Are you prepared for an IRD Audit?

There is increasing attention in the media and through IRD updates that IRD is significantly increasing its audit activity. In fact, information released by IRD shows the Department has almost doubled the number of audits opened and tripled the number of audit hours when compared to last year.

IRD are being quite upfront about its focus, made possible by the redeployment of staff previously engaged in delivering Covid Support and Small Business Cashflow loans. IRD’s focus on the areas most affecting SME’s include:

1. The hidden (cash) economy
2. Property speculators and developers
3. Cryptocurrency
4. Offshore income
5. Company restructures
6. Trust disclosures and diverted personal income

IRD has also indicated it will be targeting specific sectors including:

1. Liquor store retailers
2. Construction
3. Organised crime

 What happens if IRD shows up at your business premises – what are your rights?

 Many business owners will have never experienced an IRD review or audit, let alone an IRD officer arriving at their business premise.

So, what can you do if IRD notifies you of an impending visit, or simply shows up asking for access to your business records? You should immediately request help from your lawyer or tax adviser. IRD do not have to wait for your lawyer or tax adviser to respond, however, it would be very unusual for IRD to not provide a reasonable amount of time for your lawyer or tax adviser to arrive.

IRD have broad search powers which can be exercised when, in their opinion, other means of obtaining information are inappropriate or inadequate.

These search powers authorise IRD to request information and to access and remove information for the purposes of making copies. Where necessary, IRD can use reasonable force, including the services of a locksmith, to access property.

Information requested and removed by IRD is however limited to such information as is required to enable the collection of all taxes or duties, the carrying into effect of any of the Inland Revenue Acts, and the carrying out of functions lawfully conferred on them.

You are required to provide reasonable facilities and assistance, and to answer all proper and relevant questions.

A tax adviser or lawyer can help keep disruption to your business to a minimum and ensure that only relevant information is requested by and provided to IRD. Any information which is subject to legal privilege, or is a tax advice document, does not need to be provided to IRD. Your tax adviser or lawyer can assist you to determine what these are and can correspond with IRD in relation to these.

If the IRD arrives at your home, then they will either need a court issued warrant, or your permission to enter.

 Get ready, get through

So what should you be doing now? IRD’s increased audit focus serves as a timely reminder to ensure that your business is tax compliant. We recommend reviewing the following risk areas:

1. Are you declaring your cryptocurrency trading activity?
2. Are you paying FBT or making a private adjustment correctly for any private use of motor vehicles?
3. Are your employer records complete and are you calculating PAYE payments accurately?
4. Are you including all cash sales in your GST and income tax returns?
5. Are your travel and entertainment expenses all business related?
6. Have you excluded any private expenditure paid by your business from being tax deductible?
7. Are you declaring your overseas income?
8. Have you purchased, sold, or transferred any real estate property that may be subject to income tax or GST?
9. Are you up to date with your filing obligations and tax payments?

Oh dear… I found a skeleton in my closet

 If an error has been identified, there are options available to taxpayers, including making a voluntary disclosure or amending the relevant return. Where a voluntary disclosure is made, IRD generally adopt a less aggressive approach as it is recognised that the taxpayer is making all efforts to comply with their tax obligations. Reductions for shortfall penalties of up to 100% are also available.

Talk to our experts

If you require assistance or are contacted by the IRD, or if you are unsure whether you are compliant, please contact one of our trusted Nexia Advisors for expert advice and guidance.

Nexia is one of New Zealand’s best accounting and business advisory consultancy firms offering the full range of accounting, business advisory, tax, audit, and insolvency services.

Nexia New Zealand has offices on Victoria Street in the Christchurch CBD, Albany on Auckland’s Northshore, Newmarket in the Auckland CBD and Hastings in Hawke’s Bay.