IRD Audits and Risk Reviews

Over the last 20 plus years there has been a distinct change in the way Inland Revenue goes about its audit and review “obligations.”

In years gone by, most businesses could expect to be audited every 3 to 5 years. This is no longer the case. Audits are being undertaken on a more “risk based” approach and most often, the audit selection process may be as a result of a database “trawl” to see whether specific taxpayers are outside of Inland Revenue’s parameters.

It is also evident the Inland Revenue is keen to target its audit activity based on a “biggest bang for buck” approach. This may be at the expense of some taxpayers getting away with things that may not be technically correct, however, clearly Inland Revenue are only funded for a certain level of resource (i.e. in terms of auditors) and therefore it is impossible to audit all cases.

With the continuing significant business transformation project that is underway at Inland Revenue, some of the errors that have previously gone without audit, conceivably may be picked up in real time without the need for intervention by an auditor. This will be assisted by a ‘state of the art’ IT platform Inland Revenue will be transitioning to over the coming years.

As accountants, we often see GST being overlooked as a “high risk” area by clients. However, care should always be taken if you are filing a GST return that results in a refund that is outside the norm for your business. This may be the case when a specific transaction has occurred during the period. If you are unsure as to whether the return is correct you should seek advice before you file the GST return. As once you have filed the return you will be deemed to have taken a tax position. Where a mistake becomes problematic is when Inland Revenue can impose a shortfall penalty (often 20% of the tax shortfall amount) and use of money interest. It is therefore often very costly if you get this wrong.

Outside of audits, it is becoming more common for certain taxpayers to have risk reviews undertaken. A risk review is not an audit (even though it might feel like one at times!) however items identified in a risk review may in some cases result in an audit being commenced. Please make sure you get your Hayes Knight advisor involved in this process so that we can respond to the Inland Revenue in the most appropriate manner. In this regard there is some advice that might be “privileged” or “confidential tax advice” which should not be provided to the Inland Revenue.

Some large companies and high net worth individuals can now expect to have to complete an annual risk review questionnaire.

In a wider context there is also some onus on the Commissioner to be seen to be actively targeting segments of the community that are not paying their fair share of tax. In recent years we have seen this with the instigation of specialised property teams at Inland Revenue who are targeting property transactions.  This activity has been highly lucrative for the Government and there has been a significant return on dollars spent to conduct this activity.

Another area currently being targeted is the “cash economy”. This has resulted in an increased focus on the hospitality industry and the targeting of geographical areas in New Zealand where the cash economy is considered to be more prevalent (e.g.Queenstown and Auckland).

Tradespeople have also been targeted. Most people would have been on the receiving end in a transaction where the tradesperson has offered a “cash price.” Inland Revenue has regarded this as an entrenched way of trading in some businesses such as tiling, gib stopping, plumbing and building. Part of their task is therefore to educate taxpayers that this activity is not acceptable to Inland Revenue. Inland Revenue has actively targeted industry bodies to make sure this message gets filtered through to its members.

For both tradespeople and the hospitality industry, some of Inland Revenue’s audit activity has been unannounced visits on site. Make sure you seek advice if they turn up unannounced. As a client of a “tax agent” (Hayes Knight), Inland Revenue should be dealing directly with the tax agent in the first instance rather than directly with the taxpayer.

With the hospitality industry, Inland Revenue uses some industry measurements (e.g. GP margin) to determine whether they think there is undeclared income. These may NOT always be right.

Inland Revenue’s audit and review activity is not going to go away. This is part of their mandate laid down by the Government. Many clients will go about their business and never see an Inland Revenue auditor. If, however, you are selected for an audit, or are part of the Inland Revenue’s “risk review” selection, please contact your Hayes Knight advisor or the tax team directly.