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Will increased funding halt HMRC’s blunders?

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Hounding ordinary taxpayers while letting renowned tax avoidance scheme operators get away with millions – can HMRC’s mistakes be stopped by modernisation and investment?

9th Jul 2024
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We reported recently that notorious tax-avoidance schemer Paul Baxendale-Walker had managed to wriggle out of a £14m penalty for non-payment of tax due to procedural errors by HMRC (HMRC bungles £14m tax avoidance scheme case). Unfortunately, this does not appear to be an isolated incident and a string of similar cases has come to light where the tribunal has been forced to find in favour of the taxpayer due to lapses in process and administrative oversight by HMRC. 

With the new Labour government promising to plough investment into HMRC to strengthen the department and begin to close the tax gap, AccountingWEB readers will be wondering whether funds will be funnelled in the right direction.

You could not make this up

The first case is another involving Baxendale-Walker where HMRC attempted to prevent a tax-avoidance scheme, Nova Trust, from being promoted by issuing a stop notice. The trouble this time was that instead of issuing the stop notice directly to Baxendale-Walker or to an existing company linked to the scheme, they inexplicably issued it to a company, Buckingham Wealth Limited, that had been struck off six months prior.

The disastrous consequence of this HMRC oversight was that the Nova Trust scheme continued to be promoted as recently as January 2024 with no scope for penalties or sanctions to be applied.

Reporting on this case, founder of Tax Policy Associates Dan Neidle posted on X: “This was a basic legal failure by HMRC. Any lawyer knows that before you begin a legal process against a company, you check if it still bloody exists.”

Ray McCann, past president of the Chartered Institute of Taxation (CIOT) and former HM Inspector of Taxes told AccountingWEB: “You could not make this up, especially with HMRC lecturing the profession on competence!”

Another botched attempt

In another botched attempt, HMRC applied to the first tier tribunal (FTT) for an order that specified umbrella arrangements carried out by Elite Management & Consultancy Limited were notifiable as a tax avoidance scheme under the disclosure of tax avoidance schemes (DOTAS) regime. HMRC’s paralegal missed the deadline for submitting their bundle of evidence by two hours, voiding HMRC’s case.

The department tried to argue that it would be “completely disproportionate to strike out HMRC’s application simply because it had missed a deadline by two hours”. Nevertheless the FTT stood firm, concluding: “And so, as night follows day, the automatic strike-out provisions of Rule 8(1) are engaged.”

In his closing remarks the judge pointedly reminded HMRC that if it wished to apply for reinstatement of its application, it must observe another strict deadline of 28 days. It remains to be seen whether this is met.

Incompetence widens the tax gap

Recently published statistics from the tax authority suggested that small businesses are responsible for 60% of the tax gap. This claim leaves rather a bad taste in the mouths of accountants and taxpayers, considering the amount of money HMRC appears to be wasting via its own incompetence. 

It has not slipped under the radar that while allowing one of the country’s most high-profile tax avoidance scheme promoters to so far get away scot-free – twice – HMRC has elsewhere come down heavily on the little guy, fruitlessly pursuing fines that must surely have been lower than the legal costs involved for both parties, as reported in November 2023 and in June 2024.

McCann suggests: “We need a better approach to low-value disputes through a genuinely one-shot independent review process that HMRC and taxpayers would agree to use in place of the current tribunal.”

Problems go much deeper

Offering a glimmer of hope, the incoming Labour Party promised in its manifesto: “We will modernise HMRC and change the law to tackle tax avoidance. We will increase registration and reporting requirements, strengthen HMRC’s powers, invest in new technology and build capacity within HMRC. This, combined with a renewed focus on tax avoidance by large businesses and the wealthy, will begin to close the tax gap and ensure everyone pays their fair share.”

In its fiscal plan Labour pledged to invest £855m per year in HMRC “to reduce tax avoidance”, which is forecast to raise an additional £5.2bn. This is on top of a proposed £600m additional tax take from removing the non-dom discount loophole in 2025/26. But while procedural errors and administrative cock-ups abound in HMRC, is the problem really going to be fixed by yet more cash injection?

Posting on X in the wake of the election results, McCann was cautiously optimistic, but realistic about the scope of the problem within HMRC. He said: “I wish the new @hmtreasury team well. There is huge scope to increase tax revenues through modernisation and making the tax system easier to use so reducing the large error component of the tax gap.”

Neidle agrees that there is more to be done to ensure the extra investment has the desired effect. He posted on X: “Increased funding is part of the answer, but the problems go much deeper. The Chancellor should bring in people with deep experience of how HMRC used to work, and keen insight into how it could work.”

