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How to ... Keep Calm and Survive a Tax Investigation

3 April, 2018

James Quarmby

If there’s one letter that’s never welcome in one’s postbox, it’s a letter from the taxman. A tax investigation can range from a relatively benign routine enquiry into some aspect of your tax return that the relevant tax authority does not understand, through to a full-blown investigation into your affairs, normally when there is a strong suspicion that something is seriously wrong.

The first thing to note is that it is likely, at best, that you have made some kind of mistake that needs to be rectified and that things will at least remain ‘civil’. However, where your tax authority suspects deliberate behaviour (i.e. tax fraud), it will launch an enquiry, and the letter announcing this can appear quite terrifying. Before your stress levels go off the scale, bear the following in mind:

  • If you agree to follow procedure, then the tax authority will generally look for a civil settlement and will not seek prosecution.
  • Whenever you receive any kind of enquiry from the taxman, it is important to seek advice. The first thing your advisor will do is check that authority has been granted to enquire into your affairs.
  • Once it has been established that the enquiry is valid, it is then a matter of determining what exactly is wrong with your tax return. This involves a full review of your tax affairs for the tax year in question and presenting your findings to the tax authority. Typically, tax authorities are not very forthcoming about their suspicions and will rarely tell you exactly what they think is wrong with your return, which means that you have to play a game of ‘show and tell’ in order to get to the bottom of the matter.
  • Once the picture is clear, you should be able to agree to the total amount of understated tax (if any), to which interest will be applied, together with a penalty. The level of penalty will depend upon the seriousness of the case and your behaviour both before and during the investigation.

If taxpayers are properly advised and cooperative, even the most sinister-seeming tax investigation can become quite routine. The bonus is when the taxpayer comes to realize that the tax authority is just doing its job — to ensure that you pay the correct amount of tax under the law.