Over the past few years the Government has been steadily increasing budget funding for Inland Revenue investigations, with a current budget allocation of $74 million over five years. Of that $74 million:
- $29 million will be spent on investigating property speculation;
- $25.4 million will be spent on investigating the hidden economy in certain ‘at-risk’ industries; and
- $19.6 million will be spent on investigating aggressive tax planning issues.
The $74 million is expected to yield an 800 per cent return.
While the focus has been more on aggressive tax planning and hidden economy initiatives, this is also having a flow on effect with initiatives such as the basic compliance package (“BCP”) information requests which you may have heard of or even received.
So should you be worried at this progressive increase in scrutiny? There are a number of different reasons Inland Revenue may select you for an audit; some of the more common reasons our BDO tax team is seeing include:
- Your past compliance history (i.e. have you been filing returns and making payments on time?).
- Checking your records as a result of an audit of another related taxpayer, or an unrelated taxpayer you have had transactions with.
- Examining a particular issue facing groups of taxpayers.
- Reaction to media reports.
Past compliance history
This is often one of the more common reasons for an audit and is the easiest one to remedy. Maintaining a good compliance history with Inland Revenue goes a long way to both reducing the risk of an audit and also putting you on an equal footing in the event an audit does occur.
The good compliance history should extend beyond simply filing the returns and making the payments on time. The importance of keeping good, well-referenced documentation and workpapers to support the tax positions adopted also demonstrates you have taken reasonable care and can be crucial in ensuring a smooth process should an audit arise. It goes without saying that your accountant and/or tax adviser should play an important role in assisting in this regard.
Checking records with another taxpayer
The most common occurrence in this regard is where other companies or shareholders in a group are incorporated into an audit of one of the other members. Selection for an audit as a result of an audit of an unrelated party arises less often and is one of the more unfortunate drivers behind a tax audit. While taxpayers can control their own tax position and compliance history, they unfortunately cannot control those of the people they do business with. In these situations you will need to trust and rely on your own documentation and compliance history discussed above to minimise your risk.
Examining particular issues facing groups of taxpayers
If you follow the recent media on tax audits you will have noticed Inland Revenue’s particular focus on the hospitality and, more recently, the trade and construction industries. In this regard Inland Revenue is targeting the “hidden economy” or “cash transactions” which are not reported or included in tax returns to Inland Revenue.
Another area of focus we have noticed over the past few years is targeting unreported foreign investments held by individuals, particularly people who have immigrated to New Zealand in the past decade or so and were not fully aware of their tax obligations. These people typically maintain foreign credit cards, the use of which alerts Inland Revenue to the existence of unreported foreign bank accounts. In turn this leads to an audit which often uncovers various other foreign investments that have not been included in the person’s tax return.
Reaction to media reports
The most common in this regard is where large transactions are reported in the media. This quite often leads to either a risk review or audit soon after the transaction. This can be problematic for purchasers and/or their advisers if adequate tax due diligence on the company acquired has not been carried out and the audit uncovers a significant unreported tax liability.
What to do if you get a query
It goes without saying that the first thing you should do is contact your accountant and/or tax adviser, however some other helpful tips are as follows:
- Don’t panic!
Information requests and audits are becoming more common as a result of the increased investment by the government so don’t take it personally.
- Comply with all requests in a timely manner
This goes back to maintaining the “good taxpayer” standing with Inland Revenue.
- Maintain good communication
Audits and information requests typically occur at the busiest times so, if you think it will be difficult to supply the requested information in time, it is important to discuss this with the investigator as soon as possible and arrange for more appropriate deadlines. In our experience most Inland Revenue investigators are quite reasonable and accommodating in this regard.
When assessing an appropriate deadline and the best time for the audit to take place, don’t forget to take note of the movements of key personnel, such as those responsible for payroll or IT. All parties will get frustrated if Inland Revenue requires a certain report but the only person who can access it with relative ease is on annual leave for the next month.
In some cases, Inland Revenue will be more relaxed in relation to extending deadlines if it can receive at least some information before the deadline. It will not always be reviewed as it arrives given investigators will often have other audits to deal with and they often need to book time for conducting the review/audit well in advance.
While providing information in increments may not appear to achieve anything if the investigator has no time to review it, there are advantages to this approach. Firstly, the agreement to provide information on an on-going basis may give the investigator confidence that they don’t need to extend the deadline further. Secondly, it ensures that internally, things will not be left to the last minute. In our experience, making staff responsible for the timely provision of information, and meeting with them to monitor progress, is part of effective internal communication.
Because of the time pressures faced by investigators, you may find that Inland Revenue needs to alter its own initially proposed time-lines. This can cause frustration for taxpayers, particularly if an audit will run over a financial year and there is uncertainty around what may need to be booked, for financial statement purposes, as a tax liability. In these circumstances, have a chat with your accountant and/or tax adviser: they may be able to apply ‘gentle pressure’ to help bring the audit process to a timelier conclusion.
- Consider making a voluntary disclosure
A voluntary disclosure can deliver a reduction of penalties. It will often be as a result of an internal review of the tax matters that are the subject of the audit; and perhaps a review of other tax matters that may be included if the scope of the audit is expanded.
Assistance with such reviews may be provided by your accountant and/or tax adviser and the findings from such reviews may be provided to Inland Revenue (Inland Revenue may also ask for such review-findings).
A positive review, particularly if it includes a description and comment on the tax-related systems and processes in place, may result in less Inland Revenue time on-premises. Undertaking a review will also be an indication to Inland Revenue that you take tax compliance seriously.
So should you be worried? The fact that you are being audited or asked for information does not mean that you are necessarily ‘in trouble’. Even if you are in what Inland Revenue might consider to be a ‘high-risk category’, it is important to remember that it is an individual situation that matters. Provided you have a good compliance history, have good records and work with your accountant/tax adviser to maintain good communication with Inland Revenue, the risk review or audit should be a relatively smooth process.