Replies (38)

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Tornado
By Tornado
09th Jul 2024 16:55

Notice at my local Hairdressers -

CASH IS KING - we prefer payments in cash wherever possible

Probably due to the high costs of using digital payment methods, but the more complex and difficult it becomes to run a business (e.g. MTD) the more people will find an easier way to do things so that they can spend more time on actually doing the work that they are in business to do.

We have a massive resource of small businesses which are being held back by too much administration and not enough encouragement. If the Government really wants to reduce the tax gap, then help small business to generate more profits on which most of them will be happy to pay a reasonable rate of tax.

Thanks (23)
Replying to Tornado:
Ivor Windybottom
By Ivor Windybottom
10th Jul 2024 09:23

Time for an AML report?

Reminds me of a restaurant in the Midlands that had a proper metal sign on their counter that said their card machine was out of order! Didn't eat there.

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Replying to Ivor Windybottom:
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By Geoff56
10th Jul 2024 09:32

What would be the justification for an AML report?
Also, there is no indication that the business is one of Tornado's clients.

Thanks (6)
Replying to Geoff56:
David Winch
By David Winch
10th Jul 2024 09:53

Just for clarification - AML reporting obligations are not limited to reporting suspicions of money laundering by clients but they are limited to suspicions based on information which has come to you in the course of a business in the regulated sector.
I'm guessing Tornado's visits to the hairdresser are not in the course of a business in the regulated sector.
David

Thanks (4)
Replying to davidwinch:
Tornado
By Tornado
10th Jul 2024 10:48

As David suggests, the Hairdressers are not my clients and I have no grounds to suspect that there is anything wrong happening anyway.

In the same way that in programmes like Bargain Hunt, Antiques Roadshow and many more, all transactions are carried out in cash and a receipt is never seen to be issued, but are there grounds to make a SAP about these programmes .... of course not.

I was just making the point that there are an increasing number of traders preferring payment in Cash and many that ONLY accept Cash. This is more likely to be due to the high costs to traders of customers paying by card and the general high costs of banking these days which can eat significantly into profits.

Just because traders prefer customers to use cash if they can does not mean that there is anything wrong with the Accounting records.

On the other hand, a trader that offers to do a job without VAT if paid in Cash, is another kettle of fish altogether.

Thanks (7)
Replying to Tornado:
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By SpaceInvader
10th Jul 2024 11:20

I suspect a growing proportion of the population insisting on cash just to keep cash alive and frustrate the government's desire to move us on to CBDCs. Not everyone trusts their government.

Thanks (5)
Replying to Tornado:
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By lesley.barnes
10th Jul 2024 14:49

My hairdresser put up a similiar notice a few months ago, they do still accept cards but only chip and pin. No tapping the card on the reader!

I asked them why they were promoting cash payments suddenly. The reason was understandable - they have an online system, that they pay for monthly. It manages appointments, sends out reminders and forms, records payments, clients details and details of cuts/colour. Basically everything is in there.

When they signed up two years ago they paid a flat fee for the system monthly. Now the software company charges the flat fee plus a % of anything paid by debit or credit card. They also pay a charge to the card company who makes an additional charge if the card is tapped rather than a pin number put in. The only other option was to increase their prices again.

As the hairdresser said the software company has them over a barrel because of the complexity of changing to another system and there would be no guarantee that future providers didn't do the same. It will only be a short time when the software provider starts to charge for the cash transactions - they are recorded as well because the system produces a printed/email or text receipt for everything.

Thanks (2)
Replying to Tornado:
the sea otter
By memyself-eye
10th Jul 2024 15:01

Paying by card isn't more costly than cash.
My so runs a catering business at festivals (Glasto and the like). In the past he took most of his takings in cash which had to be secured against theft, transported, counted, wrapped and taken to the bank (that's when there were high street banks). The bank charged him hundreds of pounds to manage all that cash, sometimes deducting any forged fifty pound notes from his overall take. Additionally he had to obtain change - 20p's 10p's £1 coins etc which was costly and cumbersome. All that has now gone. His bank charges him £7 a month and he can increase his prices cos the wasted 'yoof' who attend festivals don't notice how much they are paying.

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Replying to davidwinch:
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By Joe Soap
11th Jul 2024 09:56

A very long time ago a colleague had his hair cut during office hours.
When reprimanded by a partner for this my colleague responded that as his hair grew during office hours is was reasonable to have it cut during them too.
The partner objected on the grounds that it didn't all grow during working time - but the response to that was that he wan't having it all cut off.

Thanks (2)
Replying to Ivor Windybottom:
Danny Kent
By Viciuno
10th Jul 2024 09:34

Nothing illegal about paying in cash.

