by Mike Smith, senior director of Companydebt.com
Wherever you’re based, there are few things that strike fear into the hearts of small business owners and entrepreneurs quite like news of an impending tax investigation.
Despite the fact that corporate tax investigations in countries like the UK, Singapore and the US are carried out by different bodies, the processes of Her Majesty’s Revenue & Customs (UK), the Internal Revenue Service (US) and the Inland Revenue Authority of Singapore are actually very similar.
That means there are some common rules you can follow to give you and your business the very best chance of emerging unscathed.
1. Keep calm.
The first you’re likely to know of an impending tax investigation is receiving notification from the relevant tax authority in the post. It’s very unlikely that the tax investigators will turn up at your premises unannounced. The temptation might be to try and contact the investigators immediately to clear up any issues but this course of action is ill-advised.
Random investigations are rare, so in the vast majority of cases, there will be a reason why you have been targeted. It could be that the tax authority has found out new information about you, has received a tip-off from a third party or has noticed inconsistencies in your tax returns. Either way, anything you say in haste now you could well regret later on. Instead, you should sit tight and let the investigation take its course.
2. Talk to an expert.
It might be that your current accountant has experience of tax investigations, in which case, great. If not, get in touch with a specialist tax adviser. They will usually be able to determine why you have been singled out for a tax investigation from the notification you have received. This will you give you a better understanding of the tax authority’s concerns and allow you to identify whether any issues do exist. You can then think about how best to proceed.
3. Respond to initial information requests.
One of the more common ways for a corporate tax investigation to proceed is to receive a request asking you to provide specific information relating to your tax return. In some cases, the tax authority is not entitled to ask to see the information it requests, so if anything seems unnecessary, this should be checked with your accountant or tax adviser before you respond.
If the information request is legitimate then the relevant documents should be provided in a timely manner as dragging your feet will only make matters worse and potentially lead to tougher penalties. Once the information has been reviewed, the tax authority will then decide whether further investigations need to take place.
4. Be honest.
If the investigation is going to proceed then clearly the tax authority believes everything is not as it should be. At this stage, it’s best to be honest with the investigators. They have access to a huge bank of information from a wide range of sources so it can be difficult to pre-empt the direction the investigation will take.
If you know there is an inconsistency on your tax return then consider making a voluntary disclosure. Not only will it bring the investigation to an end more quickly, but it could also help to mitigate any penalties and reduce the likelihood of a criminal investigation.
5. Don’t do it again.
Many of the errors made on tax returns that lead to corporate tax investigations are honest mistakes. But ignorance is no defence. If there’s a risk you may make similar careless mistakes in the future then you should seriously consider seeking professional assistance from a tax accountant. Any further penalties you receive will only increase so it makes sense to pay for assistance now.
If you are found to have made a deliberate omission on your tax return then the penalties you receive will reflect the additional severity of the case. Repeat offenders risk a hefty fine and even a custodial sentence.
Mike Smith is the senior director of Companydebt.com. He has spent the last 40 years helping small business owners get to grips with corporate tax matters and business debts.
