Given my background, I’m something of an oddity in the world of forensic accounting, having spent five years as an investigator of serious frauds with the Inland Revenue before returning to the accountancy profession in the late 1980s.

My time in that department provided me with a wonderful insight into the world of tax investigations and in civil and criminal litigation. The experience has stood me in good stead in resolving the affairs of a wide variety of clients whose own tax affairs have come under the taxman’s scrutiny since then.

However, perhaps unusually, I have also since used those skills in a wide range of other forensic accounting roles, providing expert witness testimony and reports in a variety of civil and criminal litigation involving personal injury, loss of profits, professional negligence, fraud, and the like, as well as business planning and financial due diligence.

My portfolio of work has always comprised a healthy mixture of tax investigations and expert witness work and it occurred to me several years ago how the skills required for each, whilst seemingly separate, are, in fact, complementary.

During my time with the Inland Revenue, the people and businesses whose affairs were under scrutiny were nearly always represented by either accountants or former tax inspectors and, quite frequently, their approach was to be belligerent and aggressive, presumably in the misplaced belief that the investigator was likely to back down in the face of a barrage of abuse. Of course, their aims and understanding were, to my regard, misplaced.

In my experience, this has rarely moved the situation forward but has instead caused the parties to become even more entrenched in their views.

There were, however, some instances when lawyers rather than accountants represented the taxpayer in investigations under the civil code. Those situations interested me because the approach to the enquiry, and to the Revenue investigator, was completely different. More subtle. More psychological and more fulfilling, both in terms of costs and time, for all parties involved in the process.

Since then, in a large number of expert witness assignments, I have had frequent opportunities to observe further the manner in which lawyers have worked their cases, and have used many of the techniques employed by them in order to successfully resolve tax investigations for my clients.

The vast majority of tax investigations are worked to civil standard and it these which reap the most benefit when employing a mixture of forensic accounting and a lawyer’s psychology. I find that using my earlier experiences of being on the receiving end of a lawyer’s approach to the handling of a tax enquiry always reaps dividends in bringing an enquiry to a satisfactory conclusion.

Firstly, there is the initial approach to the investigation. Often, I am instructed on behalf of a taxpayer when an investigation has been under way for some months (or even years). Frequently, the circumstances are that an impasse has been reached and neither the taxpayer nor their professional adviser can see a way of breaking the deadlock. They also feel that the tax authority is in complete control of the situation and can see no alternative but to accept somewhat reluctantly whatever financial proposals the investigator is making to bring the enquiry to a close.

It is an opportunity for me to create instant goodwill from and between the parties. The matter is therefore approached with a calm assurance, complete courtesy, understanding of and sympathy towards the parties’ problems – the client wants the matter ‘sorted’ as soon and as cheaply as possible; the investigator also wants the matter resolved and off their desk as quickly as possible, but only once whatever concerns they have about the taxpayer’s affairs have been either allayed or confirmed. he making of a financial offer by the client at the end of the enquiry, then financial benefits will accrue if the enquiry is handled properly.

I take a mediator’s role in the proceedings. The investigator’s concerns about the taxpayer’s affairs are issues for the parties to work together to resolve. Timetables are set. Action plans are established. The parties are kept informed of each other’s progress. A spirit of openness and trust is established.

And what about one of Lord Woolf’s aims under CPR – ‘cards on the table’ – why shouldn’t this apply to tax investigators too? Once trust has been established between the parties, it is possible that the investigator can be encouraged to expand on the issues that concern them, since only then can appropriate and focused investigation and collation of the evidence be gathered about those issues.

Which brings me to evidence, and its presentation. By now, the parties are usually co-operating with one another, having a fuller understanding of the nature of the enquiry. The client will now know why their affairs are under enquiry and will be encouraged to have some sympathy for the investigator’s position. Equally, the investigator will be more appreciative of the taxpayer’s situation and have an awareness of why issues have arisen in their affairs. Meanwhile, I continue to act as mediator.

The parties are encouraged to work together, rather than in conflict, and to each take responsibility for obtaining whatever evidence and information is required to address the investigator’s concerns.

Ultimately, information of varying quality is obtained and my role is then to present it. Proper, professional, presentation is important. As in legal proceedings, the method adopted has to be carefully considered. Carefully crafted letters and reports using unambiguous language must be produced, using each shred of evidence to its maximum potential. They should address all of the issues and be used as a basis for settling the enquiry.
This gives a good basis for bringing the process to an end, often in negotiations being entered into to reach a financial settlement of the enquiry – the amount involved invariably comprises unpaid tax, interest and a penalty.

Given that many tax investigations focus on events that occurred several years before, information will often be unavailable to allay fully the investigator’s concerns and an element of doubt, however small, often remains.

At this stage, it is important to reconsider how the investigation has been worked, with professionalism, openness and on a basis of trust between the parties. This is very important because it will affect the parties’ attitudes towards the evidence and their perceptions of the events under enquiry. There will be inevitable ‘grey’ areas on which potentially significant amounts of tax can turn. Furthermore, the penalty can be mitigated substantially for disclosure and co-operation (up to 60% in Inland Revenue enquiries) so the financial effects of working the enquiry on professional grounds and with a lawyer’s psychology, can also be significant.

I said at the outset of this article how my experiences of the litigious process, and the role played by lawyers in that process, have influenced the way in which I approach tax investigations. However, the benefits have not been all one way. The skills gained from working tax investigations over a number of years have also benefited many of the expert witness assignments in which I have been instructed. In matrimonial and personal injury cases, for instance, a keen eye for detail in the business records and accounts, together with a healthy scepticism towards the ‘facts’ as presented, have often lead to firming-up or a reassessment of the pleaded claim.

Clearly, the complementary experiences of tax investigations and a lawyer’s approach to litigation have benefited, and will continue to benefit, those whose financial affairs, for whatever reason, come under scrutiny.

[Barry Draper is principal of Forensic Accounting Services, Bristol, a Chartered Accountancy practice specialising in financial investigations and expert witness assignments.]