the DIRT and as far as we are concerned, are finished with DIRT. We are not seeking to collect DIRT from account holders.

The second phase, as mandated by the Committee of Public Accounts, was to collect the tax, interest and penalties from the account holders and to collect it on undeclared income and profits stored away in the accounts. It was put away by account holders. They say they got advice from time to time. The decision as to whether to put money in a particular account is that of the account holder.

We have taken action in two phases. We had the incentive scheme until November 2001, the heaviest publicised scheme ever in the history of Revenue, and we are now following through on those who did not avail of that scheme. That is where the other money is coming from. We are not chasing DIRT in those cases because the banks paid that. What we are chasing, quite properly, is the tax, interest and penalties on the income and the profits that were hidden in the accounts by the account holders. I do not want to sit in judgment as to whether it was the banks or the account holders who were to blame. Ultimately, it is the responsibility of the people who put the money in an account, wherever it is.

Deputy Rabbitte

The second figure is €500,000 from the NIB affair. Is that matter closed now?

Mr. Daly

It is not. I have the figures. A total of 452 cases were involved in that scheme, of which 284 were settled with liabilities and 110 with no liabilities. We have collected €48.5 million. If my figures are right, 62 cases remain to be finalised, six of which will have little liability. Three cases have been prosecuted, in two of which the defendants pleaded guilty. Fines were imposed in both cases. In the third case the defendant pleaded guilty and received a suspended sentence. One other case is under investigation at the moment for prosecution.

Deputy Rabbitte

Is the Ansbacher matter finished?

Mr. Daly

No, it is not. The Ansbacher issue is a more complex operation and we have quite a way to go on it. Some 55 cases have been settled and another 40 to 50 cases are in the pipeline for settlement. It is a slow process. We are continually challenged in these cases and have to fight off those challenges. As I said before, we are determined to stick with the matter and pursue it to the bitter end. Of our legacy of investigations, it is the one that may take more time than others. However, we will not walk away from it.

Deputy Rabbitte

In terms of the offshore assets group, the 1,200 figure for voluntary disclosures seems alarmingly high in the case of Irish Life Permanent.

Mr. Daly

It is. I do not want to get into extrapolation or the like but when we see figures like that, they explain the reason we took this initiative with the banks and the reason we are determined to conduct a major investigation into the use of offshore accounts in the Isle of Man, the Cayman Islands, Jersey or elsewhere. I do not know what moneys lie behind those figures.

The other figure we have is the 200 odd accounts from the Bank of Ireland Jersey Trust. I estimate that the Irish Life Permanent operation may involve more accounts but less money, as a result of the nature of the business done there. It will be our next investigation. Our approach is to try at some stage - I do not want to preach about this - for the sake of the country to put all this behind us once and for all. We want to get beyond Ansbacher, NIB, bogus accounts and offshore accounts.

Deputy Rabbitte

Does the Revenue correlate these discoveries with people who might have availed of one or other of the amnesties?

Mr. Daly

We do. When we get a voluntary disclosure we check it against the amnesty position. There is a Chinese wall between Revenue and the chief special collector, as he was called in the amnesty legislation. That wall is extremely difficult to breach and can only be breached on a case by case basis, if we have reason to believe that an amnesty declaration was deficient.

Deputy Rabbitte

Has there ever been a prosecution or a breach in that wall?

Mr. Daly

There has not been a prosecution by Revenue. The Deputy will be aware of other recent developments.

Deputy Rabbitte

Thank you, Mr. Daly.

Chairman

I am delighted to hear the banks are co-operating fully. How long will the inquiry take?

Mr. Daly

I hope to finish discussions with the chief executive officers of the banks within the next couple of weeks. Then I will probably need to meet or talk to them again when I have the collective view. I do not see an extended period before we commence this investigation. It will probably be in the first two or three months of 2004. I am still in discussion with the banks but we intend starting an investigation.

We want to remind people of the voluntary disclosure arrangements available to everybody. We also want as many people as possible to come to us under this provision and to realise that if they do not we will go after them on the basis of our powers, including access to information via High Court order. Our model is the bogus non-resident account model where approximately 8,000 accounts came in under the incentive voluntary disclosure scheme. I am sure most of those who did not now regret that. The same message will go out to people with offshore accounts. There will be a limited period for voluntary disclosure. This standard information is available to anybody. After that period, if there has been no voluntary disclosure we will pursue people every way we can.

Chairman

Revenue should brief this committee when discussions conclude.

Deputy Curran

I do not intend to dwell too long on the offshore accounts issue but would like further information on the 1,200 disclosures mentioned by Deputy Rabbitte. Has Revenue any idea of how much is due to the State or has the matter been examined?

Mr. Daly

I cannot give the Deputy a figure because the nature of the voluntary disclosure arrangement is that people must come in to us before a certain date and formally tell us that they will make a voluntary disclosure. They then get 60 days to do their calculations and computations and to pay the tax, interest and penalties. I do not have a figure because when they come in to tell us they are going to make a disclosure we do not get figures from them. I will not have a figure until late February or early March.

Deputy Curran

I want to go back to the issue of VAT avoidance regarding property. Is it correct that one organisation appears to owe approximately €18 million to the State, six organisations are under investigation and 21 more are to be investigated?

Mr. Daly

The one mentioned is included in the six so there are five under investigation.

Deputy Curran

Are 21 other companies to be investigated?

Mr. Daly

They will be investigated to see if they used the scheme.

Deputy Curran

Did the liability of €18 million accrue in a particular year or over a number of years?

Mr. Daly

I do not have that information but I will get it for the Deputy.

Deputy Curran

That figure would indicate a substantial level of business by the development company. I am curious as to when that company last had an audit. Does Mr. Daly have that information?

Mr. Daly

I do not have that information. Looking at the name of the company, it is quite likely that this operation extended over a number of years. I do not have information to hand on when the company was last audited but I can supply it.

Deputy Curran

The Revenue is obviously examining other clients whom the agent or accountant for that company may have. Would that agent or accountant have been audited?

Mr. Daly

They could have been in the normal scheme of things. Even in a normal audit of an accountancy firm or an accountant, it is highly unlikely we would come across the details of a scheme like this. The most you might hope to see in an audit would be something such as an invoice that would trigger a pathway to this. I mentioned the 21 cases, and that information, as far as I am aware, came to our attention because of an audit carried out on that particular tax adviser. I do not know where it was in the books or how our auditors identified it but they did and it was a success. Indeed, I would say it was a nice piece of auditing.

Deputy Curran

Was the tax adviser to the 21 the same tax adviser to the company that now owes €18 million?

Mr. Daly

I think so, yes, but I am not absolutely sure. As far as we are aware, there were only two tax advisers or two firms which were marketing this particular variety of scheme. I cannot be absolutely sure that it was the same person who dealt with the 21 cases and the one, but I think, judging by the brief I have here, it probably was.

Deputy Curran

Even if the development company, the developer, had been audited, the Revenue may not have spotted this. Is that correct?

Mr. Daly

It would probably depend on the nature of the audit. We will be discussing the nature of audits later. There are different types of audits such as comprehensive, verification and VAT audits, so it could well depend on the degree to which we had decided or the type of audit we had decided to carry on.

It is back to the question asked earlier about looking at returns in the broad context of the volume and type of business. The Deputy can be assured that in any future audits - some will arise directly as a result of this - we will not go in hoping to come across something like this but we will actively look for something like this.

Deputy Curran

I want to turn to the area of audits and the random audit in particular. The random audit is, I suppose, not random in that there are criteria in the selection of the group of companies. I said this to Mr. Daly last year, that a truly random audit would be useful. At the moment our tax situation is based on compliance.

Chairman

I am hoping to conclude on chapters 2.1 to 2.6.

Deputy Curran

I thought we had more or less covered chapters 2.1 to 2.6.

Deputy J. Higgins

Mr. Daly mentioned a global figure of €922 million which has been gathered to date and which includes penalties and interest. Has he an approximate figure as to the amount, less the penalties and extras, of tax evaded?

Mr. Daly

I do not have an actual breakdown. The amount of interest is a major factor so it depends on how far back in history the evasion goes. In terms of bogus accounts, for example, people generally are paying the Revenue about three to three and a half times the actual tax involved because of the interest and penalties. It would be fair to say that the tax element is between one half and one third.

The Deputy may remember the incentive scheme which ceased in November 2001 for the bogus accounts. A cap of 100% of the tax was applied so the interest and penalties could not exceed 100% of the tax amount. In general, the type of settlement we are conducting at present where there is no cap is such that people are paying three or three and a half times the tax amount.

Deputy J. Higgins

The amount of tax could have been between €400 million and €500 million out of the €922 million?

Mr. Daly

I think that would be the outer limit.

Deputy J. Higgins

It was substantial in any case. As far as the financial institutions, such as banks, are concerned, what steps have been taken by Revenue to ascertain who or what structures within the banks were used to organise the tax scams?

Mr. Daly

In relation to DIRT which was really the one case where this question emerged, I would have to refer back to the approach taken that was reported back to this committee in October 2000. When Revenue was enjoined to collect DIRT from the banks, we had two options in that approach; we could go down the road of seeking to obtain prosecutions against the banks, in other words, the investigation route, or we could get the money including the interest and the penalties. We were enjoined to do all this in a pragmatic way.

The problem with going into banks or institutions and taking the prosecutorial route is that the shutters come down immediately, the legal advisers come in and the challenges emerge every step of the way. We were investigating events that had taken place going back to the early 1980s. It was a situation where for the Revenue to sustain any prosecution or any penalty on banks or bank officials, we would have required the support and the evidence of individual account holders. We took the view at the time and reported back to the committee that we took the route of going for tax, interest and penalties which were substantial penalties.

During the DIRT inquiry in 1999, the Public Accounts Committee had extensive dialogue and debate and questioning of the banks with regard to their role in that affair. I will repeat what I said to the last committee. Revenue is quite interested in tackling banks or other intermediaries in future, whether they be accountants, advisers or financial institutions where there is evidence of aiding and abetting tax evasion. I am being business-like about this in that our chances of doing that successfully are much more likely in a current investigation rather than one that is grounded in events of ten or 15 years ago.

Deputy J. Higgins

Did it ever occur to the Revenue or did you discuss whether the Garda fraud squad should be involved in investigations into the genesis of some of these major tax evasion schemes by the banks?

Mr. Daly

There are evasion schemes which we refer to the Garda and we are now involved in the Criminal Assets Bureau which is in a position to take a much more robust approach. The bogus accounts and DIRT issue were dealt with by Revenue and, rightly or wrongly, that was the approach we took, to recover the money with substantial interest and substantial penalties.

Deputy J. Higgins

Hundreds of millions of euro worth of taxes were stolen from the fund by what was obviously an organised racket which must have been organised at the highest levels of the financial institutions. In September and October of this year, compliant taxpayers and contributory pensioners were on a campaign of protest against stealth taxes, particularly bin tax. What seemed like half the Garda force in Dublin was mobilised against them, as was the Judiciary, with the result that 22 of those people found themselves locked up in Mountjoy and other prisons. Mr. Daly has now informed this meeting that, by contrast to that situation, in the case of the major banks which organised this massive tax evasion racket, not even the foot of a single garda has sunk into the plush carpets of the top boardrooms of those banks, although they have carried out what has to be one of the most organised rackets of theft from a social fund that not alone this country but the EU has ever seen.

Despite that situation, the response of the Revenue Commissioners was simply to invite ten chief executive officers for a polite conversation. Is it any wonder the ordinary taxpaying public, especially the PAYE people who represent the bulk of the taxpaying system, feel so cynical about the treatment of different categories of people by the Revenue and other authorities in our State?

Mr. Daly

I cannot get into a discussion on bin charges or anything of that nature and neither, indeed, can I call anybody into my office, or anywhere else, and accuse them of tax evasion or collusion in tax evasion if I do not——

Deputy J. Higgins

When the funds in question were stolen, who organised that?

Mr. Daly

——have evidence of it. Those who put the money in those accounts were the account holders, as I have already said.

Deputy J. Higgins

Who organised it?

Mr. Daly

The facilitation is——

Deputy J. Higgins

It had to be organised at the leading level of the banks. Why would they not investigate it? Why did the Revenue Commissioners not investigate which board members and structures organised this evasion?

Chairman

Mr. Daly has said he is dealing effectively with the banks. I believe what has happened——

Deputy J. Higgins

Ten chief executive officers were invited in for a polite conversation. I want to know why the Garda was not involved.

Chairman

We had a presentation of a very detailed analysis to this committee on the consultations with the banks.

Deputy J. Higgins

Why has the Garda not been involved in what should be a criminal investigation into the theft of €4 million to €5 million from the social fund?

Mr Daly

I wish to comment on that, Chairman. The account holders were ultimately the people responsible in this regard. I cannot accuse anybody of collusion in tax evasion unless I have evidence. It would be improper of me to do so. I cannot do that with the chief executive officers of banks, nor with anybody else. The involvement of the banks in this whole affair was very well aired in this committee for a long time. Revenue has never been in a position to accumulate evidence of collusion in tax evasion by the banks. I cannot accuse people of that if I do not have evidence.

Deputy J. Higgins

The Garda has not even been sent in to investigate whether there is evidence.

Mr. Daly

I must point out to the Deputy that I cannot send in the Garda anywhere.

Deputy J. Higgins

How did it happen that in virtually every branch of some leading banks, the same methods were used for tax evasion? Did the Holy Spirit descend on every bank manager on the same day of the same month of a particular year and inspire this?

Mr. Daly

The Deputy is going over ground which was covered extensively in the inquiry by the Committee of Public Accounts, when the role of the banks in this whole affair was investigated. I have no further evidence in that regard, beyond what emerged during that inquiry. Revenue is responsible for its own investigations, whether designed to recover moneys, with civil penalties attached, or to prosecute people. I repeat that if in current investigations we come across evidence - it has to be evidence - of collusion or aiding and abetting by advisers, banks or whatever, we will not hesitate to prosecute. However, I really see little use, at this stage, in going back over the ground of the bogus non-resident accounts and the involvement of the banks. We reported to this committee in 2000 on how we dealt with the banks with regard to the €220 million, approximately, which we had recovered from the banks and which, indeed, the banks believe was not their responsibility to pay, but they paid it. That is our position.

Chairman

We have had clarification from Mr. Daly that payment has been made in respect of DIRT. The level of capital investment——

Deputy J. Higgins

I must point out that referring me back to matters covered at previous meetings of the Committee of Public Accounts does not resolve the question.