If they keep accurate records there is nothing stopping them paying the correct amount of tax.

Does it increase the possibility of fraud? Yes, but doesn't necessarily mean it is being committed. IMHO no reason for an AML report (on the basis your only evidence is they only accept cash).

In this day and age though they are just shooting themselves in the foot as most people don't walk around with cash.

Thanks (4)
Replying to Ivor Windybottom:
By JCresswellTax
10th Jul 2024 09:50

Don't know why, it wasn't the card machine who was cooking the food.

Thanks (4)
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By FactChecker
09th Jul 2024 20:15

Bad direction from the top + a mortally damaged culture + low (often no) skills within the majority of remaining staff ... SO throwing money at it is intended to change what exactly?

And I'm serious about all 3 of those 'charges'.

Top management in any organisation needs to have a cohesive story that connects the major planks of their strategies with a 5-year 'vision' - with those strategies built on measurable metrics that are reviewed regularly, and (when necessary) used to justify short-term operational changes ... rather than relying on the 'sunk cost fallacy' and 'too big to fail' mantras of those who are incapable of effective management.

This isn't the place to explain corporate culture in practical terms ... but at its heart there are basic truths, like:
- a healthy culture being one where it isn't wrong to admit mistakes
- where resolving a problem is a higher priority than allocating blame
- where management understand that listening involves absorbing unwanted feedback not just erecting defensive barriers
- where the concept of service (particularly public service) recognises a collaboration with 'customers' rather than a default of confrontation
... ultimately treating all staff and customers (and therefore agents) first and foremost as people, not as a component of a process.

And the lack of skills?
Arguably more worrying even than the lack of knowledge and experience (both of which fell off a cliff in the rush to slash the numbers and take a lot of effort/time to rebuild) is the all-time low level of skills (competences) required in new recruits at most levels.
You can (given money, commitment and time) rebuild the knowledge base through training ... but if the foundational competences don't exist then no amount of money will be transformative!

Thanks (26)
Replying to FactChecker:
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By wilkotax
10th Jul 2024 10:56

Several years ago HMRC introduced a system they called 'once and done' whereby call centre staff, on receiving a telephone query, followed it through and if possible resolved it rather than leaving a note for back office staff to deal with at some indeterminate time in the future. Apparently this led to quicker resolution of issues and greater job satisfaction among the participating staff. This seems to have been shelved, no doubt due to lack of resources or possibly a new management who saw no point in making a success of an initiative they hadn't instigated and hence would get little credit for. While the reintroduction of this initiative wouldn't necessarily directly affect the tax take it might, along with better training, enable resources to be employed in that direction.

Thanks (9)
Replying to wilkotax:
Tornado
By Tornado
11th Jul 2024 11:24

Oh yes, those were indeed the days.

Phone the helpline, get through to someone quickly, explain the problem, get an answer something like "Oh yes I see what you mean", tap. tap, tap on the distant keyboard and a further response something like "That has now been fixed, is there anything else?"

HMRC Technology is better left to those that are trained in how to use it to best effect and not expect ordinary people in business to try and use it without any qualifications or training.

MTD is as dead as a Dodo as it requires millions of people to learn how to use technology that they neither understand nor want to use. More well trained and knowledgable actual people at HMRC are going to be more efficient and useful than complex IT solutions that often never work. This may not seem very logical to the people that create 'solutions' to problems that don't exist but we find it difficult to understand why they are trying to create solutions to problems that don't exist!

We are human beings and like to be treated as such, so I can fully understand why the tax gap is increasing and will go on increasing as people just give up with complex and often unnecessary IT solutions that do not work properly, and create their own solutions.

This is all just plain common sense but there are a lot of people earning a lot of money out of making things complex for us and want to keep it that way. Do away with unnecessary IT 'Solutions' and the money saved on these may well cover the Tax Gap and also make it easier for people to pay the right taxes, which in my experience, is all that most people want to do. I believe this would reduce that tax gap as well.

If the new Government are committed to helping 'Working People' then I hope they stick to this promise and make tax easier for all of us to deal with.

Thanks (6)
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By OrmeGoat
10th Jul 2024 09:09

No.

Thanks (5)
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By Andy Hull
10th Jul 2024 09:11

If HMRC have got rid of everybody who knows what they're doing, handing a load of cash to kids & buffoons won't help

Thanks (16)
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By Open all hours
10th Jul 2024 09:24

The track record of the current management does not inspire confidence.
Would you let Sir Jim run your practice?

