The Top Ten Things to Know when you are about to have an IRD Audit or Dispute
Experience usually comes too late. When you need it, you don’t have it, and when you have it, you often don’t need it. This article gives ten tips to take into account if you have an IRD Dispute or Audit on the horizon, and tries to give you the experience you need to make wise decisions early on. The Government has recently pledged more money to allow the IRD to increase its audit activity. The chances of being audited have therefore increased. If you are in this position, we hope you find our article useful.
Top Tip Number One: The IRD is not your Friend
The first contact with the IRD is crucially important. Errors at this point cannot be fixed later on. If your affairs are in disarray, but you have acted honestly, do not send your papers to the IRD thinking that you will come off lightly. They will see this as a distress signal and go in for the kill. Do not engage in small talk with the IRD auditor, no matter how friendly they are. They are collecting information that they may use against you.
Top Tip Number Two: Good Advice from the Start is Crucial
If the IRD is investigating, and they find any errors, then it is likely that you or your accountant made the error. Using your accountant to help you correct this may not be the best option, especially if it was his/her error that caused the problem. Using an independent lawyer may give you the perspective needed. It may also get the IRD to understand that you are not going to be a pushover.
Top Tip Number Three: Tell Your Loved Ones
IRD audits are stressful and you will need all the support you can get. There is no point in doing this on your own. If it turns out that you have not paid enough tax, as it often does, then there could be a raft of family issues that arise. For example, you may need to sell your house to pay any back taxes, action may need to be taken to protect your assets as far as legally possible.
Top Tip Number Four: Use Voluntary Disclosures if Possible
There are generous deductions in the penalties regime that apply if a voluntary disclosure is made in time. In addition, these disclosures can protect you from prosecution if they are made early enough. If you know you have taken an incorrect position, it is usually best to come clean with this early on.
Top Tip Number Five: The IRD may not be friendly, but they are generally fair
The people who work for the IRD are just doing their job. They are generally not out to get you as long as you are honest and organised. However, they will do their best to enforce the tax laws of the country. If your response to the audit is professional and you use professional advisers to help with responding, the outcome is likely to be more favourable, and the audit is likely to be over sooner.
Top Tip Number Six: GST is a weak link
The IRD starts most of their general audits by looking at your GST position. Because GST returns are generally very easy, businesses often miss the more complex details that can arise with high value supplies or purchases. In addition, where GST errors occur they generally have a flow on effect into other taxes, and the IRD audit is likely to branch out into those areas if they are not satisfied with the level of your GST returns. Therefore, if you are doing your own GST returns, ensure you get advice on difficult high value transactions, such as the sale of land or businesses.
Top Tip Number Seven: Keep your Options Open
As the audit progresses the IRD will ask for information and impose deadlines. It is important to meet these deadlines. In the event that there is a dispute a further set of deadlines will apply. It is crucial that these deadlines are met, as missing them could lead to you losing your right to take the dispute further. You generally get a two-month period to respond.
Top Tip Number Eight: If the Tax Amount is Large Litigate
If the amount of tax in question is more than $200,000, and there is any uncertainty about the law, then it can be worth litigating. This means taking the case to the Taxation Review Authority (TRA) as a first step, and further if required. The TRA case could cost $15,000 to $20,000 to run, depending on the complexity and issues involved.
Top Tip Number Nine: If errors are rife reconsider
If the IRD picks up many errors, and the tax underpaid is large, you may need to reconsider whether you are in the right place. If you are running your own business, you may need to take courses to up-skill in business management. Either that, or give it up altogether. If it is your accountant who was responsible for the errors, you may need to get a new one. Take stock of your affairs to ensure that next time the IRD audits you the same mistakes are not made.
Top Tip Number Ten: Do not Lose Heart – There is life after a Tax Audit
Many clients think an IRD audit is the end of the world. This is because everything else also seems to go wrong at exactly the same time as the IRD audit. The IRD audit will eventually end. In less serious cases, the most the IRD can do is take your money. Ensure you stay strong in your relationships throughout this period and the IRD audit will be over before you know it.
Parry Field Lawyers provide legal advice on a range of tax matters and are able to assist you with any tax questions that you might have. Please contact Kris Morrison at Parry Field’s Christchurch office (348 8480) for help with tax matters. Please note that this is only a high level overview of the issues. Therefore, please don’t rely on this as legal advice.