Chairman

I must defend the Chairman of the Revenue Commissioners. He has informed the committee that he has had consultation with ten chief executives, that he will come back to this committee when those consultations conclude and that any defaulters will be prosecuted.

Deputy J. Higgins

I will expect to be informed at that stage as to who organised the scams at boardroom level and what action will be taken in that regard. If small-time individuals organised even a minuscule fraction of this, they would be called to book - that is certain.

Chairman

Mr. Daly has indicated that the banks are now co-operating and I regard that as very reassuring.

Deputy Noonan

May I move on to the next topic, Chairman?

Chairman

I wish to complete chapters 2.1 to 2.6 first.

Deputy Noonan

I have just one question on 2.1 to 2.6 concerning the VAT issue which was closed off on budget night. Is there any evidence that a disproportionate amount of the cost of houses was attributed to the sites? Has Mr. Daly had a look at that?

Mr. Daly

No, I do not have any evidence of that. It may be that, during analysis of these cases, this will emerge. However, we have not specifically looked at that.

Deputy Noonan

I wish to comment on the remaining chapters when we come to them.

Chairman

We will move on. I invite Mr. Purcell to introduce chapter 2.9, following which we will revert to chapters 2.7 and 2.8. Chapter 2.9 of the Report of the Comptroller and Auditor General reads:

Random Audit

Background

Self-Assessment

Since 1988, Revenue has increasingly used systems of self-assessment as a means of administering the various taxes and duties. In essence, such a system places the onus on taxpayers to file returns and pay taxes correctly and on time without any prompting from Revenue. The corollary of this from Revenues point of view is that returns are processed and assessments made on a non-judgmental basis. While it is a feature of a self-assessment system that the majority of returns are accepted by Revenue with limited or no checking being carried out, a key control in such a system is the detailed checking of selected returns by means of Revenue audits. Revenues programme of audits of selected taxpayers is central to its efforts to deter tax evasion and maximise compliance with tax law.

Revenue audits in relation to income tax, corporation tax, capital gains tax and value added tax can range from desk checking specific aspects of a tax return to comprehensive audits where all aspects of tax returns for all taxes are examined during a visit to the taxpayers premises. The length of time taken to complete the audit depends both on the type of audit carried out and the nature and size of the taxpayers business. Table 2.11 sets out, for each of the last five years, the number and type of audits completed under Revenues main audit programme. Audit activity in a year is not confined to audits completed. At any point in time a large number of audits are at varying stages of the audit process. In addition to audits under the main audit programme, audits are also carried out as a result of special investigations, anti avoidance schemes and in relation to other taxes and duties such as Capital Acquisitions Tax and Customs and Excise.

Table 2.11 Audits Completed 1998 to 2002

Number of Audits Completed

	2002	2001	2000	1999	1998
Comprehensive	2,424	2,200	2,270	2,512	2,844
VAT	4,300	4,223	4,409	5,101	6,886
PAYE Employees	862	1,443	2,104	2,768	2,824
RCT	169	383	352	384	261
Combined Fiduciary	582	626	670	892	35
Verification	7,594	7,107	6,126	5,248	4,314
Total	15,931	15,982	15,931	16,905	17,864

Principles and Code of Practice

Revenues audit programme is an important part of its strategy for deterring and detecting evasion and maximising compliance with tax laws. The principles underpinning the conduct of Revenue audits are set out in the "Code of Practice for Revenue Auditors", a revised version of which was published in August 2002. The revised Code defines a Revenue audit as an examination of:

A return of Income Tax (including DIRT and other fiduciary taxes), Corporation Tax, Capital Gains Tax or Capital Acquisitions Tax (either in whole or in part)

A declaration of liability or a repayment claim, for VAT, PAYE/PRSI or Relevant Contracts Tax

A statement of liability to Stamp Duties.

It may also include an examination of an individuals or a companys books, records and tax obligations so as to establish the correct level of liability, and collect arrears of tax. The Code guides Revenue auditors on how audits should be conducted. It outlines taxpayers rights and addresses issues such as location of audits, access to taxpayers records, periods to be audited, review procedures, audit settlements, penalties and disclosures by the taxpayer.

Objectives and Scope of this Audit

The majority of audits are selected from cases with identified tax at risk. A proportion of audits are, however, selected at random each year. The objective of this examination was to review Revenue's programme of random audits. It specifically set out to

Establish the objectives set for the random audit programme and their measurement, monitoring and achievement

Establish the extent to which the results from random audits can be used to assess the level of compliance in the tax system generally

Examine Revenues approach to random audits including selection, process, finalisation and review of audits.

Documentation was reviewed and discussions were held with the Audit Policy Branch of the Operations Policy and Evaluation Division. The database of completed audits maintained by that Branch was also examined. Discussions were held with Statistics Branch of the Revenue Commissioners on how random audits were selected. The random audit process was examined in three tax districts by means of discussions with District Inspectors, Audit Managers and individual Inspectors as well as examination of a sample of completed audit cases.

Revenue Audit System

General Objectives and Targets

Over the period 2001 to 2003 Revenue sought to develop its audit and investigation program mes by increasing the use of risk analysis techniques. The introduction of a computer based risk assessment and case selection system for audit and investigation was identified as a means of achieving this. Revenues latest Statement of Strategy (2003 - 2005) re-asserts the importance of a risk based audit programme to achieving its goal of maximising compliance with tax legislation.

The overall objective of the audit programme is to ensure maximum compliance with relevant legislation. Revenues annual business plans set targets for the audit programme in terms of the number of audits to be completed and expected yield. Targets compiled by each district underpin these overall targets.

Selection of Cases for Audit

At present, Revenues risk based approach to the selection of audits involves:

Screening of taxpayers returns

Intelligence gathering by each tax district

Knowledge of industry practices affecting tax at risk

Extracting information from Revenue records such as returns compliance and payment patterns

Interaction with other areas of Revenue such as Revenue Mobile Service and Customs Audit Units

Sectoral projects

Cases previously audited.

The Steering Group on the Review of the Office of the Revenue Commissioners (2000) recommended that case selection for audit be based on computerised risk assessment procedures and that all relevant information available to Revenue be fully exploited to inform the selection. In 2001, Revenue sought information by way of a Request for Information (RFI) on how it might develop more sophisticated approaches to risk assessment for selection of cases for audit. The responses to the RFI were reviewed and evaluated and it was decided that tenders should be sought for a rules based solution to risk analysis. In 2002, contractors were appointed to provide such a system for audit and investigation as well as an associated system to support Revenues management information requirements in the area.

The risk analysis software was commissioned in March 2003 and the process of implementing a risk based approach to Revenue audit has commenced. A team is training in the use of the software and is collecting and formalising rules for the system. Tools for selecting cases and for facilitating auditors in managing their caseloads are also in development. It is intended to run a pilot programme in October 2003 but the first major programme will be in the first quarter of 2004 when Income Tax and Corporation Tax risk profiles will be prepared. An important factor in when this risk analysis program is run will be the capture of certain data, such as financial accounts information, from the 2002 tax returns when submitted.

The objective of the risk analysis program is to analyse taxpayers across a number of profiles by applying 'rules' to all data available. Taxpayers will then be scored with regard to their risk to Revenue: i.e. evasion, non-payment, failure to file returns, etc. Revenue sees the benefits of this approach as enabling them:

To highlight cases with most risk

To anticipate cases which are becoming a risk

To target risk cases in a timely fashion

To free resources to tackle evasion by switching to electronic analysis

To demonstrate the fair application of processes across the entire taxpayer base as for the first time all taxpayers will be screened

To minimise contact with the compliant taxpayer by identifying risky cases.

A key part of the process will be the feedback cycle. In its first iteration, the risk analysis system will be driven by rules collected from auditors which will be tested by the rules team and validated by an expert group. However, this is a subjective process. When the profiles generated are used on audit and the results analysed, the rules will be reviewed and re-written or dropped as deemed necessary. While Revenue are reasonably confident that the new system will produce results from commencement, there is a possibility that the full potential of the new system will not be realised until it incorporates any amendments which may be deemed necessary as a result of the testing of the rules in a live environment.

Audit Results

Table 2.11 set out the number of audits completed for the last five years under Revenue's main audit programme. Table 2.12 below shows for the last three years the targets set in Revenue's Business Plans and the actual outturn for audit activity. The average yield and the percentage of audits where the yield is nil are also shown for each category. In each of the last three years, the target yield from audits has been exceeded even though the target number of audits was reached only in 2002. The large increase in the number of verification audits in 2002 and to a lesser extent in 2001 and the very significant yield from those audits is related to a particular focus on taxpayers exercising share options. As can be seen from the table, the comprehensive audit programme seems to be more successful than the other audit programmes in terms of targeting tax at risk. The average yield per comprehensive audit, rising from €30,387 in 2000 to €36,542 in 2002, is considerably higher than the average yield in any of the other audit programmes or the overall average yield for the audit programme as a whole. Also, the percentage of comprehensive audits which produce nil yields (between 34% and 39% over the three years) is lower than for the other audit programmes. The relative success of the comprehensive audit programme is hardly surprising given that the majority of audit resources are devoted to comprehensive audits and that such audits examine all taxes and are therefore more detailed and in general take longer to complete. Nevertheless, Revenue should consider what factors are contributing to the better return from comprehensive audits. Possible factors could include better risk selection procedures, more detailed examination during the audit and greater use of more experienced auditors on such audits. Revenue has stated that the new computerised risk analysis system will focus the audit resources more effectively on cases with more risk and may result in a change in the balance between comprehensive and fiduciary audit programmes.

Table 2.12 Audit Results 2000 to 2002

	Target Number	Actual Number	Target Yield	% with Nil Yield	Actual Yield	AverageActual Yield
2000 Comprehensive	2,587	2,270	€56m	34%	€68m	€30,387
VAT	5,218	4,409	€34m	58%	€m	€7,955
PAYE	2,205	2,104	€14m	63%	€12m	€5,721
RCT	270	352	€5m	49%	€2m	€4,767
Combined Fiduciary	677	670	€2m	50%	€6m	€8,846
Verification	5,543	6,126	€5m	53%	€10m	€1,633
Total	16,500	15,931	€116m		€133m	€8,392
2001 Comprehensive	2,916	2,200	€57m	37%	€74m	€33,792
VAT	4,843	4,223	€32m	55%	€61m	€14,490
PAYE	2,016	1,443	€13m	62%	€10m	€7,138
RCT	429	383	€3m	58%	€3m	€7,726
Combined Fiduciary	917	626	€6m	42%	€12m	€18,834
Verification	5,450	7,107	€11m	51%	€37m	€5,206
Total	16,571	15,982	€122m		€197m	€12,363
2002 Comprehensive	3,000	2,424	€67m	39%	€89m	€36,542
VAT	5,510	4,300	€50m	58%	€61m	€14,207
PAYE	1,248	862	€7m	52%	€6m	€7,320
RCT	560	169	€3m	50%	€2m	€10,296
Combined Fiduciary	901	582	€10m	42%	€10m	€16,993
Verification	3,000	7,594	€14m	51%	€88m	€11,650
Total	14,219	15,931	€151m		€256m	€16,074

In the current programmes it is not considered unusual that the returns from the comprehensive programme exceed the returns from the single taxhead and joint fiduciary programmes, bearing in mind the screening process for the comprehensive programme, the time and resources involved in it and the method of case selection. Revenue has indicated that many cases, particularly in the VAT programme, are selected to check repayment claims. This policy, in particular, will be reviewed when the risk analysis system is operational. Revenue has also pointed out that the extensive training programme for new auditors results in a significant number of single taxhead audits being selected initially for new trainees.

Random Audits

Each year a number of comprehensive, VAT and PAYE/PRSI audits are carried out for cases which have been selected at random from those taxpayers who have submitted returns. The purpose of the random audit programme is to maintain and improve levels of voluntary compliance by giving all taxpayers at least some chance of being selected for audit and to create among the taxpaying public the perception of Revenue as active within all sectors and at all levels of economic activity. Random audits are conducted in the same manner as targeted audits and the principles as set out in the Code of Practice apply equally to random audits.

Selection of Cases

Each year the Statistics Branch of Revenue selects a random sample of cases for possible audit. Generally, a specified number of cases are selected for each Tax District and therefore the selection is not random across the entire taxpayer base but only within each district. This was considered an appropriate method of ensuring that each district partook in the programme. It ensured a wide geographic and sectoral spread of random cases. The central selection of cases ensured that the district had no input into the selection of cases. The cases are selected from those taxpayers who have submitted returns for the most recent tax year. Up to 1998 the random audit programme was applied to comprehensive audits only. The objective was that 2% of comprehensive audits undertaken would be selected at random. In 1998, random audits were extended to the VAT and PAYE/PRSI audits with the 2% target remaining in place. In 1999, the selection criteria were further refined so that only cases where the aggregate income was less than €127,000 were included. The reason stated for this was that larger cases would be subject to regular screening and would be selected for audit if necessary but the exclusion has resulted in the selection being less random.

For 2001, it was decided to increase the number of random audits to 6% of total audits which would mean about 1,000 audits would be selected randomly. As random selection up to 2001 had produced many very low income cases due to the high number of such registered taxpayers, it was decided to select cases using parameters for income levels. These parameters were set to make more effective use of the skilled audit resources available. The selection criteria for 2001 were therefore:

For Corporation Tax, 20 cases were selected for each district from those companies who were showing profits on their latest tax return

For Income Tax

20 cases for each district where income did not exceed €25,395

20 cases for each district where income was greater than €25,395 but less than €1.27m

20 cases for proprietary directors

For PAYE/PRSI, 10 cases per district

For VAT, 10 cases per district.

For each year, the Audit Policy Branch of the Operations Policy and Evaluation Division allocates cases to districts from those selected by the Statistics Branch using the current criteria in order to achieve the desired number of audits. For 2002, cases allocated to each district were to be screened by the district and the tax at risk under each taxhead identified. One half of the cases were to be audited on the basis for which they were selected and the other half were to be audited on the basis of perceived tax at risk from the screening process i.e. if the screening of the tax at risk of a case selected for comprehensive audit indicated that VAT was the tax at risk then a VAT audit would be carried out rather than a comprehensive audit.

