By Frank Newman on 16th December 2013
Unfortunately being in business means being subject to the scrutiny of the Tax Department from time to time. To some, it is quite unfair that not only are businesses the unpaid tax collection agency for central government but there is a presumption of guilt when the people form the IRD knock on your door and demand to see your receipts. Not only do you have to deal with the stress of that situation but also the time and cost of complying with their requests can be significant.
The reason the IRD is now more likely to end up on your doorstep is because central government has given the Department more resources to do so. In last year’s budget an additional $6.6m was given to the IRD, with the expectation of generating an additional $45m a year (a +600 return!) – under the guise of making the tax system fairer! The business process reengineering can be one way to rearrange the processes and make better decisions and become a stronger competitor.
Basically there are two types of IRD ‘investigation’. The first is what they call a risk review. It’s a soft form audit where information will be requested. If they find ‘matters of interest’ it will then become a full audit which may extend back up to seven years.
The risks associated with an audit should not be under estimated. The penalties can range from payment of the tax due plus between 20% (for lack of reasonable care) to 150% for what they view as criminal evasion. With these penalty rates the sum demanded by the IRD can become very large very quickly, especially where a number of tax years are involved.
Audits are complex and the process is intimidating – the first line you will be confronted with at a formal interview is much on the lines of, ‘You have the right to remain silent…’
We strongly recommend people not take a DIY approach to tax audits We believe it is imperative that your accountant should be engaged early on, regardless of whether you think you have done anything wrong. We are able to assess the validity of the IRD claims and discuss matters such as voluntary disclosure to minimise tax penalties. We have good success in negotiating the remission or reduction of penalties.