“Why aren’t they in jail?” The woman asking me the question had the newspaper at her elbow, which was over an article about Revenue collecting millions in unpaid taxes.
There are regular reports about individuals and business people striking settlements over unpaid tax.
One of the consequences of the downturn has been a change in the attitude of people to tax default. Tax default is no longer seen as a victimless crime, and there’s a greater sense of civic responsibility towards tax than there used to be.
The only purpose of the tax system should be to collect taxes. If the tax doesn’t get paid, Revenue pursues it along with interest on the back tax owed.
Most of the time, in the vast majority of cases, they get it. Often back tax is due not because of deliberate fraud but because the right amounts aren’t paid at the right time due to carelessness or ignorance.
It wouldn’t be right to treat everyone who underpays tax the same way, because the reasons and the amounts are different.
While carelessness is not an excuse, the tax law does set out that different penalties are to be applied in such cases. Interest is always charged, but the amount of the penalty applied depends on the cause and the amount of tax involved.
In more serious cases, not only will penalties and interest be applied, but also the name of the taxpayer will be published. In my experience the threat of publication focuses the mind even more than the financial cost of the interest and penalties.
While PAYE taxpayers have few direct dealings with the tax system, it is quite literally a daily concern for anyone in business. A retailer charging the wrong VAT rate on goods or services supplied to the customer becomes liable for the back tax due. Mistakes can be made without any intention to cheat, and that’s why different penalty regimes are operated.
It seems from newspaper reports that some medical consultants fell foul of the complications that can arise when personally owned companies are used to structure commercial affairs.
Tax law treats companies as separate entities to their owners, and this means that there can be two tax bills on the same transaction. A failure to make the proper distinction between companies and their owners is at the root of many back tax settlements.
Tax penalties are sharply reduced if the taxpayer cooperates with the tax inspector or makes a full confession. The penalties are virtually eliminated if the taxpayer goes to Revenue first. Co-operation usually means you won’t have your name published either.
There are some who would say that this relatively “softly softly” approach is a form of moral hazard and effectively rewards misbehaviour by taxpayers. That may be, but it’s a practical approach to resolving a serious problem. Lower penalties don’t mean the Exchequer is at a loss, because interest at around 10% is always charged. And it’s effective.
But there’s always going to be serious tax fraud, and therefore there will always be prosecutions.
In Ireland this year so far there were about two prosecutions a month on average for tax fraud, and most of these involved custodial sentences being handed down. The cases which Revenue refers to the DPP are not always those which involve the largest sums, but ones which it thinks are most likely to be prosecuted successfully.
So there are several reasons why everyone who breaks tax law doesn’t end up in jail. Perhaps the most important reason is the pragmatic one. There must be deterrents against tax fraud, and jail is the ultimate sanction. The tax system is there to collect taxes to fund State expenses.
Why should the tax system routinely add to State expenses by sending people to prison, when it can collect their back taxes instead, along with interest and penalties? That’s the answer I gave to the lady with the newspaper.
Brian Keegan is director of taxation at Chartered Accountants Ireland.
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