The policy of selecting cases based on income levels has not been repeated for 2003. Instead a specific number of cases were selected at random for each District (1,000 nationally) and these were to be thoroughly screened by each district. The intention was that as a result of the screening a total of 500 cases would be selected for audit (250 for comprehensive audit and 250 for fiduciary taxes audits). The objective was that the screening would reduce the number that were producing a nil yield thereby reducing the amount of unproductive work for Revenue and the associated cost to the taxpayer. These were some of the concerns that district managers and Revenue staff associations had expressed in relation to random audits. A further consideration was the necessity to free up resources to deal with the DIRT Bogus Non Resident programme. The effect of this will also be to reduce the level of random audits to approximately 3% of all audits. These amendments to the selection of random audits each year indicate that Revenue are reviewing and adjusting the programme. However, with each adjustment the selection moves further away from being random. The focus has shifted from selecting cases at random to ensuring that the random audit programme produces a yield. If the purpose of random audits is to create the prospect that any taxpayer can be audited then any system other than pure random selection will not achieve this objective. The resultant yield should not be important in deciding which cases to audit. In the absence of a random audit programme based on pure random selection it is difficult to see how an indication of the overall level of compliance among taxpayers can be obtained. Revenue has stated that the random audit programme was not designed to measure, in a statistical sense, general levels of compliance among taxpayers. Revenue also stated that the selection criteria had changed in recent years, and that it could be argued that in 2003 an attempt was being made to revert to initial random selection with a screening process kicking in after the random selection. Revenue is conscious of the limited audit resources available and considers that damage can be done to the credibility of the audit programme (both externally and internally) if Revenue is seen to be auditing large numbers of small businesses with little yield. Revenue indicated that the random audit programme will be reviewed during 2003 and one of the issues which will arise is the question of whether the programme can be used as a measure of the general level of tax compliance. If this is accepted it will mean changes in how the programme is conducted.

Random Audit Process

Audits carried out under the random audit programme are no different from audits based on targeted selection. The Revenue auditors carry out the audits in accordance with the relevant legislation and the Code of Practice. As part of this examination the audit files for a sample of 40 completed audits were examined - 28 random audits (carried out under the old Code of Practice) and 12 targeted audits (carried out under the revised Code) - and issues arising are noted below.

In two of the audits examined there were considerable delays by the taxpayers or their agent in supplying information required to finalise the audit. These audits were not finalised until 13 months and 21 months after the notice of audit was issued. The option of reducing the mitigation of penalties for lack of co-operation was not considered. Revenue stated that in the first case the auditor considered that there had been no attempt to obstruct or hold up completion of a complicated audit, while in the second a reason proffered for the lack of cooperation was accepted as genuine.

The Code states that auditors require payment of all unpaid tax on record as well as the amount due under the audit settlement. In one of the cases examined the taxpayer paid the audit settlement but was unable to pay the other arrears on record. The taxpayer was instructed to enter into an instalment arrangement with the Collector General but this was not done and the arrears are still outstanding. Revenue has indicated that arrangements are now being made to set up an instalment arrangement in this case to ensure that the arrears are collected.

Under the new Code where a taxpayer makes a full disclosure accompanied by payment - a qualifying disclosure - there is significant mitigation of penalties. For a disclosure to be a qualifying disclosure it must be in writing, state the full liability for tax, interest and penalties and be accompanied by payment of the total liability. In two of the cases examined where settlements totalled €20,000, the disclosures were treated as qualifying disclosures but did not seem to satisfy the criteria. Disclosures were deficient because they were not accompanied by payment and they did not include calculation of interest and penalties. Revenue has pointed out that there is a learning curve for auditors due to the significant changes in the Code of Practice.

In one case, the auditor did not open for audit, periods other than those being audited even though the audit findings indicated that earlier periods merited review. The auditor noted that the taxpayer would not have had the resources to pay any liability arising. Revenue indicated that the absence of any unexplained build up of assets and the time required for an extended audit were also factors in the decision.

In cases where earlier periods are not opened, any liability is not computed and put on record. This effectively means that tax is being written off without going through Revenues write off procedures. Revenue has stated that as it was decided not to open earlier years, there was no question of computing a liability and putting it on record. The opening of earlier periods in audit cases would not necessarily lead to increased tax liabilities for those periods.

Under the Value Added Tax Act there is a fixed amount penalty for failure to register and for non-submission of returns. In one case examined, the taxpayer was not registered for VAT for a year in which he should have been. The auditor assessed the liability to VAT in the relevant year as €15,237 but the only penalty that could be charged was the fixed sum of €1,523. This seems relatively lenient when compared with a taxpayer who understated his return where the penalty could be as much as 100% of the amount of the understatement. This issue has been addressed in the Finance Act, 2003 which provides for tax geared penalties for failure to file VAT returns.

Results of Random Audits

The total number of random audits completed in each of the last five years is shown in Table 2.13 together with the total yield each year and the average yield per random audit completed. The increase in the number of random audits completed since 1998 can be seen from the figures in the table. Although, 20 less audits were completed in 2002 than in 2001, the total of 720 completed is still significantly higher than in earlier years. The target of completing 1,000 random audits, introduced in 2001, has not been achieved to date. The average yield has increased significantly in recent years from €771 per audit in 1999 to a high of €4,570 per audit in 2001. The significant increase in average yield in 2001 and 2002 over earlier years could be due to the selection of cases from within specified income bands thus reducing the number of lower income cases selected. The system of screening of audits in 2002 prior to deciding what type of audit to carry out did not result in an increase in the average yield, which has fallen in 2002 compared to 2001, or in a change in the percentage of nil yielding audits. However, it should be borne in mind that more than one third of random audits completed in 2002 were selected under the programme for earlier years. As was seen in Table 2.12, around 50% of targeted audits produce no yield. Table 2.13 shows that between 68-70% of random audits have nil yields. The difference in the proportion of nil yields between targeted and random audits is not as large as might be expected. Revenue is confident that if the cases were selected totally at random the average yield would be reduced and the number of nil yields would significantly increase.

Table 2.13 Random Audit Results 1998 to 2002

	Total Number of Audits	Nil	Yielding	Total Yield €	Average Yield Including Interest and Penalties €	Average Yield Tax Only €
1988	243	182(75%)	61	219,086	902	728
1999	192	151(79%)	41	147,975	771	577
2000	437	342(78%)	95	626,564	1,434	1,127
2001	740	510(69%)	230	3,381,890	4,570	3,174
2002	720	491(68%)	229	2,879,121	3,999	2,879

The average yield figures shown in Table 2.13 are based on the total number of random audits completed - both those that yield additional taxes and those that don't. The increase in the average yield is more dramatic if the average yield for each random audit where underpayments are found is calculated. This is represented in Figure 1 and shows an increase from €3,592 in 1998 to €14,704 in 2001 reducing to €12,573 in 2002.

Figure 1 Average Yield per Yielding Random Audit 1998 to 2002

	1998	1999	2000	2001	2002
€16,000
€14,000				€14,704
€12,000					€12,573
€10,000
€8,000
€6,000			€6,595
€4,000	£3,592
€2,000		€3,609

An analysis of the annual results of the random audit programme would be expected to provide a means of assessing the overall level of compliance by taxpayers that had submitted returns i.e. the extent to which reliance can be placed on the self assessment of tax liability. Key performance indicators might be: the % of audits with no yield (returns accepted as originally submitted), the average tax yield in other cases (the extent to which taxpayers are under-declaring tax due), and an estimate of the possible total tax underpayment in relation to returns submitted. However the possibility of deriving an accurate extrapolation from recent programme results has been damaged by the ongoing changes to the methods of selection. Such changes were made by Revenue in an effort to maximise yield from this relatively minor component of the overall audit programme.

Table 2.14 attempts to show how such an extrapolation might be done. It also notes the yield-focused refinements introduced by Revenue in recent years which have moved the process further away from simple random statistical selection.

Table 2.14 Attempted Extrapolation of 'Random' Audit Results 1998 to 2002

Year	Average Yield per Audit (Tax Only)	Total Returns	Possible Tax Underpayment Indicated	Refinements which may distort Statistical Results
1998	€728	340,000	€248m-	Random Audits Extended to VAT and PAYE/PRSI
1999	€577	349,635	€202m-	Only cases with aggregate income <€127,000 included
2000	€1,127	360,323	€406m
2001	€3,174	367,395	€1,166m-	No. of audits increased, and income parameters introduced
2002	£2,879	400,407	€1,153m-	Screening at district level, to focus on tax at risk

However, it is clear that the availability and application of statistically sound data would provide a realistic and significant indication of the performance of the self-assessment system. Revenue has pointed out that the current random audit programme was not designed to measure, in a statistical sense, general levels of compliance and non-compliance among taxpayers, and it would have difficulties with any extrapolation exercise based on programme results. A review of the random audit programme was under way and these issues would be taken on board in that review.

Review and Quality Control

It is the responsibility of each auditor to agree the amount of the audit settlement with the taxpayer/agent. All settlements require further approval and in this regard the District Manager or Audit Manager can approve settlements up to €50,000. An Assistant Secretary may approve settlements up to €100,000 and any amounts over that require the approval of a Revenue Commissioner. A short one page report setting out the results of the audit and the details of the settlement forms the basis for these approvals. Audit files are not reviewed in each case. Consideration should be given to including on the audit unit report the category of penalty which has been applied in each case. Revenue has indicated that this is being provided for in the audit case management system which is being updated. Such information could provide a useful insight into trends in compliance by different taxpayers or classes of taxpayers and could feed into Revenues risk selection system. Revenue ensures quality control in the conduct of audits by the requirement that 5% of audits are reviewed within the district and 25 are reviewed each year by the relevant Regional Director.

One of the aims of the audit programme is to ensure that as a result of the audit the taxpayer becomes compliant in the future. Revenue seeks to assess this by re-auditing a number of cases. The re-audit programme is not of course confined to random audits but includes all audits which yielded €6,349 or more. These cases are then reviewed four years after the original audit and the aim is to re-audit 10% of such cases based on the districts' assessment of the tax at risk. Summary results of re-audits for 1999, 2000 and 2001 are in Table 2.15 below. These results would appear to indicate that up to one half of taxpayers may remain non-compliant following an audit. It should be borne in mind that the selection of cases for re-audit is subject to some risk assessment so that possible non-compliance is identified prior to the re-audit. Nevertheless, with more than one fifth of these audits yielding more than on the original audit, the success of audit as a means of ensuring long-term compliance needs to be assessed. This significant level of taxpayers who remain non-compliant even after an audit may also be an indication that the penalties imposed did not act as a deterrent. Revenue has stated that in addition to monitoring the compliance records of previously audited taxpayers, an important aspect of the re-audit programme is also to ensure that taxpayers are aware that Revenue has not gone away just because the audit is finalised.

Table 2.15 Re-Audit Programme Results

	1999	2000	2001
Number re-audited	226	194	118
Nil Yield	86(38%)	79(41%)	51(43%)
Yielding	140(62%)	115(59%)	67(57%)
Lower yield on re-audit	89(39%)	75(39%)	n.a.
Higher yield on re-audit	51%(23%)	40(20%)	n.a.
Original Yield	€8,291,743	€7,468,587	€3,466,700
Yield from re-audit	€4,926,565	€3,459,220	€1,678,644
Re-audit yield as of original	59%	46%	48%
Average original yield	€36,689	€38,498	€29,379
Average re-audit yield	€21,799	€17,831	€14,226

Conclusions

The Audit Programme is a key component of Revenues policy of deterring evasion and maximising compliance with tax law. The programme is targeted at areas of perceived revenue risk. Nearly 16,000 audits were completed during 2002 with a total yield of €256m. In approximately one half of these cases, the taxpayers return was accepted as submitted. The total number of audits included 720 which were selected under a Random Audit Programme which is intended to improve compliance by giving every taxpayer a chance of audit selection, and to indicate that Revenue was active within all sectors and levels of economic activity. The random audits yielded €2.9m including interest and penalties, while returns were accepted as submitted in two thirds of the cases reviewed.

While an average tax yield per audit of €2,879 for the 2002 Random Audit Programme may appear on extrapolation to indicate a potential overall tax yield of about €1,000m, such a conclusion is not sustainable at this stage as the final case selection is not made on a purely random basis. Under the current approach there are distortions arising from the exclusion of high value cases which are already subject to a screening programme, adjustments to ensure a geographical spread, and efforts to increase yield by a focus on higher income bands and indications of risk.

While the increasing yield from the overall Audit Programme (2000 €133m, 2001 €197m, 2002 €256m) is no doubt welcome from a collection viewpoint, it must also give rise to some concern as an indicator of the extent to which tax returns may be understated and of the extent of the overall tax shortfall to the Exchequer without giving any clear picture of the level of overall non-compliance. That key management information, which would allow benchmarking of the impact of compliance initiatives and of the overall Audit Programme, would be provided by the random audit segment of the programme if cases were selected and examined from each years returns on a purely random basis. Any reduction in random audit yield would have little impact on the overall yield from the Audit Programme (random audit provided only 1% of the total yield in 2002). A possible preponderance of small cases would underline the current objective of the universality of audit check. Equally, it is not unknown for sizeable tax evaders to submit minimal level income returns. In response to this report, Revenue has stated that the use of the random audit programme as a measure of the general level of tax compliance will be examined during 2003.

The results of the re-audit programme of taxpayers that had significant liabilities on the original audit four years previously may indicate a requirement for an ongoing monitoring procedure of such cases during the years immediately following the original audit. The number of taxpayers that remain non-compliant would also appear to indicate that the original Revenue audit and settlement did not provide sufficient deterrence to make future non-compliance an unattractive proposition.

Mr. Purcell

Chapter 2.9 reviews the Revenue audit programme, with particular emphasis on the random audit element of the programme. The audit programme is a key component of Revenue strategy of deterring evasion and ensuring compliance. It is targeted at areas of perceived risk and a selection process is currently being developed to a more sophisticated level, using risk assessment software. This is a welcome development.

The audit programme has been increasingly successful in terms of its annual yield, with the yield in 2002 amounting to €256 million, which is nearly double the yield in 2000, from the same number of audits. The increase was attributable, in large measure, to verification audits, which brought in €88 million, mainly as a result of targeting taxpayers exercising share options. As I pointed out on a number of occasions, random audit is a small but very important part of the overall audit programme, even though, in yield terms, it only brought in €2.9 million in 2002 from 720 audits.

The committee will note that the basis on which these cases are selected could not be described as random in a statistical sense and, therefore, the results are of little use in attempting to extrapolate the extent to which self-assessed returns understate true liability. Revenue's policy of selecting cases for random audit has changed from year to year. It now involves screening cases to reduce the number producing a nil yield, thereby limiting the amount of unproductive work for Revenue and the associated cost to compliant taxpayers.

