Q&A: How far back can Revenue go on my taxes?

I’m wondering how far back do Revenue go and what amounts do they consider significant?

I had rental income about 25 years ago when I purchased my first house. Being a lowly paid PAYE worker, I didn’t complete any annual returns. I had the house for four or five years and, during that time, occupancy was a mixture of letting out, sharing with tenants, sole occupancy and a period unoccupied.

I don’t have records of rents or time periods. When I eventually sold, there was a gain of £4,000 to £5,000.

I’m wondering if unclaimed allowances over a long period (about 15 years) balance out any amounts owing.

I’ve been completing returns now for a long number of years.

Mr N.O’D., email

Essentially, there are really two questions here. How far can Revenue go back? And how far do they generally go back?

The answer to the first one is as far back as they like – certainly if they have reason to believe there was significant fraud.

More generally, however, Revenue operates, of necessity, in a pragmatic way. There is little point investing tens of thousands of taxpayer euro in an investigation that would yield just a fraction of that amount. For that reason, barring exceptional circumstances, a random audit will not go back more than seven years – the period for which you are required to keeps receipts and other matters relating to your tax affairs.

Is it likely that – without some specific good reason – they will go back 20 to 25 years to rake up what may have been significant sums to you but are really quite modest in “big picture” terms? No, it isn’t.But it’s not impossible.

If they do, of course, your issue is that you have no receipts and precious few details of the rental income arrangements back then. Over a four- or five-year period, the house was unoccupied for part of the time and occupied by yourself part of the time. That doesn’t leave a lot of time for generating income from shared living or from renting out the entire property.

Personally, unless something else in your tax affairs sets alarm bells ringing with Revenue, I can’t see them chasing you at this stage.

The big thing is not to ignore any communications that may arrive from the tax office. If, for instance, you were to get an innocuous-looking letter on foot of a return, or otherwise, asking you whether you had fully declared something such as rental income, the natural instinct may well be to confirm immediately that you had for the sake of consistency in your return.

It is worth pausing for thought. It is of course possible that Revenue is just sending a general bug letter. But it is much more likely that the letter will have been prompted by some information that has come to the Revenue’s attention – either from one of the many sources of data to which they have access, or even from a former neighbour or tenant.

If questions are raised, the key thing is to get to Revenue before they “officially” get to you by way of triggering an audit.

If it does come to that, you would have to pay any tax owing – and in the absence of records, you’d be in a poor place to contest a Revenue assessment – plus interest and penalties.

Interest is charged at between 8 and 10 per cent annually so that can quickly exceed a modest tax bill dating back a long time and penalties can add anything from 5 per cent to an amount equivalent to the tax owed.

Making a voluntary qualifying disclosure will reduce any penalty.

But that is all in the realm of the unlikely. If you have been an unexceptional (no offence intended) and compliant taxpayer for decades and nothing comes to Revenue attention to suggest serious fraud in your returns, you can probably rest easy. Revenue have enough on their plate without trawling back two decades and more for relatively small sums.

But, if it did come to that, no, you certainly could not offset unclaimed reliefs over the intervening years. Reliefs and credits operate on a “use it or lose it” basis. Any that are due to you must be claimed within four years of the end of the tax year to which they apply. After that, they disappear and you have no further entitlement to them.

In relation to the capital gains side of things, you don’t give me precise details of the gain you made. In general, your “home”, or principal private residence in Revenue parlance is exempt from capital gains tax. But, in this case, the house was an investment property delivering rental income for part of the time.

Offsetting that, there is an annual exemption of capital gains which was £1,000 (now €1,270) and the fact that the last year of ownership is considered as owner occupation even if the property was rented out. Back then, indexation also applied which would reduce the effective gain as it adjusted for inflation and there are also allowable expenses incurred buying or selling the property.

All in all, there would be little gain for Revenue to pursue. Bottom line: if they’re not going to chase you for the rental income, they are very unlikely to start querying any capital gains tax liability.

Send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara St, D2, or email dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice.