This is an area that Ian McTernan specialises in, so there is no better person to advise us on the different methods the Revenue uses to find out who should be investigated.
Listed below are the common methods that Ian has come across.
The Revenue selects a certain number of cases to make aspect enquiries into, on a purely random basis, so you could just be unlucky.
It is estimated that the Inland Revenue randomly investigates about 10,000 tax returns on an annual basis.
Third party informers
The Revenue will select cases based on third party information.
For example, this can include a tenant informing the Revenue of the amount of rental income they pay, when making a claim for tax credits or social security payments.
The Revenue will then link up the records and discover the landlord has not made any return of any rental income ever, or a much lower gross rent figure is shown on their
Return than that quoted.
Some people are just never satisfied!
The Revenue also read local adverts taken out by traders, landlords, etc., and try and link these with known taxpayers.
This was a favourite pastime of one particular Inspector I knew and one that proved very lucrative for the Revenue and very positive for his career! (Probably not as lucrative for the dodging taxpayers though!)
New stamp duty and land tax returns
With the new stamp duty land tax returns, the Revenue will soon build up a powerful database to supplement the information held at the Land Registry so that they can find out who owns more than one property.
They will also be able to track sales and purchases.
So anyone who thinks that they are currently ‘getting away with it’ better think again!
Fact finding missions
Another favourite trick of the Revenue is to discover that you own a second property and do not live there, and then wait until the year in which you sell it and fail to notify them of the gain on the property.
Or better yet, you declare the gain.
They will then send you an innocuous sounding letter asking if there is anything else you need to declare and can you confirm that your Return is complete and correct?
Once you answer yes, they will then inform you that they are opening an investigation as they have information that leads them to believe that you have omitted something from your Return.
Computers and statistics
The Revenue has another tool in their armoury, and this is the statistics they have built up as a result of the self assessment system and the computerisation of records.
They now hold a database of several hundred thousand records for any type of trade or business, and they have programmed their computers to automatically flag for enquiry any entries in a Return that fall outside the statistical norm.
It is a closely guarded secret as to exactly how far out from the norm you have to be to trigger this, but I am aware of a case that involved 20 mini cab drivers (I did not deal with this case).
They thought they were being clever when they got as many petrol receipts as possible from a local garage and included huge amounts of petrol in their accounts, thereby cutting down their tax bills.
Imagine their surprise when each and every one of them was told they were under enquiry, and based on the amount of petrol they had claimed in their accounts they must have under declared their income by about half!
Eventually the case was settled and every one of them had to pay several thousand pounds in additional tax, interest and penalties.
If your statistics fall outside the boundaries, such as too much expense of a certain type or too little income for the property concerned, then you are significantly more at risk of having an enquiry aimed at you.
So what does all this mean?
Well to put it simply, make sure that you do not have anything to hide from the taxman - because sooner or later he will catch up with you.
There is a common proven theory that: people avoid paying tax when they are able to pay it, but they get caught by the taxman, when they are unable to pay it!
Make sure that you are not one of these people!