From an administrative efficiency point of view, this is laudable. However, there may be a more important consideration to be taken into account. I am considering random audit as a means of giving Revenue a handle on the extent of overall non-compliance and the cost thereof. Such an indicator would be a valuable performance measure and could form a key input to Revenue's counter measure strategy. I am glad to note that Revenue is examining the possible use of the random audit programme for this purpose.

Turning once again to the overall audit programme, I note that Revenue went back and re-audited a number of taxpayers four years after the original audit had taken place. The results are set out in the table on page 30. The committee will note that over half of those re-audited had, once again, understated their liabilities. This may suggest that the penalties imposed after the original audit did not act as a sufficient deterrent. As the Accounting Officer points out, re-audit is an important way of getting the message across that simply because one has just been audited, it does not mean that Revenue has gone away for good.

Chairman

Does Mr. Daly want to make a statement on chapter 2.9?

Mr. Daly

Chapter 2.9 deals with the Revenue Commissioners' random audit programme. The revenue audit programme is an established and successful means of ensuring compliance with the self-assessment system. The full implementation of our new computerised risk analysis system for the screening and selection of cases for audit will add considerably to its effectiveness. Regarding the random audit component of the programme, I welcome the thought-provoking comments of the Comptroller and Auditor General about our methodology and the limitations it imposes in drawing general inferences from aggregate results. As the report indicates, the Revenue Commissioners' review of the random audit programme is under way. The issues raised by the Comptroller and Auditor General will be taken on board in the review. My opening statement does not mention the provisional conclusions we have come to in that regard. The conclusions may be of interest to the committee as the discussion progresses.

Deputy Curran

This an interesting subject. What is classed as a random audit is clearly not a random audit. I suppose it is a selected random audit. It throws up a couple of interesting things. It is found that approximately one third of the companies audited have a liability of some form. It may be that they are understated in the first instance, for example. If one examines the big picture, however, surely one will agree that a truly random audit would give the Revenue Commissioners some understanding or some scope of the total understated taxes. If one has a figure in mind, then one might be able to put in place policies or resources to try to bring these moneys in.

Our tax system is based on voluntary disclosures and returns. There were approximately 400,000 returns in 2002, as well as many audits. The vast majority of people have a remote chance of being audited, although those involved in special areas may be targeted. It would be a useful exercise for the Revenue Commissioners to have some global feel of the existing amount of understated taxes. There is always a return to the State regardless of whether an audit is targeted, comprehensive or selected and random. Although there may not be a return in each individual case, there is always a collective return. If one considers the number of random audits as a proportion of the total number of cases, one would see that a figure of hundreds of millions is involved. If I was running a business, I would like to know how much I was owed. I cannot understand why the Revenue Commissioners do not have a system in place to try to determine the overall figure. If the commissioners were aware of this figure, they could implement policies and procedures to try to recoup it. That would be important.

Some of the items we addressed in chapters 2.1 and 2.6 would no longer exist if the problem of understated taxes had been solved. Approximately €100,000 was written off in respect of small amounts that had been around for a long time. One would have a much better global picture of what is going on if one used a random audit to set some basic benchmarks to strive to achieve. I made this point last year. Having read this year's report, I do not agree that the Revenue Commissioners should have taken certain measures. It might be unpalatable to place that figure in the public domain, but all the evidence shows that when an audit, or a group of audits, is conducted, a sizeable amount of money is found to be due to the Revenue Commissioners. It is high time a significant effort was made to quantify that figure.

Mr. Daly

I agree with much of what Deputy Curran says. I recall that we had similar discussions at earlier meetings. I will respond to some of the specific points that have been made.

The Deputy is right to state that we have not been conducting a true random audit in recent years, as it has been stratified in one way or another. It has been a series of moving targets. A random element was involved in comprehensive audits until 1998, but it was later extended to VAT, PAYE and PRSI audits. We randomly audited those cases in which income was less than €127,000 in 1999. We increased the ratio to 6% of all audits in 2001. We refined the selection query criteria. I want to defend what we did. We did it because many marginal cases emerged from the truly random approach. We ended up auditing little old ladies and other marginal taxpayers. We felt that the cost, including the opportunity cost, to people who are normally compliant taxpayers of having auditors working on such cases when they could be working on other cases was not worth it. This does not take from the broader objective of a random audit. There is a deterrent effect if everybody thinks they can be audited.

I have received the provisional conclusions of the review of the programme which was put in place by the Revenue Commissioners. We have taken into account what was said by Deputy Curran and other members of this committee. We will revert to a truly random audit programme in 2004. We will consider this matter further. After the random programme has resumed, we will examine what we can gain by measuring what I would not like to call the "tax gap" - that is the bigger thing which might be measured - but by measuring what one might call the "audit gap", which is the difference between what is returned at present and what might be returned if everybody were audited. That is what might come out of this, theoretically.

As Deputy Curran has said, the critical aspect of the matter is that we use our information to refine our compliance programmes and our audit programmes. That is what we are doing. We have to examine the numbers we are going to deal with and consider how we can analyse them. We have changed our position. We have become convinced of the value of having a truly random programme from which we can extrapolate some results. The Comptroller and Auditor General agrees in his report that it is not possible to extrapolate from the type of programme we have at present. It may create all sorts of false impressions.

Deputy Curran

Mr. Daly covered himself, so to speak, in his last answer. I was going to ask him a somewhat unfair question. The Revenue Commissioners have conducted random and targeted audits, comprehensive and otherwise. Would Mr. Daly like to put a figure on the taxes that were understated to the Revenue Commissioners in 2002?

Mr. Daly

No.

Deputy Curran

Mr. Daly spoke earlier about non-resident accounts. He said that he was able to do projections along the way. The greatest problem with this seems to be that there is no way of projecting what is quantifiable or what should be collected by the Revenue Commissioners. If a quantity cannot be put on something, one does not know the resources that should be allocated to it.

Mr. Daly

Can I clarify my "No", which may have sounded quite bald?

Deputy Curran

I understand why Mr. Daly said "No".

Mr. Daly

I cannot put a figure on the understated taxes now, but I accept that we should be able to put a figure on it.

Deputy Curran

I thank Mr. Daly.

Deputy Noonan

I agree with the submission made by Deputy Curran. There is a widespread belief that self-assessment is not working. It is not working because of the manner in which it is audited, as well as the manner in which sanctions are applied, by the Revenue Commissioners. Does Mr. Daly agree with the proposition that self-assessment works only if people believe they will be caught and punished if they evade tax? It cannot work on any other basis. Is that right?

Mr. Daly

While that is a major factor, it discounts the fact that in a democracy in which tax rates are set by Parliament, people have an obligation to pay their proper taxes and file their proper returns. I agree with the Deputy that effective Revenue administration, audit programmes and penalties for those who are caught underpaying are important aspects of the system.

Deputy Noonan

I agree that while there are some honest citizens, if citizens in general who pay their tax on a self-assessment basis were to comply with the law as enunciated by the Houses of the Oireachtas, the Revenue Commissioners would be redundant. People could pay their tax through a post office.

Mr. Daly

We would still require collection mechanisms. Perhaps if everybody were compliant, ours would be a smaller organisation.

Deputy Noonan

The Revenue will not go very far on civic responsibility. It is very hard to prove that there is widespread avoidance or evasion of tax - those of us who have worked in local authorities have some anecdotal evidence to suggest it is. While many means tests take assets into account, one which does not is the test in respect of higher education grants. Those of us who have spent a long time on local authorities are surprised at some of the people whose children receive higher education grants. The higher education grant is based on taxable income and on nothing other than the tax return filed. It is the only measure which gives a fair indication of who pays and who does not. If a person qualifies for a higher education grant, one knows he or she is below a certain line in terms of what they have declared. One also knows that in terms of comparative standard of living, the qualification does not make sense.

My proposition is that self-assessment does not work as fully as intended. I reaffirm that it will only work if there is a widespread belief that if one evades, one will be caught and that if one is caught one will be severely punished. That is how the system works in the USA where people bless themselves in the morning in fear that the inland revenue service might arrive. Unless we get to that point, the system will not work.

It is a fallacy to speak of random audits as if they were a mechanism for collecting tax. A random audit is a mechanism for keeping the system honest. If the Revenue conducted extensive random audits and collected nothing, it would then know that self-assessment was working. For that reason, I am delighted by today's announcement that the Revenue Commissioners are returning to real random audits. I hope this will also entail an increase in the proportion of random audits. What percentage of taxpayers were audited last year by random or targeted audit?

Mr. Daly

We conducted about 16,000 audits last year.

Deputy Noonan

Did you say 6% of them were random?

Mr. Daly

Last year, it was 6%, which reduced to 2%. In most of the years we conducted random audits, the rate was about 2%. In either 2000 or 1999, we increased that to 6%. To say 16,000 people were audited is not to describe the full picture. In getting to that 16,000, 50,000 to 60,000 other returns were screened. The returns of many more than 16,000 people are examined. Between screening and audits, there is a 10% chance of having one's affairs looked at in any given year.

Deputy Noonan

The Revenue Commissioners issue approximately 750,000 tax forms to be returned.

Mr. Daly

We issue something like 450,000 between companies and personal self-assessed taxpayers. That does not take into account PAYE workers. Perhaps that is where the Deputy's figure comes from.

Deputy Noonan

Mr. Daly is right. I am looking at the wrong table. About 16,000 returns are audited. In general terms over the years, the random audit is 2% of 16,000, which is 320. These have been targeted audits. If they were random, the Revenue would be auditing old ladies with no tax liability and the costs would exceed tax receipts. The Revenue's strategy is based on the fallacy that the purpose of a random audit is to collect tax. The purpose of random audits is to keep the system straight. To achieve that, the rate of random audit would have to be far greater than it is currently. People must know there is a high probability that if they evade they will be caught. That is not the case at the moment. Compliant taxpayers are going through a calm period. The reason PAYE workers have calmed down on these issues is they have given up hope that anything real will be done about them.

Mr. Daly

I must respond on a number of points. If I have given the impression that the purpose of random auditing is to collect money, it was a mistake. In so far as we had a purpose, random audits were designed to make everybody feel they might receive a visit from the Revenue. The costs involved applied to the taxpayer as much as to the Revenue. The Revenue audit puts a compliance burden on people. The Deputy referred to the USA which has abandoned its random audit programme as Congress took the view that it was too intrusive to ordinary taxpayers. I gleaned that information from a recent OECD study of random audit which is being prepared for publication.

Deputy Noonan proposed that the self-assessment system was not working. Over the years, we have received more and more tax from the self-employed sector. This is reflected in tables which have been published from time to time in our statistical reports and elsewhere. Among the 16,000 audits referred to, there is a high proportion of nil-yielding investigations. This indicates that there is compliance because our audits are effective. There are sectors in respect of which we have concerns about non-compliance. The targeted approach we are now adopting is designed to focus our audits on those particular areas. The computerised risk analysis system has been introduced to refine our targeting process to get at the sectors in which people are less compliant. That is not to say self-assessment is not working in those sectors.

Deputy Noonan said that a visible, effective tax administration, audit and compliance programme is a pillar of self-assessment, and I agree with him. The focus of the Revenue Commissioners is to demonstrate that it conducts audits and that anybody can be audited through our random audit procedures. When a person is audited and is found to be non-compliant, he or she pays substantial penalties. He or she may be prosecuted, which is something we have not discussed today. I hope people realise that the Revenue Commissioners are persistent. If one is found not to be compliant, one will pay the penalty.

Deputy Noonan

I acknowledge that the Revenue Commissioners are far more effective than they were. Improvements have been occurring out of all proportion in recent years, but there is still a significant gap. Mr. Daly will not agree with the figure but, by way of example, when extrapolated, one set of assumptions, which neither he nor the Comptroller and Auditor General would stand over, produces a figure of €1 billion outstanding in any one year. The Comptroller and Auditor General will not go to the wall on this figure as he has included many qualifications. While I do not know whether it is in this order of magnitude - Mr. Daly would probably say it is not - nevertheless, even if only half correct, it would represent a significant amount of money.

When one considers the matter from our perspective, especially the Deputies from the Government parties who are faced with horrendous decisions when finances become tight, the decisions which impact on our constituents and on a Deputy politically frequently involve sums of €15 million or €20 million. The cuts in social welfare, for example, will lead to savings of between €60 million and €70 million. Against this background, we have the Comptroller and Auditor General extrapolating figures from the audit and concluding that an outstanding €1 billion a year may be involved. Does Mr. Daly accept the disproportion involved and the reason we may be so concerned that even if the Comptroller and Auditor General is only half correct, many problems facing ordinary people and political problems will be quickly displaced on the agenda?

To return to his comment that we have not discussed punishment in chapter 2.8, I note that once the process starts of taking people to court, including the associated adjournments and fines - the whole shooting gallery - the final returns forced out of the non-compliant taxpayer amount to less than €500 in 50% of cases and these are not audited by the Revenue but accepted. Having dragged people through the courts, imposed fines and so forth, the Revenue accepts without audit 50% of returns at less than €500 per taxpayer and says, "Grand, thanks very much."

Mr. Purcell

Mindful of the last time a figure of €1 billion was floated around as being the amount of money involved, I should go on the record and make the matter clear in the report. With due deference to Deputy Noonan, with whom I agree in some respects, while the programme may appear on extrapolation to indicate a potential overall yield of about €100 million, such a conclusion is not sustainable at this stage.

In table 2.14, I showed the kind of exercise which would be possible if one had a truly random audit. As someone who has promoted the cause of random audit almost to the point of a crusade during the years of my tenure as Comptroller and Auditor General, I concur with many of the points made so eloquently by Deputy Curran. I certainly feel gratified to hear what the Chairman of the Revenue Commissioners had to say about going down this road in 2004. I agree with the Accounting Officer that the purpose of random audit is not to do a large number of cases randomly, but to see where one stands and, as I stated earlier, get a handle on the indicative size of the problem. In that way, one can make reasoned decisions about the kind of resources one needs to apply. It will not then be a case of concluding that self-assessment is working or not working as one cannot really answer this question at this stage. One can, however, get an idea of the extent to which it is working if one carries out this exercise in a statistically valid manner. I have no doubt the Revenue Commissioners will set up this statistical sample in a professional manner and hypothesis test the findings and so forth to clarify matters a little and bring us a little further down the road in this important task.

Deputy Noonan

I fully agree with the Comptroller and Auditor General's remarks. I stated that the figure was heavily qualified and he would not stand over it. The figure in the second paragraph of page 31 is not €100 million, but €1 billion.

