I thank the Chairman and members of the committee for the opportunity to make an opening statement. I want to try to bring as much clarity as I can to the data Revenue received recently from the Department of Social Protection relating to pensioners, our approach to analysing that data and letters we issued, and our next steps.
Revenue's job is to collect the right amount of tax at the right time from people and businesses. In order to do that we need the correct information about people's circumstances and about their income. In regard to self-assessed taxpayers, we get that information from the taxpayers themselves in a return every year. In regard to people taxed under the PAYE system we get employment or occupational pension information at the end of February each year from their employer or pension provider in the P35, with which most members would be familiar. In most instances, until relatively recently, we could only get information about any other income which people in that sector have from the taxpayers themselves. However, for a number of years our strategy has been to seek to get information automatically from third parties, under appropriate legal provisions, and to use that data to update our records and for risk analysis.
The strategy has been widely articulated by us in statements of strategy, annual reports, public appearances and so on. In recent years we have received information from third parties ranging from bank and credit union deposit interest, rent supplement information from the Department of Social Protection, payments from the Department of Agriculture, Food and the Marine, payments under the taxi regulators and so on. There is a long list.
Under regulations made last year we received returns from all Government bodies regarding payments made by them. All of this information is incorporated into our risk analysis and profiling system, REAP, which has 46 data sources and it chooses the information to identify mismatches which might indicate that there is tax at risk.
We have had exchange of information arrangements with the Department of Social Protection for many years, as outlined by Ms Vaughan. As part of ongoing closer working with that Department, we are now receiving regular flows of data relating to most of the long-term schemes.
Following a project carried out in Revenue relating to Department of Social Protection pensions, we asked the Department to provide us with an up-to-date file on pension payments and late last November it did so. I should clarify that. We received a test file in mid-November and the actual data on the cases on 1 December. That file provided us with 560,000 records relating to the State pension, namely, widow's, widower's, surviving civil partner pensions and invalidity pension, and the transition pension which is not on a printed copy.
It was an incredibly large data set and our first job was to match it with our records. When we matched it we found in three quarters of the cases we had no immediate concerns because 310,000 cases either had only a Department of Social Protection pension or the figures matched - in other words we knew about all their sources of income - and 100,000 cases are in the self-assessment system and will be due to make tax returns next October, in the normal way.
However, in 150,000 cases which are taxed through the PAYE system, the figures did not match and our immediate priority was to rectify the mismatches speedily for the tax year 2012 and beyond in order to prevent arrears building up for taxpayers. At the same time, we had to tell the taxpayers involved very quickly because they were about to see a change in their take home pay or pension. In most cases this would be a negative change. We wrote tailored letters to four groups: 20,000 cases who were paying too much tax; 30,000 cases who had never reported their Department of Social Protection pension to Revenue, and on the basis of information available to us, would pay more tax in the future; 85,000 cases who had reported their Department of Social Protection pension but had under-reported or their circumstances had changed since they reported; and 15,000 cases that did not report their Department of Social Protection pension to Revenue but as it appeared that their total income is less that the exemption limit for those over 65, they would have no liability but that there could be a temporary hiatus while we updated their records and prepared new tax credit certificates for them.
Each person was given an individual tax credit certificate setting out his or her Department of Social Protection income and the tax credits as we know them. There is an error in the printed version which states that the certificate also included their pension or their salary. It did not. It was their Department of Social Protection income and their tax credits as we know them. They were urged to examine the information and get in touch with Revenue if the information was wrong.
Everybody knows what happened next. We caused confusion and distress to some people and I am sincerely sorry for that. It is important that I make some points in this regard because there has been much comment and questioning of Revenue's approach and our communication strategy. Revenue only wants to collect the right amount of tax - no more and no less - from all taxpayers. That is our job. The total amount of additional tax involved in this category is material in the aggregate and we had a responsibility to the State to secure it as quickly as possible. Our overarching focus was to put the cases in question on the correct basis for 2012 and we only had a few weeks to do that. Any delay, as I have already indicated, beyond January would have meant a build up of arrears for the taxpayers concerned with even more serious consequences for their take home pay or their pensions later in the year. Rightly or wrongly, we judged that a large scale public announcement that we were examining the tax records of 560,000 pensioners would have caused wide scale and unnecessary distress - way beyond what we have seen. This would have been pointless since three quarters of the cases are not an immediate cause of concern to us. I emphasise also that none of our letters used the kind of emotive language that has been used by some commentators and we made no reference whatsoever to back years in our letters, except in the letters to people to whom we owed money.
What happens next? There is no one simple answer to this question. We will review the 20,000 cases that may be owed money for 2011 as a priority as soon as we get their P35 details. We will issue revised tax credit certificates to the 15,000 cases I mentioned who seem to be exempt and we will have that completed in a short number of weeks. That leaves approximately 115,000 cases. The range and complexity of these records makes it impossible to give a simple answer and we need to understand them better.
I can tell the committee that we looked at a very small random sample of the cases that got letters to give us some insights which I could share with members today. We looked at 51 cases which showed that in four cases, we owe money, that 14 cases never told us about the Department of Social Protection payment at all and that in 33 cases, the amount of the Department of Social Protection pension is understated for various reasons because of changed circumstances. The amount of income in those cases which would not have been taxed had we not amended the record quickly for 2012 ranges from 20 cent to €17,820. A total of 19 cases, which in terms of the 51 cases is more than one third, have additional income of up to €2,000 about which we did not know. I emphasise that this was not scientific but I was trying to get some sense of the range at which we are looking.
The Revenue Commissioners' normal approach to compliance is to put the right arrangements in place on a current basis and to focus the attention of our compliance staff on the cases which represent the greatest tax risk. As part of our day-to-day compliance strategy, we regularly take groups of cases, analyse them and, on the basis on that analysis, devise a policy for other cases in the same sector.
Our approach in these pension cases is no different. Accordingly, as soon as we can, we will examine in detail the 2,500 largest cases where there is a mismatch between our records and the Department of Social Protection record and where there is non-Department of Social Protection income of €50,000 or more. In that cohort, at which we have not yet looked, we expect to find cases of very recent pensioners who will have no issue. We expect to find cases who reported their Department of Social Protection payment to us but their circumstances changed and they did not report the change. These cases may or may not be material as it depends on the change. We expect to find cases that will not have claimed appropriate medical expenses, for example, which will reduce any liability they may have. I cannot say at this stage whether we will find in that cohort cases with a material liability but I can say that whatever we find will inform our approach thereafter to the next group of cases.
What can I say to reassure pensioners? I can say to those who did not get a letter that they should not be concerned. We know some of them are concerned because they have telephoned us. There is no further tranche of letters to issue to social welfare pensioners. Some people have become quite upset and scared that because they did not get a letter, there is one on the way. I can also say to pensioners that the new arrangements with Department of Social Protection mean that we will get information weekly from now on, so changes to pension payments will be reported to us on an ongoing basis and we will take the necessary action. We will prepopulate the online return of income for self-assessed taxpayers with this information, so if one is a self-assessed taxpayer about to file a return next October on ROS, our online system, one will see this figure there.
We will collaborate with representative bodies to develop and implement a communications strategy in regard to tax and pensions with particular focus on the PAYE sector. Meetings in this regard have already taken place this week.
Much comment has focused on how many years the Revenue Commissioners will go back and what income levels will cause us concern. By law, we cannot go back further than four years, except where there is fraud or negligence but, in practice, the scale and nature of non-compliance must influence our approach to arrears. We know that approximately 11,000 pensioners only commenced their Department of Social Protection pension last year, so there is no arrears issue, and that another 10,000 only commenced their Department of Social Protection pension the year before.
As members will have heard in the media, I can also reassure pensioners over 65 with total income of less than €18,000 if they are single, widowed or a surviving civil partner or €36,000 if they are married or in a civil partnership that they are exempt from tax. It is important that I point out that the corresponding figures for the years 2007 to 2010, inclusive, were €20,000 and €40,000 - in other words, they were higher. Therefore, if one's income in those years was below the higher figures, one has no arrears issue about which to worry.
Yesterday, we published headline results for 2011 showing that we completed 11,000 audits which yielded tax, interest and penalties of €414.9 million. That is almost €40,000 per case. In that context, the Revenue Commissioners could not justify deploying resources to pursue small amounts.
The Revenue Commissioners' job is to collect the right tax fairly and efficiently as our mission statement states. In fairness to taxpayers generally and to pensioners who are paying tax on all their income, when we became aware that a large number of Department of Social Protection pensioners had not reported their pensions to us, even though they were advised to do so by the Department, or that the amounts we had on record were understated, we had to move very quickly to put it right for this tax year and future years. The short timescale between then and the start of the tax year became our undoing. We were not able to implement the changes with the standard of service which we would have liked and I regret that. We will review, in particular, the communications strategy and we will learn from it.
I thank the Chairman. I am sorry my statement was a bit long but I needed to put some things on the record.