A $2400 IRD interest bill after underpaying an instalment of provisional tax by a mere 30 cents.
This is just one example of how the programming issues within IRD’s system are currently affecting interest calculations for provisional taxpayers.
IRD says it has seen cases where taxpayers have lost access to the safe harbour provision because its system is not correctly truncating instalment amounts payable to whole dollars.
And any taxpayer who thinks their system is truncating is discovering a nasty IRD interest surprise after they file their income tax return for the year.
How this error is affecting taxpayers
The safe harbour provision applies to taxpayers using the standard uplift method who have an income tax liability for the year of less than $60,000.
Under this provision, IRD does not charge interest if they pay their provisional tax instalments for the year on time and in full.
In fact, any remaining balance to settle the actual liability for the year is due at their terminal tax date. IRD interest applies from this date if they do not pay the final balance by then.
However, if they fail to pay any of their provisional tax instalments for the year on time or in full, they fall outside of safe harbour.
As IRD’s system is not truncating instalment amounts due to whole dollars, taxpayers who fail to pay the instalment amount including cents at their provisional tax dates are being caught out.
And they are suffering financial consequences.
That’s because when a taxpayer falls out of safe harbour, they will incur IRD interest on the final balance to settle what they owe for the year from the last provisional tax instalment. Interest continues to accrue on this amount until a taxpayer pays it off.
Therefore, this is how a mere 30-cent shortfall becomes a $2400 IRD interest bill.
We have also seen another case where a taxpayer was short $1.67 at their first instalment for the 2019 tax year and incurred IRD interest of $168 on the final balance owing from their final instalment date.
Although this treatment is correct (as per the wording of the legislation), IRD says this should not be happening and is looking at some relief for these cases as there is a disproportionate cost to the error made.
The system error explained
IRD says the truncation/rounding issue has arisen after IRD switched from their old to new system.
IRD’s old system would truncate amounts due at provisional tax instalments to whole dollars. For instance, $5000.33 would become $5000 and taxpayers would be deemed to have met their liability if they paid this amount.
Cents truncated at the first and second instalment would be loaded to the final instalment. Using the example above, this means $5001 would be due at the last instalment.
However, the new system is loading truncated cents to the second instalment, not the last one.
As such, taxpayers thinking the old system logic still applies are inadvertently underpaying at their second instalment, hence losing the ability to use the safe harbour concession and being hit with a hefty IRD interest bill.
IRD says it is working on a solution to this problem. No timeframe was given as to when they expect to remedy this.
IRD interest incorrectly charged from earlier instalments
Another system issue is resulting in standard uplift taxpayers with nil assessments at the first (P1) and second instalments being incorrectly charged IRD interest from P1 instead of the final instalment.
Again, this is resulting in significant interest bills as a taxpayer has greater exposure to IRD interest.
IRD says this is on the list of things it is looking to correct.
If you have any cases where this is happening, please send us details (including myIR statements and use of money interest reports). We will refer these to IRD so they can convince their systems people that this is an urgent request.
IRD’s system and tax pooling
IRD also reports there are some instances where its system is charging a handful of taxpayers interest as it is not recognising their tax pooling transfers.
It appears those who had a tax pooling arrangement in place for their second instalment of provisional tax are being impacted.
IRD says it is still investigating this issue.
We will keep you abreast with any IRD interest calculation updates as they come to hand.
Are there any other IRD system issues you are noticing in relation to provisional tax? If so, please email firstname.lastname@example.org.