Mr Dermot Quigley, the chairman of the Revenue Commissioners, arriving at the DIRT inquiry in the autumn. Photograph: Paddy Whelan
Management of the Revenue Commissioners during the 1980s and early 1990s is severely criticised in the report, which finds that the tax laws were not implemented fairly.
Overall, the report finds that there was a particularly close and "inappropriate relationship" between banking and the State and its agencies. "The evidence suggests that the State and its agencies were perhaps too mindful of the concerns of the banks, and too attentive to their pleas and lobbying."
The sub-committee recommends a comprehensive review by the Department of Finance of the structure and operation of the Revenue Commissioners, prior to the introduction of a new law to provide a "clear and modern framework in law" for the organisation.
It suggests the review considers the desirability or otherwise of having executive and non-executive commissioners on the board of the Revenue.
"There was no effective management from the top," the report concludes in relation to DIRT and the Revenue. Morale within Revenue was low as inspectors knew tax administration was unfair because bogus non-resident accounts were enabling large-scale tax evasion. "Given the scale of DIRT evasion, it is clear that the law was not applied equally as between categories of taxpayer.
"The situation, leading as it did to a scenario of taxes going uncollected, contributed to problems for governments as they grappled with a fiscal crisis and the restoration of order in the public finances.
"During a most crucial period in the fight against tax evasion and in the fiscal and economic history of contemporary Ireland, the Office of the Revenue Commissioners . . . cannot be said to have been functioning coherently in any real sense."
A "temporary" instruction in July 1986, the year DIRT was introduced, stated that pending further notification Revenue inspectors should not inspect the non-residency declaration forms kept by the banks for each non-resident account. However the instruction was not rescinded until 1998, when the DIRT controversy erupted as a result of media reports. The sub-committee was unable to identify the author of the July 1986 instruction.
It was a "serious lapse" that the Revenue, despite knowing that a problem existed, did not launch an industry-wide initiative in relation to DIRT. "The Revenue should be capable of taking an active leadership approach" but on the evidence available "the Revenue was not capable of leading any such initiative. Despite the changes in the organisation of the Revenue Commissioners, the problem persisted up to 1998."
One informed source last night expressed reservations about the recommendation that the Department of Finance conduct a review of the operation of the Revenue Commissioners. "Asking one State agency to reform another State agency" was a curious way of proposing radical reform", the source said. The chairman of the Revenue Commissioners, Mr Dermot Quigley, said he was "disappointed" that the modernisation process of the Revenue process, "which has been widely acknowledged by business and political interests, was not adequately reflected", in the report.
"The Revenue is now a very professional organisation."
Mr Quigley welcomed the finding that there was "no deal, agreement or understanding" with AIB in relation to a write-off of DIRT.
The report also criticises the Department of Finance and the Central Bank in relation to their performance. In particular it is critical of the view that a clampdown on bogus non-resident accounts would lead to a flight of capital. "The more relevant hypothesis was not capital flight but flight from disclosure and flight from taxation - tax evasion." The "grip" of the theory of capital flight and its intertwining with the bogus non-resident account problem was "indicative of an absence of rigorous analysis".
The sub-committee found the Department of Finance "did not fully inform ministers during the relevant period (1986 to 1998) in relation to the problem of bogus non-resident accounts".
The Minister for Finance, Mr McCreevy, said the Department would be studying the report as would the other relevant agencies.
The report finds that bogus non-resident accounts were in breach of the exchange control regulations which existed up to 1992, but the Central Bank took no action. The bank had responsibility for the regulations but they were routinely "flouted".
"There was an insufficient concern with ethics and supervision other than from the standpoint of a traditional and narrow concern with prudential supervision in the Central Bank," according to the report. "The bank knew of the problem. It was, with the other two agencies, the Revenue and the Department of Finance, conscious for an extended period before and after the introduction of DIRT of the existence of evasion." A spokesman for the Central Bank said it rejected an implication in the report that it defined its supervisory role in a narrow way. "The terms for supervision are laid down in European and Irish law and are not a matter for the bank's discretion."