If you talk openly, watch out, because overheard conversations are just one of the myriad of methods the tax authorities use to check on you.

There are too many methods used to mention here, but the basic premise is that they are so simple. Apart from checking your tax return, looking at your employment details or accounts, they also have reams of information supplied to them direct from banks and building societies on accounts held and interest paid both in the UK and overseas.

From these and a basic knowledge of economics, they can work out roughly how much has been invested over the period and match this against your declared income.

Tip-offs are looked at with a view to bringing in extra revenue. One common cause of a malicious tip-off is where a deal was done for cash, the service or goods didn’t perform and the businessman refused to honour the customer’s claim.

Deaths often lead to extra funds for the government. After every death, the executor handling the estate of the deceased must make a formal return on the value of estate. A valuation of the assets may be too high for any previously declared income from the deceased’s previous tax returns.

The Revenue’s tax inspectors read newspapers. So if you’ve had a burglary, keep well away from the media. Reports of a burglary where valuables are stolen might cause an inspector to check his records to see if you could afford those items.

Remember that taxmen also use the yellow pages or local papers. Watch out if you are advertising for an undeclared business, and take care who you offer cash discounts to. Although not illegal, cash deals could indicate some dishonesty.

Your business, unless it is quite unique and effectively a monopoly, can be tested against industry norms. The Revenue have over the years collected statistics on businesses in various industries on for example bad debts, turnover, gross profit, number of employees, costs of raw materials or services and so on. By looking in detail at your accounts and seeing how items recorded compare to the industry standard, the taxman will see if you might be cheating him.

It does not matter how good your tax planning is if you do not document it properly. In particular have formal written agreements between associated companies - and keep to these agreements. Many people inside the Revenue seem to think that small companies minute all major decisions. In most cases the reality is very different. But if the Revenue expect to look at minutes it makes sense to minute all major decisions.

Now that you have a background in the strategy used by Inland Revenue, here are some pointers on reducing the risks to you and your business.

1. Tax inspectors are tax specialists and not businessmen. They may therefore find it difficult to tell if your accounts are fact or fiction. However, don’t ever think that Revenue staff are ignorant. After looking at thousands of accounts and investigating many hundred, they will get a feel for what is accurate. If the Revenue are not happy with a set of submitted accounts, they can raise an assessment to the best of their judgement. It will then be up to the tax payer to prove that the assessment is wrong. In effect, the taxpayer will be guilty until proven innocent. If you are accused of fraud, you can be sure they’ve got the evidence.

2. The House of Commons Public Accounts Committee set targets for investigations in addition to the random audits required under self assessment. Inland Revenue do not now need an excuse to investigate your affairs, but if you commit a Statutory Offence or Failure, for example, the late return of tax documents - tax return, P111D for benefits in kind etc - then expect an investigation.

3. With regard to tip-offs, you’d be doing yourself a huge favour if you treated staff, suppliers and customers as favoured family.

4. When dealing with the authorities, do not be obnoxious and answer all questions put. Also, you’ll always get the best results if you treat others with respect. At the same time, unanswered questions - whether written or verbal - always look as if you have something to hide.

5. When compiling your accounts, always show enough money to live on. It’s simple and obvious, but if you have two children, two cars, a £150,000 mortgage and you are the sole breadwinner, how can you live on £10,000 a year?

6. Be careful to declare every penny of income. While doing this you can be creative with your accounts, but don’t lose sight that creativity has limits.

7. Finally, if you are caught you would be best advised to make a full and complete disclosure and come clean. You’ll certainly have to pay the missing tax plus interest, but you stand a better chance of getting away with a smaller penalty.