Hard edge of tax estimate: An Inland Revenue assessment should not be taken lightly, warns Roy Cannon

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THE RECEIPT of an estimated assessment from the Inspector of Taxes is a serious business and should never be taken lightly or ignored.

If anyone fails to notify taxable income to the Inspector, or if the Inland Revenue is dissatisfied with a return, the Inspector may make an estimate.

This happened in the case of Mrs R. When her husband died they were living in a large house but also owned a flat, which they let. Mrs R decided to move into the flat and let the house to give an income.

Mrs R did not get a tax return, but just over a year after the lettings started she received seven envelopes from the Inland Revenue. Each contained an estimated assessment of income from furnished lettings.

The assessment for the current year charged pounds 10,000 as income from lettings with tax of pounds 2,500. The others charged for preceding years, each assessment dropping by pounds 1,000 per year. The total demanded came to more than pounds 12,000.

It is not uncommon for the Inspector to issue estimated assessments when apparently undisclosed income is discovered. Once an estimated assessment is received the onus is squarely on the taxpayer's shoulders. He or she has 30 days from the date of the assessment to lodge an appeal and show, if they can, that a lesser amount ought to be assessed, or prove that no such source of income ever existed.

Failure to appeal will mean that the assessments become final and the Collector of Taxes will demand the tax shown.

If taxpayers meekly accept estimated assessments the Inspector will probably worry that the figures were too low and issue a further assessment under the 'discovery' provisions of the Taxes Acts to get the taxpayer to give proper information on the income.

Accepting a low estimated assessment when the true income is higher is an offence under tax law and can give rise to penalties as well as restitution of the tax liability and interest.

Receiving an unexpected demand for a very large sum of tax can be a daunting experience, especially when the income has arisen for just over 12 months. In Mrs R's case, she immediately contacted her accountant, who appealed against the assessments and agreed liabilities for the two tax years involved. This reduced the tax payable from thousands of pounds to a few hundred.

The Inspector probably became aware of the lettings through Mrs R's advertisements for tenants, but information is often given to the Inspector of Taxes by disgruntled neighbours.

This happened to Mr S, who worked in a clerical position for a multinational and paid PAYE. One day he received an assessment from his local Inspector of Taxes charging him with income as a 'dealer' on pounds 5,000 with a tax of pounds 1,250. Mr S spoke to the tax district who, to his amazement, told him that they had information that he was carrying on a business for which no return was made.

Mr S consulted an accountant as he was adamant that he had no earnings other than his salary. The accountant immediately appealed against the assessment and was able to get the Inland Revenue to disclose that it had received a letter from one of Mr S's neighbours, complaining that while he had to work long hours of overtime to get a decent living, Mr S not only had a job but was carrying on a business as well, on which he was sure he paid no tax.

He also said the close in which they both lived was continuously jammed with cars visiting Mr S, which could not possibly be for personal visits.

In fact Mr S was a football enthusiast and managed a number of local amateur clubs. As they had no premises, he used his house as a headquarters without any payment being received. The club members and players visited him frequently during the week to discuss playing arrangements. His visitors' cars often caused chaos in the close and he got many complaints from his neighbours.

After Mr S's accountant had reviewed his financial affairs he reported to the Inspector, who agreed to cancel the estimated assessment. The neighbour's letter had caused Mr S months of anxiety, plus accountant's fees and enduring bitterness.