Mr. Purcell

For the purposes of clarification and because I am conscious that members of the media are present, I will cite the text to which the Deputy refers. It is important to get these things absolutely right. "While an average tax yield per audit of €2,879 [I should have put the figure in quotation marks] for the 2002 Random Audit Programme may appear on extrapolation to indicate a potential overall tax yield of about €100 million, such conclusion is not sustainable at this stage as the final case selection is not made on a purely random basis." That is all I am saying.

Deputy Noonan

My problem is that the figure in my copy of the text has an extra zero, giving a figure of €1,000 million.

Mr. Purcell

Sorry, let me correct that, I meant to say €1,000 million.

Deputy Noonan

As I stated, if the Comptroller and Auditor General is only half right, it is a considerable sum of money.

Mr. Purcell

I have developed an aversion to this figure of €1,000 million.

Chairman

Deputy Noonan knows where the zeros are.

Deputy Noonan

I am only trying to be helpful to Deputy Curran and his colleagues, who are being pasted for cutbacks.

Deputy Curran

I am grateful.

Deputy Noonan

I want to press the point that having taken people to court and had fines imposed on them, one accepts returns of less than €500 in 50% of cases without doing an audit.

Mr. Daly

To clarify the point, no cases of any size will be left out of the new computerised selection system and all cases will be potentially audited. I endorse everything that has been said about the danger in extrapolating from the figures with regard to a current programme which no one could describe as truly random. I could analyse some of the figures that have emerged. If one removed a couple of cases with a fairly good yield, the average yield would fall significantly. Even if one were to extrapolate at that point, the final figure would be well below any figure mentioned today.

The main point is that we will go forward to a regime or process in which we can make reasonable assumptions. We are being a little heroic here because when I look at the OECD study, I am not convinced that other countries are equally convinced, if I can put it that way, of the value of random audit and extrapolation based on such audit. At any rate, we will proceed and see what we come up with. We will, as the Comptroller and Auditor General has said, do it in the most sophisticated way possible. I do not want to leave Deputies with the impression that I may be able to return to the committee next year and fill out this audit gap or tax gap. We will have to do this carefully if we want to make it scientific and be able to stand over it.

Deputy Connaughton

To continue on this road, my understanding is that new legislation was enacted in the past year or two to allow people taken to court previously for non-compliance to be brought back to court on the same conviction. Is that true?

Mr. Daly

I assume the Deputy is referring to prosecutions for non-filing of returns.

Deputy Connaughton

Exactly.

Mr. Daly

As well as taking persons to court and having them fined for not making their return in the first place, the court can order that they make the returns. If they do not do so, we can go back into court and indicate that this has not happened. In effect, therefore, prosecution is on a continuing basis.

Chairman

The methodology of the meeting in dealing with each chapter separately is working well and a credit to the committee. I propose to close deliberations on this chapter in a few moments. I do not expect to deal with all the chapters today and that is why members should confine their remarks to the chapter under discussion.

Deputy Fleming

Page 23 of the report of the Comptroller and Auditor General states, under the heading Selection of Cases for Audit, that the Revenue's risk based approach to the selection of audits involves: screening of taxpayers' returns; intelligence gathering by each tax district; knowledge of industry practices affecting tax at risk; extracting information from the Revenue's records; interaction with other areas of Revenue; sectoral projects; and cases previously audited. Page 26 states: "The cases are selected from those taxpayers who have submitted returns for the most recent tax year." I am far more concerned with those who have not been making returns for the most recent tax years and who are not already in the system. The Revenue does not have information on them from the tax districts, other Revenue records or previously audited cases. It seems as if all the random audits are based on cases already in the system and on the Revenue's computers. It would be a far more fruitful exercise to ascertain those who are in the black economy and who have not submitted tax returns. What is Mr. Daly's view on such people?

Special investigations comprise a large portion of the Revenue Commissioners' work, but if these have determined anything it is that there are substantial amounts of money upon which tax, interest and penalties should have been paid. However, Revenue has had no record of this up to now.

Mr. Daly

The paragraphs quoted by the Deputy relate to the selection method for audit, particularly random audit. Obviously, they are based on cases for which returns are available or where we have taken initiatives to ensure returns were submitted. Those who had not made returns and who were forced to do so are in that category and will be in future.

Obviously, there are those who try to stay totally outside the system. I would not like anybody to think Revenue has no programme to deal with them. Under the old structure there were special inquiry branches and under the new structure there are special compliance districts, to which I have referred in the context of the construction industry. Those districts are tasked primarily with making sure everybody in their local community or business area is on record.

A study by the Comptroller and Auditor General from some years ago concluded that because of special inquiry branch-type activity, nobody would be likely to operate in the black economy for any considerable period without it coming to the attention of the Revenue Commissioners. We have programmes in place designed to bring people into the system. Some are as simple as knocking on the doors on every street in a town at a particular time to make sure everybody with a business on those streets is registered. This is an extensive part of our operation and it is probably unsung. Maybe we do not highlight it as much as we should.

There are other issues of concern pertaining to the black economy, such as that of nixers. We have a black economy group which works quite closely with the hidden economy monitoring group, which was set up under a programme for Government. It meets regularly and will next meet in January. At such meetings we discuss, with trade unions and others, what actions we should take and on what sectors we should focus.

If one says "There is a huge black economy and Revenue had better tackle it", one would probably never get anything done. It is better to identify, in conjunction with the other social partners and players, particular sectors that need attention. This is what we do and we have done so extensively in recent years in the building industry, particularly regarding relevant contract tax and whether people were employees or contractors. Similar concerns existed in the forestry industry and in meat factories.

Deputy Fleming

Over the years, I have often heard of the approach of Revenue representatives knocking on every door on a street. I have not heard much about it recently. Is it still happening? Are many engaged in the practice?

Years ago, we all felt there was no pot of gold, yet it emerges after every investigation that there is a new pot of gold. Our previous assumptions on what Mr. Daly has suggested never proved to be accurate. We have always underestimated the extent of tax evasion. Therefore, when another special investigation is conducted into some matter, perhaps next year, we can predict that the extent of the problem will be much greater than it was first thought to be. The thinking in the system is old and is not based on the facts that emerge every time a new investigation takes place. It needs to be updated and I do not detect that this is happening.

Social partners are already in the system. As I keep saying, I am far more concerned

about tradespeople, such as carpet layers or painters, who list addresses that exist only on the sides of their vans. Such people are still operating and I do not know how much work the Revenue Commissioners are doing to combat this. As a result of the economic boom in recent years, there has been much more money in the system than there was previously. Furthermore, the economic boom has increased the potential for people to operate partly within the system and partly outside it.

Mr. Daly

The Deputy believes he has problems but if the Chairman of the Revenue Commissioners tried to get someone to do building work for him, he would have even greater problems.

Deputy Connaughton

That must be difficult.

Mr. Daly

Let me provide the committee with some figures. In 2002, the walking-the-streets initiative I mentioned detected 969 people who were not on the record and who are now on our database. The same initiative detected 2,600 people who were on the record but who had not made returns on part of their income. In other words, they were not telling us about part of their businesses.

Deputy Fleming

What follow-up measures were employed regarding the 2,600 people who were partly in the system and the 969 who were not in the system? Has a case study been done on them?

Mr. Daly

They will be in the system for audit and screening and we also have a compliance programme. If people come into the system and are put on to the books of a tax district, this district will certainly pay attention to those. Many of those that come into the system are not big businesses, as there are other regulations companies must follow to operate as a business. Many of these are small start-up businesses. Against what was expected early in the year, we have collected a record amount of tax this year. The last thing I want to see is complacency in Revenue where, because of the huge revenue coming in, all moneys due are not collected.

The Deputy mentioned the other investigations and said that a crock of gold has been unearthed on each investigation. We collected €925 million in recent years from five or six investigations and will collect more from the offshore accounts investigation. While I agree that money is welcome and useful, I am more concerned that Revenue is seen to follow through on these investigations. I want to bring these investigations to a conclusion. We have a huge programme of special investigations and they are putting a strain on our resources. I am concerned that while we are tackling these investigations something else is happening that we are not aware of. While I have no knowledge that anything like this might be happening, I do not want our resources to be tied up for ever in legacy investigations with the result that we might not be on top of what might emerge in the future. None of us wants a re-run of the DIRT investigation in five or ten years' time.

Deputy Fleming

As regards the cases the Revenue discovered by walking the streets, will Revenue assess whether it was a worthwhile exercise in view of the staff allocation to the task? Should this level of activity be increased?

Mr. Daly

We have probably already increased this level of activity. Revenue has been restructured in the past year and there are now special compliance units in each district. I take the Deputy's point that we should not simply accept these figures and must analyse what is behind them.

Deputy Boyle

I have a question on the geographical dispersal of the random audit and the original system in 2001, and the changes in 2003. It seems that a set number is being chosen in each tax district. Therefore, the likelihood is that the exposure to a random tax audit would differ in each area. If one were in a large tax district, one would be less likely to be randomly audited and vice versa if one is in a small tax district.

Mr. Daly

That is not necessarily true. The number allocated to each district is pro rata to the number of taxpayers covered by the district. With 800 or 900 audits being spread over the districts, the absolute number in some districts will be relatively small.

Deputy Boyle

Revenue has moved away from the system of looking at different income levels and will not do this in 2003.

Mr. Daly

We will return to a true random selection in 2004 with no parameters, stratification or preconceived views.

Deputy Boyle

I think it is called a Lorentz curve.

Mr. Daly

I am not a mathematician and I bow to the Deputy's knowledge.

Deputy Boyle

How does the Revenue make the sectoral differences for corporation tax, for example? How do random audits come about in this case? Does Revenue look at the turnover of a company or look at certain types of company?

Mr. Daly

We did not carry out many random audits on bigger businesses as many of them are automatically screened and selected for audit annually. While I am not sure how we randomly selected the businesses, I am sure we used the same basic principles as we did for all random audits. If the turnover is above a certain level, we viewed that they would be screened as part of the normal process and there would be a targeted audit. Below that, they would fall into the random process.

Revenue has taken a decision to go truly random from next year. We must now look at how we select the cases. If it is truly random, this will encompass everyone included, whether businesses or individuals.

Deputy Boyle

Will this include decisions on the type of taxes being assessed? I note that the specific audits on VAT seem quite small in comparison to other taxes. Are there reasons for this and is the matter being re-examined?

Mr. Daly

We had an interesting discussion on the VAT scheme earlier. One must remember that comprehensive audits cover all taxes, including VAT. Therefore, VAT issues are dealt with within comprehensive audits. We look at the relative importance of comprehensive, VAT and PAYE audits and combine fiduciary audits that would also include VAT. This year for the first time, VAT has outstripped income tax in total take to the Exchequer. VAT is now increasing in relative importance as a tax. From our perspective it is also increasing in relative importance with regard to the opportunity to avoid paying VAT. We have ratcheted up the VAT avoidance unit in the office.

Our audit programme is continually evaluated. Comprehensive audits are the most difficult and require the most experienced auditors. There would have been a time when, because of moving auditors to the bogus accounts investigations and the need to train new auditors, the number of comprehensive audits was reduced. I would like a greater number of comprehensive audits carried out across all tax heads, including VAT.

Chairman

We now move on to chapter 2.9 and the re-audit programme, carried out four years after the original audit. It says that the results of the re-audit indicate that for the review of the cases from 1999, 2000 and 2001, over half of those taxpayers originally found non-compliant may remain non-compliant after the original audit. It also says that more that one fifth of the re-audits yielded more than the original audit. This indicates that the penalties imposed do not act as a deterrent. Is the Revenue worried about this?

Mr. Daly

I admit that I am disappointed with those results. Another way to read this is that more than 40% became fully compliant and a further 39% became more, if not fully, compliant. I would have expected a better result from the re-audit. Something we have done which should address this is, whereas in the normal audit, particularly in the case of voluntary disclosure, there is mitigation of penalties depending on the degree of co-operation, if one re-offends, mitigation is restricted by 50% for the first offence and if there is a second offence, there is no mitigation. Therefore, there is a "two yellow cards and a red" approach. I hope that will improve the situation.

Chairman

Deputy Noonan referred to the fact that the yield in 2002 was €256 million, which indicates there was an increased number of audits that year and the yield was higher. Does that back up Deputy Noonan's point that the level of avoidance is huge, as has been proven by the fact that in the years where the increased number of random audits took place, the yield was considerably higher. The projection was for an increase of more than €100 million in anticipated income in that period.

Mr. Daly

Is this in the general audit programme?

Chairman

Yes.

Mr. Daly

In the general audit programme, the number of audits has remained static but the recoveries have been increasing all the time.

Chairman

They were higher than anticipated by the Revenue Commissioners. You got an additional €100 million.

Mr. Daly

Yes, indeed. The committee must remember that in recent years we have been targeting better and learning as we go. That means we are doing the same number of audits but we are getting a better yield. There were probably audits which have yielded more than we expected.

Chairman

As Deputy Noonan said, is that not an indicator of the level of avoidance?

Mr. Daly

It is a fair point. However, one must remember that in the audit programme, 30% yields nothing. My colleague mentioned that one must remember that interest and penalties are part of the figure.

Chairman

I wish to conclude on chapter 2.9 and I ask Mr. Purcell to refer to chapter 2.8.

Mr. Purcell

Before we conclude chapter 2.9, on a point of information, there was an unexpected yield from verification audits as a result of the Revenue Commissioners examining people who took up and realised share options. If one examines the target yield for 2002 for verification audits, it was €14 million and the actual yield was €88 million. As I stated in my opening remarks, that was a factor in the increase which was specific to that year.

During Deputy Fleming's questioning, he referred to people outside the system in the black economy. The Accounting Officer is correct that we addressed that through having a focused look at the then special inquiry branch three or four years ago. At that stage we found that while information was often there, it was not organised in such a way as to maximise its use. As a result, it was going to be revealed anyway but I like to think we help in these movements forward. The Revenue Commissioners have re-organised their intelligence in order that it can be harnessed and used to try to reduce the scale of the black economy.

Deputy Connaughton

Mr. Daly spoke about special compliance officers in each tax district. What type of job specification do such people have? Is there a modern Columbo-type operator, are those people visible, are they private investigators and are there many in each tax district area?

Chairman

They wear cashmere rather than gabardine.

