IRD audit activity is ramping up. It is monitoring tradies and those operating restaurants, bars, cafes and takeaways closely.
After all, it’s noticing a high level of non-compliance by some working in the construction and hospitality sectors. They include business owners who are not declaring part or in some cases all of the income they receive. Some are also not paying GST and PAYE.
Hence IRD’s interest in their business affairs.
As IRD continues with its investigations work in the ‘Hidden Economy’, we thought we would share some insights about how it is going about this. We also provide some tips on what to do if you find yourself caught up in an IRD audit.
How IRD is selecting its audit cases
Behind the scenes, IRD is running detailed analytics over large volumes of third party data it can access to find taxpayers to investigate.
For instance, they know people are likely to spend the income they conceal at some point. As such, they’re comparing their spending habits with their income tax returns to identify any outliers. If someone cannot explain where the money to pay for certain items came from, it may arouse IRD’s suspicions.
IRD can also compare the income someone has returned for GST against their electronic receipts. The difference should be cash sales. As a result, IRD may investigate anyone returning lower-than-normal cash transactions in comparison to their industry peers. In hospitality, no recorded cash sales will almost certainly ring alarm bells.
Another tell-tale sign that someone’s tax affairs my warrant a closer inspection are discrepancies between supplies bought and goods sold.
What are the consequences?
Not surprisingly, avoiding tax obligations is a serious offence. It carries serious repercussions.
Any additional tax obligations that arise from an IRD audit carries interest (currently 8.22 percent) and shortfall penalties. The latter are brutal. They range from anywhere between 20 to 150 percent of the tax shortfall, depending on the seriousness of the breach.
Criminal prosecution may also follow.
What to do during an IRD audit
If you keep up-to-date records and have a good compliance history, then don’t worry. Any dealings with IRD should be quick and painless if they come calling.
However, below are a few pointers to help you out if you find yourself on their radar.
1. Know your rights
IRD investigators have the right to visit your business without warning.
However, if they show up out of the blue, don’t panic. Ask to see their identification and grab their business card.
It is also wise to refrain from answering any of their questions at this stage. Take the investigator’s contact details and arrange a time to meet with them along with your accountant.
Do not let them take original documents with them as they may misplace or lose them. Insist they make copies if they require any information.
2. Don’t go it alone
An IRD audit can be tricky. It’s a specialist area and tax law is complex. Therefore, engaging the services of someone who has expertise in both is important.
While you will incur fees, this will save you considerable time, stress and money in the long run.
3. Respond to IRD swiftly
Deliver any information IRD wants by the deadlines it imposes. If you require more time, let them know and negotiate a new date to supply what they are after.
Whatever you do, don’t leave things until the last minute. Giving IRD what it wants promptly shows you take your tax compliance seriously.
4. Fess up
It is true what they say. The truth shall set you free. Given that, consider making a voluntary disclosure if you have been dodging your tax obligations.
There are several advantages of doing so.
Firstly, it can reduce any shortfall penalty incurred. Making a voluntary disclosure before the IRD audit starts is the best thing to do. It can reduce the shortfall penalty by 75 percent or even 100 percent in some cases. Disclosing any incorrect tax information during the investigation may reduce any penalty by 40 percent.
Secondly, you can reduce the likelihood of criminal prosecution by coming clean.
5. Use tax pooling
If you receive a notice of reassessment due to an IRD audit or voluntary disclosure, consider tax pooling to pay what you owe.
An IRD-approved provider can reduce the interest cost by up to 30 percent on any additional tax payable. Savings are considerable.
That’s because they will apply surplus tax paid to IRD on the original due date against your liability when you pay via them. As such, IRD treats this as if you paid on time, eliminating any interest and late payment penalties.
You also get more time to pay – an additional 60 days from the date IRD issues the reassessment notice.
Remember, TMNZ can help with audits or voluntary disclosures that result in IRD issuing a notice of reassessment. We reduce IRD interest and wipe late payment penalties if you owe additional income tax, GST, PAYE, RWT, NRWT or FBT than you initially paid. If you wish to know more, feel free to email firstname.lastname@example.org. Alternatively, you can contact us on 0800 829 888.