money: Process now - and cheque later - is the powerful taxman's new motto

Tax: Random checks are only one of the terrors in store as we are asked to assess ourselves
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Last week, we looked at the new self-assessment system. Despite the penalties that I mentioned (or perhaps because of them) some people may have looked at the article - or their tax return - and thought, "How do they find out?" or "What happens to the return when I send it in?" So what are the Revenue's new powers?

We have to assume you submit a return - if you don't, the Revenue can estimate your liability and they have no incentive to guess low! Your return is fed into the jaws of the Revenue's computer to go through what they term "process now, check later".

The forms have been designed to make it easy for the Revenue to run simple computer checks on all forms. It will correct minor errors, a process called amending the return. This covers an arithmetic error on your tax return, or entering figures in the wrong box.

The Revenue basically has up to nine months after the 31 January filing deadline to make such amendments. These may be in the taxpayer's favour. But if it does result in extra tax becoming due, there will be interest from the date it should have been paid, normally 31 January.

The "check later" will be a second stage and in most cases won't happen. But if there is something which prompts a concern on the Revenue's part, an inquiry may be launched. The sort of thing the Revenue will be looking for is omitted income or deliberate errors in the taxpayer's favour. (Yes, it will spot your using 4 instead of 40 per cent in computing the tax due if you go down the route of working out your own bill!) Revenue lays great stress on their Code of Practice on the review being reasonable and fair, not a witch-hunt - and it is an inquiry, not an auditThose with American friends may know how US citizens fear an Internal Revenue Service audit - it ranks second only to cancer in the American worry league!

Taxpayers will be given formal notice of an inquiry, but will not be told why their affairs have been selected for review. The notice must generally be given within 12 months of the 31 January filing deadline. The investigation may focus on particular aspects of the taxpayer's affairs or may be more comprehensive.

The Revenue has wide powers to call for documents or other particulars it thinks necessary to decide whether the return is complete. There are penalties if someone cannot, or refuses to, produce them, though these are likely to be imposed only in cases of persistent failure or deliberate obstruction.

The records must be reasonably required for the purposes of the audit. Appeals are possible if the Revenue is being unreasonable. Likewise, the independent Tax Commissioners can be asked to bring an investigation to a close if the taxpayer believes an inspector is pursuing an enquiry without having reasonable grounds.

In due course, the inspector will issue a notice to signal the close of the inquiry, which will incorporate conclusions as to the amount of additional tax (if any) the investigation has shown to be due. Additional tax will attract interest, and may also attract a penalty of up to the amount of the tax itself.

Perhaps the most controversial aspect about the Revenue's activities in this area is its new power to select cases for inquiry at random. We have to accept that random inquiries are part of proving the integrity of the system, But there is nevertheless a genuine concern that totally innocent taxpayers may be put to the worry and expense of having to prove a negative - ie that they have omitted nothing at all from their return. There is no tax deduction for any fees incurred in defending a position, despite pressure from official bodies.

The advice must be to take care over the preparation of the tax return. Make sure it is complete and correct. Get reliable professional help if necessary and keep supporting records safe in case they are needed later. But it is a sobering thought that if the Inland Revenue select only a few thousand returns each year (they are talking about 7,500) using their random selection powers, you have a far better chance of being subjected to a Revenue investigation than of winning the lottery!

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