Mr. Daly

We do not dress them up in any particular way. I cannot tell the Deputy how many are in each district. There are four regions and there is a special compliance district in each region. The special compliance district includes people in different towns in which the Revenue Commissioners have offices. They have a broad remit but they are focused on being the eyes and ears of the Revenue Commissioners in the areas, getting to know what is going on, doing the types of street surveys which were mentioned earlier and undertaking surveillance from time to time. I know of a couple of cases where this has proved fruitful, for example, a retail business returning a low amount of tax and to buoy up an assessment of a much greater amount of tax for that business, our special compliance district people would have simply sat outside the business for a number of days, noting the throughput and volume of business. Therefore, when we confront the business or its accountant we have concrete evidence. That is the type of work being done.

Another example is where those people visit a big building or drainage scheme. They are not Columbo types, who always work under cover. Our approach to tax compliance is to work with businesses and people to persuade them into the net.

Deputy Connaughton

How many are there, 20, 30 or 50?

Mr. Daly

There are more than that. One must remember that in the restructured Revenue Commissioners, we have brought together former tax inspectors and customs and excise officers. Members will be aware that customs and excise officers have been working on diesel sampling and oil laundries, and the policing of vehicle registration tax and so on is now coming together in these compliance districts, working with their tax colleagues. A great deal of information is given to the Revenue Commissioners by various sources. In the past, we would not have been the best at putting all that together and that is what we are doing now in the new organisation. For example, if someone comes into the country at Rosslare with a consignment of wine, the customs and excise people are interested but so also are people on the tax side. Therefore, this is to bring all that type of information together.

Chairman

I ask Mr. Purcell to introduce chapter 2.8 because we are under a time constraint. Chapter 2.8 of the Report of the Comptroller and Auditor General reads:

Prosecution of Non-filers of Income Tax Returns

Background

The self assessment system requires every chargeable person to submit a return of income, profits or gains for each chargeable period by a specified filing date. As the timely filing of properly completed returns is the bedrock of self assessment, it is Revenue policy to bring criminal prosecutions under Section 1078 of the Taxes Consolidation Act, 1997 against those who ignore their filing responsibilities. Non-filer prosecutions are taken by way of summary proceedings in the name of the Director of Public Prosecutions in the District Courts. Prosecutions in Dublin are taken by the Revenue Solicitor, while outside Dublin the State Solicitors perform this work.

In 1998 Revenue decided to substantially increase the number of cases being referred for criminal prosecution for non-filing offences. This decision was based on the view that criminal prosecution would be:

The best method for obtaining outstanding returns

A deterrent against future non-submission.

The prosecution results for Income Tax non-filers for the past six years, which indicate the growth in convictions from 1998, are summarised in Table 2.7 below.

Table 2.7 Results of Prosecution of Income Tax Non-Filers 1997 to 2002

	1997	1998	1999	2000	2001	2002
Warning Letters (Rev. Solicitor)	1,917	5,450	5,399	6,457	9,818	9,348
Cases referred for issue of summons	853	1,968	2,369	1,951	2,401	1,839
Number of taxpayers convicted	223	659	1,159	936	1,050	972
Total Fines	€0.2m	€0.9m	€1.5m	€0.9m	€1m	€1m

Objectives and Scope of the audit

The objective of the audit was to examine, in relation to Income Tax returns, the effectiveness of the prosecution approach

As a method to ensure submission of outstanding returns

As a deterrent against future non-submission.

The audit work included interviews, the issuing and review of questionnaires and the examination of internal reviews, correspondence and operational instructions. While Revenue has adopted various approaches to non-filers under other taxheads, these areas were not covered by this audit.

The role in the prosecution process of the central Compliance Policy Unit, four selected tax districts (Dublin, Cork, Letterkenny and Limerick) and the Revenue Solicitors Office was examined, together with recording and tracking databases in those offices. The reported results of the prosecution work in the four tax districts were reviewed and analysed.

An examination was also carried out on a sample of 99 Income Tax cases with 275 outstanding returns that were referred for prosecution by the four tax districts. The sample was selected on a generally random basis with the intention of achieving an even split between cases where convictions were actually obtained (in the event 56 fell into that category), and cases which did not reach that stage (43). Computer records, tax returns and correspondence relating to each case were examined and analysed.

The findings set out in the report reflect this approach to the audit, and fall into two sections that relate to:

The general review of the operation and administration of the prosecution process both centrally and in the districts

The more specific findings arising from the review of the sample of cases.

Operation of the Prosecution programme

A bulk issue of the standard income tax return form is made annually to all taxpayers required to make a return. Reminders are issued to those who fail to file a return by the due date i.e. 10 months following the end of the tax year. After a further 3 months, lists of cases with annual returns still outstanding are forwarded to tax districts for further investigation and, if necessary, prosecution.

Table 2.8 provides details of the number of Income Tax return forms issued for the tax years 1999/00 and 2000/01, and of the number of cases with a return outstanding referred on to tax districts.

Table 2.8 Tax Return Forms Issues and Non-Return Cases Referred to Tax Districts

	1999/00 General Issue of Income Tax Return Forms	Non-Filer Cases referred to Tax Districts	2000/01 General Issue of Income Tax Return Forms	Non-Filer Cases referred to Tax Districts
All Areas
Dublin	72,434	16,846	75,942	22,412
Cork	40,129	7,845	40,719	8,410
Letterkenny	11,022	2,162	11,206	2,604
Limerick	27,290	6,033	29,494	6,510

Cases are categorised by the number of outstanding returns - most cases are persistent non-filers. The tax status of each case is checked on the Revenue databases prior to a visit and cases which should not be pursued are excluded. A programme of visits to assess the extent of tax at risk is organised for cases which have still failed to submit returns and are deemed possibly suitable for prosecution. A visit report is subsequently completed by the Field Officer with a final recommendation as to suitability for prosecution. Lists of cases deemed suitable for prosecution are forwarded by the tax districts to the Revenue Solicitor who then issues a 21 day warning letter to the non-filer. Cases that fail to respond to the warning letter are forwarded for summons. A separate summons is instituted for each outstanding return. Court times are arranged and summonses are served by the Gardaí. The Gardaí require at least 6 weeks to serve a summons. Each offence is liable to a fine of €1,900 (which can be mitigated by a maximum of 75%) and/or committal to prison for up to 12 months. The fine was increased to €3,000 by the 2003 Finance Act. A provision to allow Revenue to apply for a Court order compelling convicted defendants to submit the outstanding returns of income was included in the 1999 Finance Act. The powers available to Revenue in dealing with Court orders were further extended by the 2002 Finance Act which created an additional offence of non-compliance with the Court order, with the same fine or committal provisions as those for non-filing. Fines are collected by the Fines Office administered by the Department of Justice and paid over quarterly to the Revenue Commissioners. Revenue is obliged by law to publish details of convictions of non-filers.

While Table 2.8 indicated the annual flow of non-filing case referrals to the four tax districts under review, Table 2.9 details the disposal of that workload for 2001 and 2002, including by summons, conviction and Court order.

Table 2.9 Results of Prosecution Activity in Four Districts in 2001 and 2002

	Dublin		Cork		Letterkenny		Limerick
	2001	2002	2001	2002	2001	2002	2001	2002
Warning Letters	992	802	717	553	366	361	835	688
Referred for issue of summons	448	320	380	344	155	186	92	174
Convictions	373	371	256	301	112	9	88	64
Court Orders Returns Submitted	5	72	1	5	-	-	3	6
No returns needed	3,562	2,977	461	619	101	30	393	719
Unsettled Cases	9,102	15,964	3,820	5,355	941	2,055	2,241	3,257
Total Caseload	16,846	22,412	7,845	8,410	2,162	2,604	6,033	6,510

An analysis of cases handled by Dublin tax district in 2002 revealed that nearly one third of referred cases were 'settled', with 15% submitting returns while the remainder were deemed not due to make returns. Within that figure, the rate of returns submitted ranged from 24% of those with only 1 outstanding return to as little as 4% for persistent non-filers. 4% of cases were referred for prosecution with the emphasis on persistent non-filers; half of those proceeded to summons stage.

Findings from General Review

Deterioration in Compliance Behaviour

There were indications of a hardcore of non-compliant individuals and their numbers have increased substantially in recent years:

The number of cases referred to Dublin and Limerick tax districts increased by 60% in two years;

While a prosecution can only be taken once for an outstanding return some individuals have several convictions for non-filing (one case had seven convictions). Up to 10% of those convicted are repeat offenders. The Dublin prosecution database had 891 (13%) cases with previous convictions, with the bulk coming from persistent non-filers. In 2002 Letterkenny fast tracked the prosecution process for 152 repeat offenders whose current returns were outstanding.

Revenue Response

Compliance trends show that timely filing rates are holding and for the most recent year have improved from 74% to 75%. This figure is significant in the context of the 2002 change to the calendar-year basis of return, which meant that taxpayers and their agents had to deal with two income tax returns in one year. Specific compliance programmes viewed in isolation may not provide the best yardstick by which to measure compliance trends. There are other strategies besides prosecution to encourage timely compliance. Late filers are subject to 10% tax surcharge and interest on late payment of tax due. More importantly, to minimise tax at risk Revenue may raise assessments to tax in the absence of a return and pursue the liability to enforcement if necessary.

System and Resources Under Pressure

The holding back of distributions to districts, the emphasis on the multiple non-filer, the extended period before issue of summons and the serious backlog in Dublin district and in the Revenue Solicitors Office suggest a system under pressure to cope:

The 2002 download of cases of outstanding returns was not distributed to tax districts until August of that year. There was insufficient time in the tax districts to work these cases and outdoor visits were reduced from previous years. The bulk of cases heard by the courts in 2002 were taken from the download for 2001

The larger tax districts are unable to work the full download. Priority is given to categories of cases, mainly the persistent non-filers with returns outstanding for all 5 years. Due to the workload in Cork a distinction on the degree of suitability for prosecution is made following the outdoor visit with the result that some suitable cases are dropped from the programme. Cases which are excluded may be worked from future downloads

The recommended interval of 4 weeks to referral for summons from the date of warning letter was generally followed by Limerick, Cork and Letterkenny while Dublin allowed up to 6 months to elapse prior to referral for summons. 1,050 Dublin cases referred for summons are held in the Revenue Solicitors Office. In consequence of that backlog, a further 1,382 cases are held in the tax district ready for summons

Limerick tax district initiates their compliance programme with a telephone campaign followed by a warning letter from the district and then a visit for those who fail to submit returns. Other districts limit their telephone campaigns to agents.

Revenue Response

Technical developments taking place in Revenue's computerised taxpayer ledger system delayed the distribution of the 2002 download of non-filer cases to tax districts. By contrast the 2003 download was issued in March. Some tax districts did not work all 2002 cases because of the impending second return date in October. With regard to tackling non-filers at district level, it is not expected that all districts will do exactly the same thing. Districts are allowed to take account of local factors and to try different approaches if they feel this will achieve a better outcome.

Delays in Processing Cases

The maximum impact on the Non-Filer arises from a prompt and firm Revenue response to each outstanding return of income. That may not always be achieved:

The prosecution process is lengthened in some cases by delays in serving summonses, arranging court times, and numerous adjournments to facilitate requests for more time to submit returns. The length of time from the warning letter to getting a case to court varies from 3 months to over 2 years;

Up to 2001 the annual download extracted cases which had outstanding returns in any of the previous 5 years. In 2002 the application of a different programme identified and downloaded additional cases outstanding for more than 5 years and up to 10 years. In effect, prior to 2002, these latter hard cases were not included in the compliance and prosecution programme. Dublin received 400 such cases. Revenue have pointed out that these cases were previously subject to the debt management programme, which pursued both the tax due and the return.

Court Hearings

The course of the hearings in Court does not always run smoothly from the Revenue viewpoint. Instances include mitigation and a high level of adjournments.

Judges generally mitigate fines by or near the maximum limit of 75% when returns have been filed. The level of mitigation varies from court to court. In some courts fines were mitigated even though the returns were not filed. Other courts impose maximum fines in cases where the defendant fails to attend or submit outstanding returns. In other instances the benefit of mitigation was applied to repeat offenders. Revenue estimate that the average level of mitigation of fines is 62%.

Finalisation of cases is delayed by the high level of adjournments allowed by the Courts. There are many instances of cases with up to 5 or 6 adjournments. Revenue estimate that 37% of all cases brought to court were granted adjournments.

In cases of individuals with several offences before the Court, Revenue withdraw 50% of charges when returns are submitted in time for the court hearing and the defendant is in attendance. Only one charge is pursued in hardship cases. Judges have expressed reservations about convicting individuals who have filed returns.

Prosecution costs are awarded by some Courts to the State Solicitor. There is no evidence of subsequent transfer of costs to Revenue even though State Solicitors are remunerated by the State for this work. Revenue is not opposed to State Solicitors seeking costs provided such costs are transferred to Revenue on behalf of the DPP. However, Revenue have pointed out that neither the DPP nor Revenue have any contractual relationship presently with the State Solicitors whose contracts are with the Chief State Solicitor.

Fines and Court Orders

The tasks following conviction are fine collection and, in cases where the defendant has not already submitted returns, obtaining and enforcing an order of the Court for all outstanding returns of income. Performance is less than satisfactory in both areas:

The collection of fines imposed by the courts is not monitored by Revenue. The quarterly payover from the Fines Office does not provide a breakdown by case. A comparison of fines received by Revenue with fines imposed by the courts indicates that one third are not collected. There is little point in having fines imposed by the courts if there is no follow-up to ensure the fines are paid. Revenue has pointed out that the collection of fines is a matter for the Court Service.

Instructions to State Solicitors to apply for court orders in respect of outstanding returns did not issue from the Revenue Solicitor until 15 months after the provision became law in the 1999 Finance Act.

There is a lack of consistency in the approach adopted to the use of court orders. In Dublin and Limerick, court orders are sought in all cases where returns are not submitted on conviction. In Cork, court orders are sought in larger cases and/or cases with previous convictions where despite the conviction returns remain outstanding. In these cases following the application of the State Solicitor the decision on the imposition of fines is deferred to an adjourned court hearing as an encouragement to the defendant to influence the level of fines through the submission of the returns. In Letterkenny, court orders have not been sought but will be sought where it is deemed appropriate.

In all, 31 court orders were obtained nationally in 2000 while a further 40 were obtained in 2001. 19 non filers in Dublin and 14 in Cork have failed to comply with court orders.

As at June 2003 the offence of non-compliance with court orders, created in March 2002, has not been utilised by Revenue in any case to-date.

