Remember tax pooling as IRD audit activity increases

Remember tax pooling as IRD audit activity increases

Remember tax pooling as IRD audit activity increases 1200 630 Lee Stace
Image: IRD audit in hidden economy

IRD ramping up its investigation activity by targeting businesses under-reporting cash sales or paying staff under the table is an opportune time to remind taxpayers that tax pooling can assist with audits or voluntary disclosures.

The hidden economy is estimated to be worth close to $1 billion.

That’s why IRD is cracking down on cash payments and gearing up for a string of surprise visits to ‘high risk’ businesses.

Many will have read the story about the department’s investigation staff conducting searches and unannounced visits to cafes, restaurants, bars and takeaway operators in Queenstown and Central Otago recently. Bakeries and liquor outlets are also on their radar.

It follows the successful prosecution in the Thai House case.

The hospitality sector has a high risk of businesses not declaring income and/or paying staff under the table because of the high number of cash transactions and the more short-term nature of employees.

During the Queenstown and Central Otago campaign, IRD says it seized wage records, computers and other business records using court-issued search warrants.

Staff also seized information on employer-provided accommodation, rental properties, Working for Families tax credits and payroll matter, as well as till records and lists of staff names and work rosters to check against employee details it holds.

Similar investigation activity is being done in the trades and construction sector because cash-in-hand jobs are more common.

For the past couple of years, the focus of IRD investigators has been businesses in Auckland. Now they are expanding their work to the regions.

How tax pooling can help with audits or voluntary disclosures

A taxpayer can use tax pooling to reduce the interest cost and eliminate late payment penalties on any additional tax they owe if they receive a notice of reassessment from IRD due to an audit or voluntary disclosure.

An IRD-approved tax pooling provider such as TMNZ can assist if a taxpayer owes more income tax, GST, PAYE, RWT, NRWT or FBT than what they initially paid.

The reason a tax pooling provider can reduce the IRD interest cost and eliminate late payment penalties is because they can apply date-stamped tax that was paid to IRD on the original due date against their liability upon receiving payment from a taxpayer.

As a result, the taxman recognises that a taxpayer paid the amount due and payable on time once is processes this transaction, eliminating IRD interest and late payment penalties.

The taxpayer has some interest to pay. However, the rate the tax pooling provider charges is cheaper than what IRD charges. TMNZ can reduce the IRD interest cost by up to 30 percent.

As such, the saving can be considerable.

To use tax pooling for an audit or voluntary disclosure, a taxpayer must have filed the original return. They must also be within 60 days from the date IRD issues the notice of reassessment.

How IRD is identifying ‘high risk’ taxpayers to audit

Despite contrary opinion, cash DOES leave a trail – and IRD has ways to determine if a taxpayer is concealing income.

Part of its work in the hidden economy involves running analytics over large volumes of third-party data to which is has access.

Once that is done, investigators can then evaluate a business on what they perceive their proper level of income should be by comparing them with other like-type businesses in similar locations to determine whether they are under-reporting their income or if it is closer to the appropriate level.

For instance, this can be done by looking at the income someone returns for GST against their electronic receipts. The difference should be cash sales. Lower-than-normal cash sales in comparison to industry peers may arouse suspicion.

In the hospitality sector, it is a common tactic for an investigator to come into the premise, order a meal and watch how the business operates. They’ll be looking for such activity as staff not running cash payments through the till.

In the trades and construction sector, a tell-tale sign that someone’s tax affairs my warrant a closer inspection are discrepancies between supplies bought and goods sold.

IRD also knows the income a taxpayer conceals is likely to be spent at some point. Comparing their spending habits with their income tax returns can identify any outliers. A taxpayer will arouse suspicion if they cannot explain or show where the money to pay for certain items came from.

By the time an IRD investigator shows up on site, they will have a fairly good picture about a taxpayer’s behaviour and level of compliance.

The hidden economy – facts and figures

According to a joint study by IRD and Victoria University, New Zealand is missing out on an estimated $800 million in its annual tax take.

This is due to self-employed taxpayers under-reporting their income tax by about 20 percent.

However, Chartered Accountants ANZ believes that figure is likely to be in excess of $1b each year.

For the 2018-19 tax year, IRD’s annual report shows that for every $1 it spent on investigation activity, there was a return on investment of $7.54.

This is against a measure target of $7 for every dollar spent.

IRD says there are 90 prosecution cases before the courts due to tax evasion.

Lee Stace

Lee Stace is the PR and Content Manager at Tax Management NZ.

All posts by: Lee Stace