Tax Investigation Tactics

Inside Track - Richard Lawrence On Tax Investigation Tactics

"It's a bit like dancing with wolves."

I take great care of my clients' affairs. Provided they follow my advice, there is no reason why their local tax man should take any unusual interest in them. For the record, though, many clients simply do not believe me when I tell them the lengths to which the Revenue can go to investigate the affairs of someone they suspect. Prevention is always better than cure. If you do happen to find yourself faced with some awkward questions, knowing the kind of tactics to employ, is always useful.

What follows is based on my own experiences of being investigated by the UK's Inland Revenue over a period of several years. I imagine investigation methods practised by revenue authorities around the world are all very similar. In my case, all they found was that I owed them nothing. The experience did take up a considerable amount of my
time; it could have taken even longer had I not adopted some of the tactics I am passing on to you.

The Initial Stages
Keep in mind at all times that you may not know if you or your business are potentially or currently the subject of an investigation by The Revenue. Answers to routine and apparently innocent questions from a junior in your local tax office, for instance, may be contributing to the groundwork of a full scale investigation. Inaccurate or unconsidered responses, casually given at this stage, may need to stand up to much greater scrutiny later. Initial responses will need to hang together with any other information that is subsequently requested or obtained from other sources. Do not underestimate a revenue authority's power to acquire information. If any of the initial questions relate to transactions that you have conducted with a professional intermediary, contact them at the outset for advice on how to respond. A carefully constructed initial response will often result in the matter going no further.

If however, after initial enquiries, your local tax office does decide that your affairs warrant further research, your file will probably get passed to some kind of special office which deals only with investigations. The revenue may or may not inform you that this has happened, depending on whether they believe it is prejudicial to their enquiries to do so. If you are not told officially, then the first you may hear of it, is if third parties known to you are contacted by The Revenue and asked questions about your affairs. If you are alerted in this way, you should react immediately by asking your local tax office to explain to you what is going on.

The Revenue rarely use the word 'investigation'. They prefer more euphemistic terms, such as 'referral for further enquiries'. If you are informed that your file has been passed to some kind of special office, you can assume you are the subject of an investigation. In the UK that office is called the Special Compliance Office (SCO).

The SCO in the UK categorises investigations, based on the information available to them, as being either those where serious fraud is suspected at the outset, or others, not involving serious fraud. Each are dealt with in a different manner, under codes of practice referenced 8 and 9 respectively, although, unless you ask, you are unlikely to be informed of this.

If you are a UK tax-payer and you become aware that your file has been passed to the SCO, the very first thing to do, before entering into any other dialogue or correspondence with them, is to request confirmation in writing, under which code of practice you are being investigated. At the same time request a copy of the relevant code of practice, as this contains useful information on how the investigation should be conducted. It obviously does not contain details of all the devious little tactics that may be employed, but it does provide a useful insight into the official attitude towards such investigations. If you receive confirmation that code of practice 9 is being applied, it means serious fraud is suspected. Seek legal advice immediately, and the remainder of this guideline is not applicable to you.

Some Decisions To Make
From the outset there are two important decisions to be made. (i) Should you provide total co-operation or not? (ii) Should you employ professional help or not? Only you will, or should know, what potential The Revenue might have for substantiating whatever they apparently suspect. The problem, as somebody once observed, is that if every tax-payer received a message saying, "flee the country, all is known", 99.9 per cent of the
population would leave.

Selection for an in depth investigation is unlikely to be made if you are suspected of some relatively small mis-declaration of income. Rather, any major tax avoidance schemes that you have put into place will come under the spotlight. You should carefully review all aspects of these schemes before you decide what tactics to adopt.

If you have put schemes into place without taking the proper advice from someone like me, and you suddenly realise they may not stand up to scrutiny, then you may feel it better to cut your losses and give full disclosure. This may work out for you, as The Revenue like quick settlements. They will often agree to settle for an amount that excludes the penalties that could be added, if they had taken the time and made the effort to pursue and prove their case.

If professional help is to be sought, you will need to employ a firm of accountants who have specialists in investigation work, as it is unlikely that a regular accountant will have much, if any, such experience. The costs of this can be high, although, in the UK, if it can subsequently be proven that there were no reasonable grounds for the investigation, a claim for compensation can be made to the Inland Revenue Adjudicator Since money grabbing accountants and lawyers don't always have their clients best interests at heart, my opinion is that a tax-payer is probably better off retaining the conduct of a revenue investigation himself, regardless of the degree of difficulties to be faced. One major benefit of this is being able to dictate the pace of the proceedings (the importance of this will become apparent). If, as the investigation unfolds, specialist advice is needed on particular matters, this can be sought, as and when required.

Revenue authorities usually recommend that professional advisors are appointed. In view of this, alone, it probably is a good reason not to do so. Typically, specialist investigation accountants have many cases open with The Revenue at any one time. This indicates they'll have an ongoing and close relationship with The Revenue, which could mean that settlements are often arrived at after a great deal of informal negotiation takes place. During negotiations, there will be give-and-take on both sides, which allows for the possibility that you could be sacrificed, in order for your accountant to secure lighter penalties for one of his other, and possibly more lucrative, clients.

The Initial Ritual Dance
The opening shot from an investigating officer will usually be along the lines of an invitation for you to disclose or explain any apparent omission from tax returns or accounts, or to request more details about information you have already provided. Particularly so, if it relates to something that is, or looks like, a tax avoidance scheme. Initial communications from The Revenue will be carefully worded, in a way that might make you think they know more than they probably do. This is done in the hope that you might tell them something they don't know.

