Home > Updates > Managing and clearing Inland Revenue tax debts
Tax debt can be a significant source of stress for individuals and businesses alike. However, with the right approach, and understanding the processes involved, managing and clearing tax debts with the Inland Revenue (IR) can be more straightforward than you might think. Below is our guide to effectively navigating tax debt.
Tax debt arises when an individual or business fails to pay their tax obligations by the due date, such as income tax, GST, PAYE, or other tax types. The consequences of not addressing tax debt promptly can be severe, including penalties, interest charges, and potential legal action.
Assess the situation First, assess the extent of the debt. Review all outstanding tax obligations and understand the total amount owed, including any penalties and interest already charged.
Communicate with IR Having open communication with IR is crucial. Contact IR as soon as you realise you cannot meet your tax obligations. IR is often willing to work with taxpayers to find a solution, especially if you are proactive in seeking help.
Explore payment options Instalment arrangements: IR offer instalment arrangements that allow taxpayers to pay their debt off over time. This can be a viable option for those who can’t pay the full amount upfront.
Write-offs: In some cases, IR may agree to write off a portion of the debt if you can demonstrate serious hardship.
Compromise agreements: For those who cannot realistically pay their debt in full, a compromise agreement may be an option. This involves negotiating a reduced amount that IR will accept as full settlement of the debt.
Consider sale of assets or financial assistance Consider the sale of excess assets to clear tax debt.
Explore financial assistance options, such as bank loans or tax purchases from the tax pool, to help manage your tax debt, however, it is important to weigh up the costs and benefits of taking on additional debt.
Stay compliant Ensure that you remain compliant with your ongoing tax obligations while managing your debt. This includes filing all required tax returns on time and paying any new tax liabilities as they fall due.
Lump-sum payments If possible, making a lump-sum payment to clear the debt is the most straightforward approach. This can save on interest and penalties that accrue over time.
Instalment plans For those who cannot make a lump-sum payment, setting up an instalment plan with IR can help manage the debt. Ensure that the agreed-upon payments are manageable within your budget to avoid defaulting on the arrangement.
Purchases from the tax pool Backdated purchases of income tax can be made through the tax pool. This removes the imposition of penalties; however, there will still be interest charges, albeit at a lower rate than that charged by IR.
Negotiating with IR In some cases, negotiating with IR for a reduction in penalties or interest can be beneficial. This requires demonstrating genuine financial hardship and a commitment to resolving the debt.
Accurate record-keeping Maintain accurate and up-to-date financial records. This helps ensure that you are aware of your tax obligations and can plan accordingly.
Regular tax reviews Diarise tax payment dates and conduct regular tax reviews to identify any potential issues early. This proactive approach can help prevent the accumulation of tax debt.
Budgeting for taxes Include tax obligations in your budgeting process. Setting aside funds for tax helps ensure you have the necessary resources to meet your obligations on time.
Seek advice from your trusted Nexia advisor. We can provide you with the guidance and support needed to manage your tax affairs effectively.
Managing and clearing tax debts with IR requires a proactive and informed approach. By understanding the options available and maintaining open communication with IR, you can navigate tax debt issues successfully.
The key is to act early, stay compliant, and seek advice from your Nexia advisor when needed. With the right strategies in place, managing tax debt can become an integral aspect of financial planning.
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