The review of private financial information can be time consuming and costly. It may involve a review of private cash, a means test, or a more substantial look at private finances, including bank statements, possibly culminating in the preparation of capital statements.
The Inland Revenue may wish to perform such a review if they believe that business profits may have been understated, particularly where there is a cash based business. They will want to identify whether takings may have been retained by the owner(s) and not recorded in the books and records. The private review may support a business economics model or it may replace it.
If the Inland Revenue is alleging that profits are understated, supported by a business economics model, then a private side review may be helpful in resisting the allegations.
Requests for private financial information should not be complied with without first considering whether the Inland Revenue is entitled to the information and, if not, whether it would be beneficial to provide it anyway.
The primary aims of the Inland Revenue when performing a review of private financial information will be to:
i) Show that insufficient funds are available to meet living expenses;
ii) Identify patterns of cash withdrawals, hoping to highlight periods where no/insufficient amounts are drawn;
iii) Show lodgements to bank accounts that cannot be identified, arguing that they are from a taxable source;
iv) Obtain information to suggest that there are further bank accounts, such as transfers that cannot be tied up or receipts that are not lodged in known accounts;
v) Demonstrate that assets have been acquired utilising funds from unknown sources.
Often the Inland Revenue officer will wish to perform the review, and will ask for mandates to authorise requests to banks and other institutions for information. When faced with such a request, the following may be helpful:
i) If there is undisclosed income, consider performing the review and presenting the findings to the Inland Revenue; this may assist in minimising the amount of tax, interest and penalty that subsequently becomes payable. The potential savings must be compared with the likely costs of performing this additional work;
ii) If the amounts are large or serious fraud is involved, then the possibility of prosecution should be considered and appropriate action taken to limit this possibility as far as is possible;
iii) In situations where all income and profits are properly disclosed in the business records and accounts, then it may be beneficial to let the Inland Revenue officers perform the review, in order to minimise costs;
iv) If mandates are requested, consider whether they should be provided. As an alternative it may be possible to request the information that the Inland Revenue requires, and pass this on. Where a decision is made to provide mandates, ensure they are to specified individuals/organisations. Do not give open mandates, giving the Inland Revenue authority to approach any individual or organisation.
Where problems have been identified, the Inland Revenue will normally ask that a statement of assets and liabilities, and a certificate of bank and building society accounts operated, be completed. It is important that the information upon these documents is complete and correct. A failure to include material items may result in those under investigation being prosecuted.