Revenue Response

The Revenue Solicitors Office is in the process of advising State Solicitors to actively pursue appropriate cases to prosecution for failure to obey the court order to file the outstanding return.

Audit of Non-Filer Cases

The selection of cases for criminal prosecution for failure to file returns follows the refusal of the taxpayer to respond to Revenue contacts, and a case review and visit to establish the likelihood of a reasonable level of tax at risk. It would be expected that such cases would receive strong consideration for selection for audit. The extent to which such cases are audited is unclear:

Dublin referred 20 cases to Dublin audit districts in 2002 as specifically suitable for audit. Dublin also forwards all late returns received from prosecution cases to audit with a recommendation that they be included in the next screening programme for audit selection. Cork forwarded 21cases and Limerick forwarded 14 cases in 2002 as suitable for audit. There was no feedback on any cases referred to audit.

Letterkenny do not forward returns obtained through the prosecution programme to audit.

Revenue Response

It does not follow that a case considered suitable for prosecution is necessarily suitable for audit. In many cases it may be more efficient to deal with risk to Revenue through the assessment and debt management programmes. However, all late filers are included as part of the screening programme used to select cases for audit. Cases are selected for audit purposes by tax districts, including Letterkenny, based on risk assessment criteria. The Revenue audit programme selects some 200 non-filers for audit each year. A computerised risk analysis system currently being developed is likely to bring more convergence to the prosecution and audit selection criteria.

Findings from Audit Sample

The results of the examination of a sample of 99 cases with 275 outstanding returns which were referred by the four selected districts for prosecution are analysed in this section. Features noted include the difficulty of obtaining returns in all cases even following conviction by the Court, the extent to which those who had been pursued by legal means for outstanding returns again failed to file a return for the current year, and the surprisingly low level of tax liability which was accepted without audit in respect of many of the cases which had gone to such lengths to avoid making a return of income.

Returns Obtained

Of the 99 cases, 79 submitted the outstanding returns, returns were not needed in 8 cases and 12 were still not resolved at 30 June 2003. In 5 of the unresolved cases returns have not been made despite a court order. Of 79 cases which ultimately submitted outstanding returns due to the prosecution programme, 33 have again not submitted returns for the most recent year - 2001.

Assessment and Collection of Tax Due

An analysis of the liabilities set out in 194 returns received from the 79 recalcitrant filers is shown in Table 2.10 and indicates that 50% of returns had a declared tax liability of less than €500 for the year under review. That the individuals appeared to require Revenue to utilise the full extent of its compliance procedures to establish that fact must raise questions as to the completeness of such returns. Revenue initiated an audit of the returns of two of the recalcitrant filer cases. Notwithstanding the extent of the delay in making a return and payment, computer files did not record interest charges in any cases. The self assessed amounts due totalled €371,615 but €63,134 remains unpaid by 21 individuals. The Field Officer report on outdoor visits generally did not record an assessment of the materiality of tax liabilities.

Table 2.10 Tax Liabilities Declared on Non-Filer Returns of Income Obtained under the Prosecution Programme

Total Tax Liability Declared	No. of Returns	% of Returns
Nil	55	28
€1-€500	43	22
€501- €2000	49	25
€2,001-€5000	25	13
€5,001-€10,000	15	8
Over €10,000	7	4
Total	194	100

The business status of the self-employed individuals whose returns are included in Table 2.10 covered a wide range of occupations including company directors, accountants, small manufacturers, publicans, builders, farmers, tradesmen, taxi drivers and hairdressers.

Revenue Response

Officers are instructed to make every effort to determine and record customers circumstances as well as their general disposition towards compliance and capacity to pay. A reminder drawing compliance officers attention to these instructions is being prepared. Comprehensive audits are ongoing in 2 of the sampled cases. Interest was charged on four late filers and collected from one to date. There have also been two VAT and one Relevant Contracts Tax audit relating to taxpayers in the sample.

Pre-Prosecution Activity

Analysis of the sample indicated the time intervals which elapse at the different stages of the process, and the extent to which cases can be resolved before a Court hearing

The time intervals which elapsed between outdoor visits and issue of the 21 day warning letter were

Dublin 3-12 months

Cork 4-6 months

The time intervals from issue of the warning letter to referral for summons were

Dublin 6-12 months

Cork 5-6 weeks

Letterkenny 2-3 months

Limerick 2-3 months

37 of the sampled cases were settled and not brought to court, of which 27 were settled without the necessity for referral for summons.

Prosecutions and Convictions

The sample confirmed the findings of the general review in relation to number of charges, repeat offenders, mitigation of fines, and multiple adjournments. It also raises a question as to whether all convictions in the sample were published.

Seven cases had previous convictions.

Fines were mitigated in all but 3 of the 56 convictions.

Of the 20 Dublin cases sampled, adjournments ranging from 1 to 6 occasions were noted in 10 cases.

A sample of 15 convicted Dublin cases were checked to the published quarterly list of defaulters. However, 8 of the cases could not be traced.

Conclusions

In its Annual Report for 2002 Revenue notes that as a result of a major project to introduce the Pay and File procedure, together with coordination with tax practitioners and An Post and a public information campaign, 80% of the 2001 returns issued had been returned within a few weeks of the due date together with €1.7bn. The focus of this report was on a later phase of compliance activity when cases which had failed to respond to the promptings of the central compliance programme are distributed to tax districts for local investigation and, in particular, the use of the prosecution option to ensure that a return is finally filed. Dealing on a case-by-case basis with a hard core of cases for which prosecution is considered the only suitable method of obtaining a return of income is in strong contrast with the annual high profile compliance campaign. Equally the final tax yield will be insignificant in comparison, and the overheads will be greater. However that phase is of equal importance as it ensures that the equity of the income tax system is preserved, and ultimately that the success of the mainstream tax system is maintained.

For these reasons, Revenue has increased the use of prosecution as a method of obtaining outstanding returns and the results of the revised approach can be seen from the annual statistics of convictions of non-filers which show an increase from just over 200 in 1997 to an average of over 1,000 per annum in the period 1999-2002. In addition there have been two amendments to the law to strengthen the power of Revenue to obtain the outstanding return as well as a fine in conviction cases. However the audit findings raise the question as to whether the policy as implemented is achieving its maximum impact.

The system would appear to be under pressure to meet the demands of full implementation of the non-filer prosecution policy as indicated by:

The late distribution of 2002 cases to districts, the focus on the persistent non-filer as opposed to hitting all initial instances, and the large backlogs in Dublin district and with the Revenue Solicitor

The length of time from warning letter stage to getting the case into court can be up to two years

Instructions to State Solicitors to apply for Court orders for returns of income did not issue until fifteen months after the provision became law under the 1999 Finance Act

Lack of consistency between districts in the approach adopted to the use of such Court orders

The offence of non-compliance with Court orders, created by the 2002 Finance Act has not been implemented to date.

A review may be necessary to establish how the various bottlenecks can be addressed in order to ensure that the prospective non-filer can have a strong expectation of being subject to an early firm response for each offence.

While the annual number of convictions and the imposition of over €1m in fines undoubtedly makes a significant contribution towards improved compliance levels, a closer examination gives rise to concern that the overall impact at case level is not as clear cut as might have been expected. There were inconclusive outcomes to many prosecution cases:

One third of the total fines imposed may not be collected

Returns remain outstanding in all of the five cases in the audit sample where Court orders had been obtained

The tax due remained unpaid in 25% of a sample of 79 cases in which returns had been obtained as a result of prosecution activity

Only seven cases from a sample of fifteen convicted cases were traced to the published quarterly list of defaulters.

Only full implementation of available penalties including the enforcement of court orders will change the behaviour of persistent non-filers. This is confirmed by data from the report indicating that at present up to 10% of those convicted are repeat offenders, and that of a sample of 79 cases settled through prosecution activity returns for the latest year are outstanding in 33 cases.

194 returns were submitted in 79 cases only after an extensive compliance effort by Revenue, and a commensurate degree of reluctance on the part of the taxpayer. It was noted however that 50% of these returns declared annual tax liabilities of less than €500. Most of the 194 returns were accepted by Revenue without audit.

In general, the prosecution of non-filers is established as an effective method for extracting returns and is a vital part of the compliance programme. The shortcomings identified, when addressed, should improve the effectiveness of an extensive and costly but very necessary process.

Revenue Response

Compliance levels for the most recent year, as they relate to timely filing, continue to improve with 75% of all returns received on the due date rising to 80% within a few weeks. Initiatives to assist taxpayers through electronic filing via Revenue Online Service (ROS), streamlining of processes, the introduction of the calendar year basis of return and Pay and File in 2002 will facilitate improvement in this area.

Revenue's programme of prosecution of non-filers is one of the measures used to address taxpayers who fail to meet their obligation to file a return. As can be seen from analysis provided in the report at Table 2.9, a percentage of cases with an outstanding return will, on examination, be reclassified as no return needed. This may arise where an individual has ceased to operate a business, moved into PAYE employment or the source of income giving rise to the return e.g. investments rental income, no longer exists.

The remaining hard core of cases who fail to lodge a return are pursued through criminal prosecution by Revenue. Notwithstanding the success of the prosecution of non-filers programme in securing outstanding returns, prosecution has done little to change behaviour amongst hard-core non-filers. The Revenue response throughout this report highlights how Revenue will target such cases using improved audit selection, greater knowledge of the taxpayer and their business through "whole case management" which will lead to the raising of accurate assessments which will be pursued through the debt management programmes to enforcement where necessary. Furthermore this whole case management approach will be fundamental to addressing the relationship between returns compliance and audit as raised by the report.

The shortcoming highlighted in the report relating to the timeliness of non-filers programmes and backlogs throughout 2002 have been addressed by Revenue in detail. 2002 was an a typical year given that:

The change from the tax year basis to the calendar year meant that uniquely two tax returns were due in 2002 at end January and end October respectively.

IT developments used to extract cases for the year 2002 led to a more comprehensive but later issue of cases to the tax districts i.e. August 2002 as opposed to May/June 2001 for the previous years returns.

As part of the Revenues current development of a New Compliance Strategy all operations will be reviewed with a view to ensuring that the most efficient and effective systems are in place so as to maximise the use of resources towards targeting the non-compliant. The main findings of an internal Revenue review of non-filers prosecutions, taken by way of summary conviction, were:

The threat of criminal prosecution, i.e. the Revenue Solicitors pre prosecution warning letter, has a success rate of some 70% in securing outstanding returns but there is little evidence that it changes future compliance behaviour for the better.

Criminal prosecution is -

a slow process,

reasonably, though not 100%, effective in securing outstanding tax returns, not effective in changing future returns compliance behaviour in all cases.

Amongst other recommendations the review concluded that the threat of prosecution is a useful tool in securing outstanding returns and should continue as one of the compliance options for dealing with non-filers.

Issues relating to the pursuit of outstanding fines, court adjournments and mitigation of penalties, even in the case of repeat offenders, remain a matter for the Courts. The Revenue Solicitors office is in the process of advising State Solicitors to actively pursue appropriate cases to prosecution for failure to obey the court order to file the outstanding return.

Mr. Purcell

Chapter 2.8 records the results of an in-depth examination by my staff of the effectiveness of the Revenue Commissioners' prosecution strategy. That is in regard to those who fail to make income tax returns. This involves establishing the degree to which it is successful as a method of ensuring submission of outstanding returns and as a deterrent against future non-submission. Our approach was to carry out a general review of the operation of the prosecution process, both centrally and in the districts, and to supplement that review by examining in detail a sample of cases referred for prosecution.

The Revenue Commissioners' activity in this area has increased dramatically in the past five years. Statistics of convictions of non-filers show an increase from just over 200 in 1997 to an average of more than 1,000 per annum in the period 1999 to 2002. There have also been two amendments in legislation to strengthen the power of the Revenue Commissioners to obtain outstanding returns. However, my examination raised questions as to whether the strategy, as implemented, was achieving maximum impact. The report concludes that the time limits of the prosecution process need to be improved. At the time of the examination, there was a backlog of cases awaiting summonses in the Dublin district and in the Revenue Commissioners' solicitor's office. The length of time from the warning letter to getting a case to court could be anything up to two years. Although prosecution has proven to be reasonably effective as a means of obtaining outstanding tax returns, it has been less successful in changing compliance behaviour of persistent non-filers. It may well be that these must be subjected to a more stringent regime, including audit and the fast-tracking of prosecution action.

The Revenue Commissioners' strategy could also benefit from better enforcement of the collection of fines imposed, effective follow-up of court orders to ensure the production of returns, improved pursuit of unpaid tax on the returns ultimately made and the publication of the names of all defaulters. All in all, while the Revenue Commissioners can be commended for a more extensive approach to the pursuit of outstanding income tax returns, the report shows there is scope for making it more effective.

Mr. Daly

As pointed out in this audit, the prosecution of non-filers of returns is just one of the means used by the Revenue Commissioners to deal with non-compliance with obligations to file returns. Revenue's regionally based restructuring programme will provide greater knowledge of the taxpayer and his or her business through what we call whole case management in the future. This greater knowledge of the taxpayer will assist in targeting the most appropriate means of securing outstanding returns and tax. It will aid the raising of realistic estimated assessments in the absence of returns and allow the Revenue Commissioners to target the case for enforcement action with the sheriff, solicitor or attachment. This will ensure that the non-filer will not gain an advantage - indeed, he or she will be disadvantaged - by withholding tax returns. That said, I welcome the conclusion of the audit that the prosecution of non-filers is an effective method of extracting returns and is a vital part of the Revenue Commissioners compliance programme.

Chairman

The Comptroller and Auditor General stated that 2,500 referrals for summonses were in the Revenue Commissioners' solicitor's office in the Dublin tax district and that they can be there for up to two years. Is there a case for a Revenue court that would be more effective and would reduce the timespan?

Mr. Daly

We have addressed to a large extent the issue of the bottleneck in the solicitors' office and in some of the tax districts. The Limerick and Letterkenny compliance campaigns were mentioned in the report. The turnaround time in those campaigns has been reduced to between five and eight weeks. The sheer volume of cases in Dublin causes us problems but we are tackling that.

The idea of a Revenue court was the subject of a study by the Law Reform Commission, which issued a consultation paper in recent months and came to the general conclusion that it was not justified at this time. The question of a fiscal prosecutor was also considered. The view of the commission was that in view of the different approach being taken by the Revenue Commissioners towards prosecution, we should get on with it for some years and see how it works.

