Former Tax Inspector James Bailey, provides some guidance on what ‘to do’ and what ‘not to do’ if the Inland Revenue decide to investigate you.

What you should NOT do if you receive an enquiry notice

The first thing is don’t panic and don’t ignore it.

I have known a number of cases where people have received these letters and a bit like the credit card statement or the bank statement you know contains bad news, they have just put it in the back of a drawer and hoped it will go away.

You need to respond quickly and positively if you get an enquiry notice because if you don’t the Revenue may interpret this as a lack of co-operation, which can have financial consequences later in the investigation – as we shall see, the amount you have to pay if errors are found will be directly influenced by how co-operative you have been.

It may also be tempting to telephone the inspector immediately in the belief that you can sort the whole thing out with a quick chat on the phone. This is not a good idea – having notified you that he is investigating your tax affairs, the inspector is not going to be put off by your assurances that there is nothing wrong.

If you already use the services of an accountant, the first thing to do is to discuss the situation with him – he should have been sent a copy of the notice opening the enquiry in any case.

If you do not have an accountant, you should consider taking advice from a professional tax adviser who specialises in tax investigation work. In a simple case, you may be able to deal with the enquiry yourself, but only after you have had the benefit of a professional view of the situation. In more complicated or serious cases, you really need to be professionally represented.

A tax professional who is used to dealing with tax investigations can often tell a lot from the initial letter that you have received from the inspector. Many of these letters are basically just a formal notice to say you are under enquiry, but where there are questions included with the letter then it can be obvious to the tax specialist exactly what the nature of the enquiry is going to be.

I was consulted about a case recently and it was clear to me from the questions asked that the inspector had received specific information that something was wrong with the accounts. 

In another case it may be fairly obvious to the adviser that it is just a “fishing expedition”. You are unlikely to be able to spot the difference if you are not a tax specialist.

If the Revenue do have some sort of information and you just ring them up and say “what’s all this about”, the danger is that you’ll get into a conversation where you’ll say things that you later regret saying. Don’t forget that the inspector will be making notes of what you say.

I hope I have made it clear how important it is to get proper advice and to think carefully what your response to the notice will be. If you feel you must respond immediately in some way, then simply send a short letter to the inspector saying: “Thank you for your letter. I am seeking professional advice and I will be in touch with you again in the near future”.

What you should do if you receive an enquiry notice

The first thing you should do is to check the date on the top of the letter. This is because there is a time limit for the Revenue to open a tax enquiry, and it is one year after the filing date for your tax return.

If we take the example of the tax return for the year 2004-2005, which ends in April 2005, then the filing date for this is the 31^st of January 2006.  This is your deadline for getting the return in to the Revenue.

The Revenue then has one year, until the 31^st of January 2007 to open an enquiry into it.

So if you get an enquiry notice at the beginning of February just check that the inspector is within his time limit.

I have seen several cases of inspectors suddenly realizing that they need to open some more investigations for the year and sending enquiry letters out a day or so late.

I have also seen a few examples where I strongly suspected that the inspector had back-dated his letter!

It is exactly these details that you need professional advice and help with, and that is why I have already said that you should contact your accountant if you already have one, or if not, an independent tax adviser.

You should also consider whether you are going to ask your own accountant/adviser to deal with the enquiry or whether you are going to get a specialist independent adviser involved. 

There is much to be said for having an independent investigation specialist to help you deal with the case – indeed, several of my clients are firms of accountants who ask me to deal with all their tax investigation work. This is because the independent adviser will be looking at the case with fresh eyes and he is likely to have more experience than your accountant in dealing with Inland Revenue enquiries. An independent adviser will not feel personally involved whereas some accountants see it as almost a personal insult that the Revenue have decided to investigate one of their clients or investigate accounts that they have prepared.