Ordeal by brown envelope

You missed the self assessment deadline and you're waiting for a brown envelope ordering you to pay a £100 fine. If the tax form is still in its celophane wrapper this weekend and the box of receipts remains unloved in a filing cabinet then you are also likely to miss the February 28 deadline for paying the tax bill. A 5% surcharge based on the outstanding tax will follow.

But a greater fear is lurking at the back of your mind. What if you are selected for an inquiry by the Inland Revenue into your tax affairs? Should you become a target, your eventual tax bill is likely to be many times larger than last year.

The Inland Revenue is due to say next week how many people missed the January 31 deadline this year. Last year around 900,000 of the 9.4m on the Revenue's database missed the deadline.

Something in the order of 7,500 to 10,000 taxpayers will be the subject of a random investigation whether they filled in their form or not. Most of these people will never know their tax affairs were scrutinised because the case is dropped after an initial examination of the files.

If suspicions are raised there is still a good chance the case will be dropped - reports based on internal memos show that only when there is a 75% chance of successfully recouping lost tax will a full-blown investigation go ahead.

But what should you do if you receive the dreaded brown envelope? Accountants, who are the nation's main tax advisers along with some specialist solicitors and independents who belong to the Institute of Taxation, will say at this point you should buy in their services. "You don't want to fight the Revenue on your own," says Andrew Burgess at accountants Mazars.

If you are a higher rate taxpayer who has simply failed to get their act together, you probably just want to confess your sin and make the necessary calculations. But if you are one of the 3m self-employed and are paid cash for even a small part of your work, professional support might be a good idea.

The Revenue, going on nothing more than a hunch, can decide that your income is far bigger. Officials can base the tax bill calculation on the higher income figure and it is up to you to disprove them.

"In battles with the Revenue you are guilty until proven innocent," he says.

Daniel Dover at accountants BDO Stoy Hayward points out that the tax affairs of the average self assessment form filler are more complicated than ever. More people own shares and more own property to rent. They are more likely to have a capital gain. The self assessment form itself also gets bigger. The 2001/02 form was 20% larger than its predecessor.

"These days, in the ongoing war between the taxman and the taxpayer, there is less of a scattergun approach, more a series of carefully aimed shots," he says in his new book - War or Peace, Skirmishes with the Revenue (Profile Books, £6.99).

The Revenue has certainly been flip-flopping between trumpeting how it has become an "enabling" agency only too willing to help taxpayers and an aggressive battering ram keen to drive up the figures for reclaimed tax.

There are two types of inquiry, he says; "aspect" inquiries and general inquiries. An aspect inquiry picks up on a few points in a tax return, say expenses claims, and can be dealt with by the taxpayer. A general inquiry is usually of the no-stone-unturned variety and will involve lengthy correspondence and a meeting with your local inspector. He or she should only ask for relevant information, though they have the power to see all your business and personal financial documents.

In correspondence or meetings, Mr Dover warns against jokes. "Tax inspectors do have a sense of humour, but it is not always predictable." Also: "Taxpayers who protest their innocence the loudest are usually those with something to hide," he says.

Mr Burgess urges taxpayers to volunteer early on to make a payment on account if the Revenue are establishing an undisclosed tax liability.