Chairman

The fines handed down by the district judge are often not collected. Is that not giving people carte blanche to ignore their sentences? People go into court and are fined, but one third of the fines are never collected.

Mr. Daly

That is a problem for us. Approximately one third of fines are not collected and that is disappointing for us after we have gone through the process. We are not responsible for collecting the fines but we have arranged a meeting between the Revenue Commissioners, the Courts Service, the Garda Síochána and the Department of Justice, Equality and Law Reform, to take place on 9 January, to deal with this issue, which needs to be tackled.

Chairman

I am delighted to hear that news because it is unfortunate that people can leave the court and never pay the fines handed down to them. Co-ordination with the Courts Service, the Garda and the Revenue Commissioners is important, as is the fast-tracking of cases through the courts. If people wait up to two years to appear in court it is likely they will have other tax liability issues by the time they get there.

Deputy Connaughton

Studying what the Comptroller and Auditor General has said about this and the response of the Revenue Commissioners, it appears there is a cohort of people out there which, through no fault of the Revenue, consistently puts the two fingers up to the system. I am talking about late and non-filers. For example, in 1997 the Revenue Commissioners sent out 1,917 warning letters, while in 2002 the figure was 9,348. Obviously the letter-writing department got into full gear over the intervening years. However, there are a number of people who, no matter what sanctions are brought against them, are just as bad the following year and the year after that, even when they are brought to court.

I will not go back over what the Chairman said about non-collection of fines. My understanding is that the people who have gone through the courts have not been audited. If ever there was a red light signalling that a person should be audited, it would be that he or she had already been through the courts for non-compliance. I do not understand why all these people are not audited. They are right in the heart of things. It is astonishing that after receiving the letter, being brought through the courts and fined, they reoffend the following year and thereafter. Will Mr. Daly give us some idea of the people who are involved in this? Is it the case that because the fine is so small and they know they will get away with it, they could be hiding something especially big? If they are, would it not be right to subject them to a full audit?

Mr. Daly

The Deputy mentioned the letter-writing campaign, as he called it. Two things must be taken into account. First, the population of potential taxpayers has grown enormously in the period concerned and, second, this programme was in its infancy in 1997 and we have since ratcheted it up as a valuable part of the Revenue Commissioners' overall compliance programme.

With regard to auditing, I am conscious that earlier I may not have given members the full picture in this regard. We did not target these non-filers for audit but we have done something about that now. All late filers are put into the screening process to select cases for audit. We do not take them as a block for auditing but we put them into the screening programme. About 200 non-filers emerge from that process.

Deputy Connaughton

How many non-filers?

Mr. Daly

We must consider the people who eventually emerge from the court system and are convicted. A total of 972 people were convicted in 2002. The whole process, however, beginning with the letter-writing, the Revenue solicitor's letter and the threat of going to court generally brings in the return, putting these people on record. I appreciate the Deputy's point that people who have bucked the system, whom we have had to force through the courts to persuade them to file returns, may have something to hide. In most cases, however, they are simply careless and sloppy. In many cases we are talking about relatively small businesses which do not get around to filing returns. Within that there is a hard core of perpetual non-filers. The changes to the legislation in the past year or so enable us to get a court order to require the return and then go back to court if the return is not made.

Deputy Connaughton

Is that power used?

Mr. Daly

Yes, we are beginning to use it. It will be an effective measure. The whole programme is under review because it is not enough to say that we will bring a few thousand people to court every year. We need to review how effective it is. It is part of a greater compliance programme which includes audit, enforcement, assessment and sending material to the sheriff and solicitors.

Deputy Connaughton

Is there a criminal subtext to this cohort?

Mr. Daly

No, I do not think so. There is a criminal element elsewhere but not in that cohort.

Deputy Connaughton

I have one other question which may or may not be related. It is a simple matter which I intended to ask Mr. Daly about the last time he was here regarding the normal self-assessment forms that every taxpayer gets. There used to be a system in the farming world up to 2002 called a farm profile. That is now integrated into this new system and I do not know whether the farming organisations or others in the farming community have relayed to the Revenue Commissioners that they find it extraordinarily difficult because it does not seem appropriate to their business. Has that come to Mr. Daly's notice?

Mr. Daly

It has. We have been trying to rationalise the returns from all taxpayers. We want to begin analysing the information we are getting on returns so that we can assess the risk of a particular taxpayer either under-declaring income or not making a return. We need to get into this new computerised audit selection process and to get consistent information from every sector. It is that as much as anything else which has driven the need to try to standardise our tax forms and returns.

Admittedly, we have standardised by abolishing particular forms for farmers and other categories, but within the new standardised form there are different boxes or accounts menus. Not all of them have to be filled in by everybody - the farming community or any other is only required to fill in the ones relevant to it. We are not looking for any more information than in the older system but are trying to get it in a consistent fashion so that we can feed it into a computer to do the analysis for us. We had discussions with the farming organisations during the process of changing over——

Deputy Connaughton

It is confusing.

Mr. Daly

If there is anything we can do with the farming organisations to remove that confusion we will certainly do so. I will talk to our business customer service area about that.

Deputy Noonan

I have a few questions on court procedures, fines and so on. Do these cases normally go to the District Court?

Mr. Daly

Yes.

Deputy Noonan

Mr. Daly said that he was going to meet various people, including representatives of the Department of Justice, Equality and Law Reform. Did he have a meeting with the President of the District Court at any stage?

Mr. Daly

No, I did not meet him to discuss this process. I know the court procedure is slow, and I am not saying that all this delay is the fault of the courts system. Obviously, within the Revenue Commissioners we must streamline our own processes, and we are doing so. We are trying, for a start, to identify the more entrenched cases and concentrate on them.

I hesitate to discuss what happens in the courts but I am most interested in speeding up the process. There is a high level of mitigation, for example, in these cases. Even though convictions are obtained, the Judiciary will mitigate the fine or penalty by about 62% on average. There is a very high level of adjournment - about 40% of cases - which delays the whole system. In a lot of cases people give us the return on the steps of the court or send it in a few days in advance. It is fair to say that judges do not like convicting people when the reason for which the case has been taken has been dealt with.

Deputy Noonan

On the face of it the court procedures are not working very efficiently. It is very difficult to talk to judges without being accused of trying to influence them. That has been a problem right across the administrative system. However, the presidents of the various courts are now taking a greater interest in the manner in which their courts act, and the way to avoid an accusation of interference is to talk to the president of the court.

The number of adjournments is outrageous by any standard. Yet if Mr. Daly, as Chairman of the Revenue Commissioners, was to say that in public there would be a row. He could not criticise a particular judge either. However, it is legitimate to talk to the president of the District Court and ask whether there is any chance of a more streamlined system being put in place. I see from the report that District Court judges may mitigate up to 75% of a fine. Is that provided for in the tax consolidation Acts?

Mr. Daly

The level of mitigation is provided for in the legislation.

Deputy Noonan

It is only in Revenue that a discretion like that is provided for. Generally, judges have discretion in the fine they can impose. The norm in other areas of law would be the specification of a maximum fine, with the judge free to apply any figure up to that maximum. Once it is applied it is then for somebody else to vary. It is unusual that in the context of Revenue the judge can mitigate up to 75% of the fine. How did we arrive at that position?

Mr. Daly

My colleague is stating history and to be honest with the Deputy I cannot give him a more erudite answer right now. I honestly do not know. Maybe it is just a matter of judges being reluctant to impose penalties in tax cases.

Deputy Noonan

That could be right. There was an anti-tax culture for a long time. It comes back to a point I made under chapter 2.9 about how self-assessment works if people know they are very likely to be caught for evading and that if caught they will be punished. The court system is very ineffective in carrying out the last part of that mandate. Judges can mitigate up to 75% of fines and mitigate 62% of fines on average. The courts system fails to collect one third of the fines imposed. When one measures the numbers of terms of every €100 of fines in tax cases, only €25 to €26 is collected.

Built into that are all the adjournments. I see from the report that some cases are adjourned five or six times. As a result of the system seeming lax and soft, as Deputy Connaughton pointed out, half of the same people return to the court the following year for the Revenue to re-prosecute. This area must be sorted out.

Mr. Daly

I agree with the Deputy, and we have set about the process of streamlining. We have started with our own operation, and the fair way to do it is to make sure that we are above criticism ourselves before moving on to the next phase. We have taken the initiative regarding the non-collection of fines, and I certainly take the Deputy's point about meeting the president of the District Court.

I emphasise that this non-filer regime is just one part of a whole lot of compliance initiatives. Return filing compliance rates have been improving over recent years. The general rate is 75%, which is an improvement on 2002, and I am hoping for an even bigger improvement this year. There are other effective methods, not least the 10% surcharge that applies to late filing. That is very effective. However, I take the point that this whole process needs streamlining.

Deputy Noonan

The Revenue solicitor's office seems to be under a lot of pressure. Is that through lack of staff or what is the position?

Mr. Daly

In recent years we have ratcheted up this programme quite extensively but the same office has been heavily engaged in going to the High Court for orders under section 908 on the DIRT inquiry. There was an unprecedented number of these orders and of cases in which we had to seek the advice of the Revenue solicitor's office on challenges and appeals. The staffing is not inadequate, it is just about right. We can streamline the procedures and achieve more productivity there.

Deputy Noonan

It seems that for the courts, and the fines and penalties system, to be effective the case should follow quickly after someone has not filed but there appears to be quite a long delay before summonses are issued. While it varies from one tax district to another it does not appear to work as a penalty system to ensure compliance. The problem, whatever it is, seems to be in the Revenue solicitor's office.

Mr. Daly

As a general proposition it is valid to say that justice delayed is justice denied. We have put two extra people into the Revenue solicitor's office in the past year at general management level to streamline the processes. Prosecutions outside the Dublin area are generally taken by State solicitors rather than the Revenue solicitor's office. The workload there can vary from one area to another and we are reviewing this programme.

Deputy Noonan

The State solicitors are remunerated by the State but I see in the report that if costs are awarded in the District Court the State solicitors do not return them to the Revenue, so in effect they are paid twice. Is that some kind of convention that arose over the years or will the Revenue address this?

Mr. Daly

I think it is a convention but I am not sure. The report was critical of State solicitors not applying for costs or collecting costs from the taxpayer and we are concerned about that. The State solicitors contracts are under review following the Nally report of the public prosecution system. The position on costs forms part of that review.

Deputy J. Higgins

Is there a formal or informal criterion regarding the vehemence with which fines are pursued? Is there a limit set below which smaller orders might be disregarded so that more effort is put into collecting a higher order?

Mr. Daly

In this general non-filer regime, no. The collection of fines is not a matter for Revenue, it is the responsibility of the Courts Service and the Garda, and I cannot say what criteria they apply. Revenue has no particular views on that. Our view is that if the fine is imposed it should be collected. If one were to interfere in that process by deciding which fines should be collected one would be interfering in the decision of the court.

Deputy J. Higgins

I was not insinuating that should happen but does Mr. Daly think that any such criterion exists in the mind of the collecting authorities?

Mr. Daly

I am not aware of it.

Deputy J. Higgins

Is Mr. Daly aware ofthe fines or does he have any examples of thehigher level of fines that have not been collected and have more or less fallen into a hole somewhere?

Mr. Daly

The maximum fine imposed for non-filer prosecution is €3,000. That is generally mitigated by up to 75% of that amount, which is €750. That is the general fine. We have other prosecutions for tax evasion which we have not discussed today but in which the fines would be significantly higher.

Deputy J. Higgins

In these cases is there no alternative of a few days in the can?

Mr. Daly

I am sure there is if the person does not pay. There is one tax prosecution case in which a fine was imposed and the individual did not pay, and he is now in Mountjoy.

Deputy J. Higgins

Does it not happen automatically? I am curious because by coincidence, a man called Fintan Lane is serving two months in Limerick prison for refusing on grounds of conscience to pay a similar fine, having been involved in a peaceful anti-war protest in Shannon Airport. It seemed that he was automatically thrown into prison which was ridiculous, yet it does not happen in these cases.

Mr. Daly

We are not responsible for the collection of fines so I cannot speak for any other agency. We are responsible for many things but not that.

Chairman

That is an issue for the courts and it is in the remit of the Minister for Justice, Equality and Law Reform.

Deputy J. Higgins

It would be fascinating to invite someone to come in here to explain to us what drives the different ways in which people are treated.

Mr. Purcell

I published a value for money report on the collection of fines in December 2000 which this committee examined extensively over several meetings with representatives of the Courts Service and the Garda Síochána. I recall that the pattern of collection of fines for Revenue offences is consistent with the pattern in the general areas of the imposition and collection of fines but there was one very unsatisfactory area. The Courts Service and others gave certain undertakings and certain proposals were put in train to improve it. When the Courts Service next appears here the committee can ask what progress has been made and hear answers to the kinds of questions Deputy Joe Higgins is raising. I can confirm, however, that the experience of Revenue is not particularly different from the general problems surrounding the collection of fines and what happens when a person does not pay a fine, the issue of warrants and so on. The report covers that and if the Deputy does not have a copy he can find it on our website or I can furnish a copy to him.

Chairman

That would be very useful, thank you. Will you please make your concluding remarks on chapter 2.8.

Mr. Purcell

The acid test of any of our reports is the degree to which they are debated here, and the process of accountability. I like to see them as contributing to an improvement in the process. The Revenue Commissioners have taken or are taking some action on most of the shortcomings or areas with potential for improvement, identified in the report, which is good to see.

I raised the issue of State solicitors and their costs in a report dealing with fishery fines and noted that when costs were awarded to the State solicitors they were not returned to the State. It was the same as Deputy Noonan's point that there was a sense in which they were being paid twice. When costs were awarded to the State solicitors, they were not returned to the State. I made the same point as Deputy Noonan, that there was an element of being paid twice. At the time, there was nothing in the contracts which prevented this happening. We were looking at moral persuasion, but such a philosophical argument is not always the best one to use. It was stated that in the course of the renegotiation of the State solicitors' contracts with the Chief State Solicitor, the matter would be addressed. To that extent it is something that can be determined by the Committee of Public Accounts.

Chairman

We could follow up on that matter. I propose that we cover the other chapters in the new year. We also need to get an update on offshore accounts. I thank Mr. Daly and his team for a comprehensive discussion.

I propose that next week's meeting will examine the Appropriation Accounts of the Department of Agriculture and Food, Vote 31, chapter 9.1 on the exhibition and show centre at Punchestown, resumed.

The committee adjourned at 2.25 p.m. until 10.30 a.m. on Tuesday, 16 December 2003.