Thanks (6)
Replying to Open all hours:
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By WallyGandy
10th Jul 2024 09:38

He can buy it!! Get a taste of what we're up against? However- it's cash only to pay us. :-)

Thanks (2)
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By JD
10th Jul 2024 09:25

Throwing money at any of the public services just means they end up doing more things badly.

Spending billions on agile development processes for complex matters does not work, using bots and online information does not work for anything other than the simplest of questions, failing to understand the wider costs and administrative burden for businesses created by changes such as MTD, is simple madness, pursuing cases at significant cost with no thought towards the likely of the level of tax recovered is plain stupidity, inventing tax gaps figures that have no basis in reality helps nobody, and may others.

Unless the money is matched with a bit of old fashioned common sense it will be wasted.

Thanks (10)
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By JD
10th Jul 2024 09:25

Duplicate.

Thanks (2)
Ivor Windybottom
By Ivor Windybottom
10th Jul 2024 09:26

Simplest fix is not expensive - trust agents and include us in the tax process, rather than distrustfully push us away.

Thanks (11)
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By aidan.sergent
10th Jul 2024 09:44

You only have to look at the lack of scrutiny by HMRC of tax advantaged schemes, and their unwillingness to look into schemes that are demonstrably corrupt to see that institutional incompetence is rife.

Thanks (3)
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By Sell1623soon
10th Jul 2024 10:26

Not only lawyers should check if a company bloody exists. As a retired but interested layman, I do it with plumbers, drive cleaners etc and have reported suppliers purporting to be defunct companies to Trading standards. As for HMRC, words fail me.

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By Paul Crowley
10th Jul 2024 11:23

Simple
Get the staff back to the workplace, train them, and supervise them.
People are what is needed, preferably some that understand tax law.

Thanks (12)
Replying to Paul Crowley:
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By ruth.julian
15th Jul 2024 17:27

With the shrinkage of HMRC estate to only a few regional centres it means that some staff are commuting as much as an additional 2 hours a day to the office, with no compensation or assistance for the additional travel or to move nearer their new office. Closure of the local offices may have made a big dent in the accommodation budget but it has increased costs for staff and removed the enquiry offices who were, in the main, more efficient than helplines and digital guidance. Why not work from home when there are no longer many face to face meetings or visits to businesses?

Thanks (1)
Replying to ruth.julian:
Morph
By kevinringer
16th Jul 2024 10:29

Because staff working from home take longer to deal with each transaction than staff in the office. That's because home working staff computer connections are slower and less stable, and the staff have less monitors and smaller screens so spend more time switching screens. I have empathy for staff who have to travel further and this is something HMRC needs to address.

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By Self-Employed and Happy
10th Jul 2024 11:31

A bit like throwing money at the NHS it won't solve the issues.

HMRC needs a complete overhaul and re-organisation.

Do away with MTD for ITSA as well, no need for it, no value to the public whatsoever.

Put some value into Agents being qualified by giving those people an increased level of control within the HMRC portal / ability to do more things.

It took me 10 phone calls in the last 2 weeks (all of which cut off after 30 minutes) and probably 20 attempts at PAYE chat before I didn't get the "no one is available" message, all this to be told my issue that was escalated 6 months ago can only be dealt with by a certain team and there is no way of contacting them, cue a Agent Management Service email to see where that gets me....

Its [***] mentally exhausting.

Thanks (9)
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By Greenslades
10th Jul 2024 11:41

Is it just me of has HMRC over the last2 years or so (and particularly the last 6 months) got really bad at communicating with those of us working in the accounting profession?
I have experienced very bad problems just continuing to communicate with HMRC with HMRC being guilty of cutting my access to their routine websites by doing things such as changing the number of digits in a supporting password without informing me. I think this plus some policy changes on other details for filing/access to key working documents has cost me around a months lost time in the last 3 months. It has got really silly in my view and I am completely enraged that the man in charge has actually been knighted for creating this shambles. Am I an alone voice?

Thanks (4)
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By listerramjet
10th Jul 2024 11:48

This tax gap thing is a complete fiction! I wonder if we can guess who has been advising Starmer!

Thanks (3)
Morph
By kevinringer
10th Jul 2024 11:52

When I started in the profession, HMRC (or Inland Revenue and HM Customs & Excise as they were at the time) used to answer the phone within a minute (no queues, no pre-recorded waffle), would respond to post timely (those were the days of hand-written assessments, which were issued faster than HMRC currently captures digital Tax Returns with Marriage Allowance claims), were very much an enabling organisation by holding PAYE, CIS and VAT workshops for businesses new to tax. Everyone we dealt with in HMRC knew their tax. Everyone in business would expect an in-person VAT visit every 5-10 years, and occasional investigations. As a result, HMRC were treated with respect.