The first approach may also contain an invitation to have a meeting. Even if a meeting is not initially suggested, face-to-face interviews are a major strategic element of revenue investigation techniques, and should usually be avoided. In such a situation, even the most accomplished individual will probably be like a lamb being led to the slaughter.
In the UK, a taxpayer has no legal obligation to attend any such meeting. There are considerable benefits to conducting the whole of the investigative process in writing. You may think that if you have nothing to hide, then a meeting will deal with it once and for all. Don't be deluded. During that meeting, in your eagerness to 'tell all', you may well say something that is perfectly innocent but which only leads to further suspicion and additional questions.

From the outset, make it perfectly clear to The Revenue that if they put their precise questions to you in writing, you will answer them - in writing. This alone could deter them from taking the matter further. Especially if, at the time, they have other cases they believe will be quicker and easier to settle, and will enable them to more rapidly achieve results on their settlement targets.

The Investigation Proper
While The Revenue maintains that tax payers have an obligation to tell them everything that is relevant to enabling a proper assessment of the tax due, they are obliged also to not incur on the tax-payer excessive time or cost.

If you receive letters containing catch-all general questions, ask them to be specific about the information they require. Also ask them why they want the information. If you are confident of your position, it does no harm at all to adopt a positive, if not aggressive attitude when responding.

When answering points of detail, look back over your files to ensure that what you say is consistent with any information you have already given them or which they might have obtained from other sources. A simple mistake in a date or amount of money could compound rather than reduce any suspicion they may already have about a transaction.
Do not underestimate The Revenue's potential sources of information. Most revenue authorities now have the power to obtain details of almost anything about you, regardless of what you may hope or believe about secrecy or client privileges. The advantage you have is that they still need to know where to look. Don't inadvertently give out this information.

For example, The Revenue might ask for some proof that an invoice you are claiming as an expense was actually paid. (The particular invoice may in fact have nothing to do with their actual investigation.) They suggest a copy of a bank or credit card statement, showing payment of the item, would suffice. You send such a copy and they immediately know the location of your bank or credit card account. They can then require that the bank or credit card company provides details of all the transactions on your account. Once they have these details, they can start looking for the real information they hope to find. Remember one piece of information invariably leads to another.

To prevent The Revenue, without refusing their request, from getting these kinds of details, just send them a photocopy of the entries on your statement, which shows the relevant transactions, but conveniently excludes the top section of the statement, containing the details of where and with whom the account is held. Be careful, too, that other entries on the copies you supply will not raise further inquiry.

Once you know you are under investigation, it is worth alerting any business associates who you think The Revenue may contact. They, The Revenue, might do so to try and substantiate things from a different angle. Tell your associates that you have nothing to hide, but ask them not to respond to questions over the 'phone. Business friends of mine, for instance, received 'phone calls from The Revenue, and were asked all kinds of questions about their dealings with me. The Revenue's approach was, "We have extensive powers to obtain information from you, so you may as well answer these few questions anyway." Some of my associates responded by saying they would only comply to the request if The Revenue formally put their questions in writing, and that was the end of the matter; they never heard from The Revenue again.

You will probably find that The Revenue often takes a long time to respond to your written responses. Do not assume this is because they are either satisfied with them, or that they are conducting further checks as a result of your replies. Usually it's because they are plain inefficient. You can, and should, take advantage of this. Take about the same time, if not a little longer, to respond to them, as they take to reply to you. This will have the effect of dragging the whole thing out. You may think this simply prolongs the irritation for you but it can also work to your advantage.

For instance, there are statutory time limits within which all businesses must retain records. It's usually not more than five or six years, depending on your own country's laws. Usually the revenue cannot demand to see documents beyond that period of time, and even if they do, you can tell them that they are not available. Unless of course those said documents help you to endorce your position, rather than theirs.

An investigation, when it first starts, will usually be about historical accounts. If you drag it out as long as possible, it could last several years. This will do no harm, even if you are confident of a favourable outcome.

Time has a way of altering circumstances, often in your favour. The bureaucrat handling your investigation, to site a possibility, may change jobs. A new recruit will be less than enthusiastic about picking up a file like yours, which has already dragged on, and may not earn them the full credit, even if they subsequently achieve a result.
In this way, interest in your case is surruptitiously eroded, and, even without a little nudge, may finally fade away.

Ending An Investigation
If you employ an accountant to handle an investigation, you can imagine they would not be so enthusiastic about using these go-slow tactics. Accountants like to get quick results, so they can bill you and get on with the next job. Doing it yourself, with advice from intermediaries or others as you proceed, is best.

The investigation may just end anyway because The Revenue find nothing of real interest to them. They probably will not tell you it's over, although in many countries they are, in theory, obliged to do so.

If you continue to receive questions that relate to information you have already supplied, or if continuing questions appear to be unjustified or irrelevant, say so. It may just be a final fishing expedition, to see if you will volunteer something that might be helpful.
If you feel the inquiry has got to such a stage, write back and say so. Tell them you are not going to spend your time and money answering any more correspondence. Say that if they feel you have underpaid some tax, they should issue you with an assessment.
I have no way of knowing what result this ploy would bring in your case, but in mine, it ended the investigation.

How To Contact Me
If you are interested in contacting me directly about this or any other aspect of tax mitigation or asset protection, you can do so by emailing me at richard-lawrence@mail.com

About The Author
Richard Lawrence is an expert on tax mitigation and asset protection, who has an international portfolio of clients. His modus operandi is to respond to all client email within twenty-four hours, seven days a week. For snoop-proof confidentiality he uses PGP encryption. He is friendly, clued-up, helpful, and if you want to hire him, his fees are reasonable ... so, if you have an asset problem to solve, or an offshore agenda you'd like to fulfil, drop him a line.

Quotes

"The Revenue might make you think they know more than they really do."

"A tax-payer is better off conducting a Tax Investigation himself."

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