The HMRC of 2024 has such dismal performance that we’ve lost all resect for HMRC.

Amy says “can HMRC’s mistakes be stopped by modernisation and investment?”

In my view, it is the modernisation that is the problem, modernisation without the investment. HMRC has attempted to replace HMRC people with IT when the IT is not fit for purpose. And instead of fixing their problems, HMRC introduced more complexity (30/60-day CGT, Basis Period Reform, MTD). HMRC is intoxicated with IT and completely lost sight of its purpose.

Thanks (12)
Profile
By indomitable
10th Jul 2024 12:04

Throwing money at any civil service department won't solve anything IMO.

I cannot remember the exact percentages but the civil service has grown by the order of about 30% since the 2016 - that order of that magnitude.

Have any services got better since that date?? No!!!

Too many non productive jobs, diversity managers, committees etc etc. - the list goes on

I think the quality of parliament has a lot to do with it

Thanks (4)
Rob Swan
By Rob Swan
10th Jul 2024 12:27

The wider point here is that HMRC is in exactly the same position as any/all other Gov't. Depts: NHS, MOD, etc... It's a Government problem, not just HMRC.

Politicians promising 'money to ... (solve the 'blah-blah' (current) problem)' actually and always results in (most of, if not all) that money being shamefully wasted and, as a direct result, the problems get worse. This point is significant (IMHO) because HMRC is simply one department of an entire civil/public service which has long since been broken - stripped of competence - and therefore nothing will solve anything if the entire system is not completely rebuilt from the ground up; and that's just not going to be addressed, let alone sanctioned.

It's broken beyond repair. We (mostly) appreciate that; 'they' either can't see it or won't admit it.

If you're not retiring or leaving the profession, enjoy....

Other opinions may be available, but I haven't found any.

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By Tom+Cross
10th Jul 2024 13:47

With Sir Starmer's inside knowledge, of how Sir Humphry (actually) works, he'd know that these ideas are all pie in the sky, which is a shame. I believe that his intentions are honourable, however, I think that the damage is beyond repair.
It's a similar situation with the NHS, and once again, the civil service must carry much of the blame.
They'd be good at spinning plates; it's simple and repetitive!

Thanks (1)
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By lesley.barnes
10th Jul 2024 15:15

No matter how much money Government throws at the Civil Service, Local Government and the NHS nothing will change. The additional money will be swallowed up because these departments resist change.
There are too many jobs that produce nothing - the song busy doing nothing comes to mind. Unless this is addressed nothing will change.
Too many people over qualified - a degree seems to be the default start position in a lot of jobs these days. Why-what happened to training on the job. These leads to large student debt that needs paying off so wages need to recognised this.
I'm not proposing that Doctors/Dentists etc train on the job but I know people who do admin jobs in the NHS studying for Masters Degrees. Madness.
Doing a job once would help rather than various people having a half hearted attempt. We've all experienced ringing HMRC several times to get the same issue resolved. All wasted resources.

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By flightdeck
10th Jul 2024 19:27

The answer to all public sector issues is to throw more money at it for yet more layers of management, more policies and procedures, more forms, more IT.

At some point this works in reverse - the organisation is essentially gridlocked.

Thanks (1)
Tornado
By Tornado
12th Jul 2024 13:32

I often wonder if the Tax Gap is calculated after setting-off the the residual funds left over by the untold thousands of people who do not claim all the benefits, grants, allowances, etc. that they are entitled to. The Government must set aside contingency sums in case everyone does decides to claim everything they can, but there must be billions of pounds left over each year that has not been claimed and never will be.

Thanks (3)
Replying to Tornado:
Rob Swan
By Rob Swan
12th Jul 2024 15:24

I think the probability (of significant detail and contingency) is, er... low.

More likely a damp finger held to the breeze and 'adjusted' to produce the desired figure.

How can HMRC possibly know how much unpaid tax there is. It might know what it hasn't (yet) collected form returns submitted - the rest is a guess at best. 'Setting aside a contingency' is 'unlikely' I think ;)

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Replying to Rob Swan:
Morph
By kevinringer
12th Jul 2024 16:15

The HMRC of old used to carry out VAT inspections and SA investigations, the results of which could be extrapolated to estimate the tax gap. But I've not had any VAT inspections or SA investigations for many years; at least 15. Discussions with other accountants suggest this is now the norm. In which case, what does HMRC base the "tax gap" on. And could HMRC's late of inspections be the cause of the tax gap? After all, if there is a reduced risk of investigation, there's less incentive to be compliant.

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