There’s no doubt that IRD audit activity is increasing. Hardly a week goes by where we don’t receive a phone call from someone asking for advice and assistance.
There is a common thread with a lot of these enquiries. They often come from taxpayers who have not kept their affairs up to date with the IRD.
Most people believe that the chances of an audit is quite low. In reality, the chances of audit, risk or compliance review is increasing as the government devotes more funding.
There’s little doubt that an IRD audit, risk or compliance review is a stressful situation. It can be quite a frightening place to be but with advice and support, you will get through it.
How are you selected for an audit?
There is absolutely no rule of thumb here. There are any number of reasons why the IRD may wish to audit a taxpayer. They include:
- late GST or income tax returns
- incorrect information in the returns
- failing to inform the IRD when you employ staff, close down a business or start a new one
- living beyond your means
- not declaring all your income
- using an accountant with a poor reputation
- claiming expenses outside the norm for companies in similar industries
- claiming non-deductible expenses
This list is not exhaustive.
In addition, the IRD must also act on anonymous tip offs from members of the public alleging evasion or avoidance.
Inland Revenue can audit any business. It uses a range of methods to select who to audit, but won’t disclose the reason you have been chosen.
What is a Risk or Compliance Review?
Sometimes the IRD will write to you indicating that you have been selected for a risk or compliance review. They will usually indicate that this is a pre-audit process. You should always assume that any review may give rise to a full audit later down the track. Get advice early.
A Visit from the IRD
The IRD may decide to visit your business premises out of the blue and they are perfectly entitled to do this. They must have a warrant however. Ask to see it and ask for their business cards.
We would advise you not to answer any questions from an IRD investigator without first getting advice. This should be from someone who is experienced in handling the IRD audit process. Take the name and contact details of the IRD inspector and inform him or her that you will make a time to meet along with your professional advisors.
If the IRD want copies of business records, make sure they take copies and leave you with the originals. Mistakes can happen and documents can be lost or mislaid. It is vital that you have your original documentation for any subsequent audit.
Communication with the IRD
Where possible, all communication with the IRD should be in writing. Of course it’s a really good idea to consult a professional advisor before compiling any correspondence. Alternatively you can get your advisor to write to the IRD on your behalf. Any correspondence should ask the IRD to confirm receipt and the length of time they will take in following up.
Interviews with IRD Inspectors
Do not attend interviews without a professional advisor. It is best practice to ask ahead of time just what questions the inspector wishes to ask. This allows you time to prepare information and get advice.
The most obvious but perhaps the most overlooked advice is to keep all your records. These should be retained for at least seven years. Invoices both sent and received should be filed. With Xero you can do this electronically so there is no need to worry about physical file storage.
If you are facing an audit, you will need to get all your records organised ahead of the meeting with the IRD.
An audit is an expensive process and its hard to do on your own. You will need the advice of an accountant and this may involve work correcting accounts and returns. These fees soon add up.
Audit Insurance is inexpensive and we think it is a must for any business owner. A small annual premium will cover you for up to $20,000 of fees. It really is a no brainer so contact us if you want to know more. Insure yourself before the event and you will have one less thing to worry about.
If you have done something that is keeping you awake at night, a voluntary disclosure may be a way to set the record straight. It has one major advantage in that any penalties will be reduced by 75% to up to 100% in some circumstances.
There is also the potential to make a voluntary disclosure ahead of a compliance review or audit. If you know that you have taken an incorrect position, it may be best to front this early on in the process.
Before making a voluntary disclosure, check with an expert to ensure that any shortfall really is a shortfall. There’s nothing worse than paying tax when you didn’t have to. Make sure that you have complete information in order to make a disclosure and understand the likely costs associated with making that disclosure, such as interest, penalties and additional tax.
A voluntary disclosure may not prevent a subsequent audit. It will normally significantly decrease any penalties that would arise from an audit.
It is always far cheaper to get advice first than to suffer the consequences down the track. Interest and shortfall penalties are applied to reassessed tax by the IRD at the conclusion of an audit. This can be very expensive, particularly if the issue is historic. In extreme cases the IRD might choose to pursue a prosecution. Always get advice early.
On the topic of advice, IRD investigations (be they compliance reviews or audits) are a specialist area. Not all accountants are proficient at handling the audit process. They may lack the experience and background to handle an audit on their own, if at all.
If you are facing an IRD audit, don’t go it alone. It’s stressful and uncertain and tax law is complex. Even if you are confident that all your affairs are above reproach, check your assumptions. Remember, all things must pass and you can get through it.
This advice is by its nature general in application. Every situation is unique. Generate Accounting Group has expertise in guiding taxpayers through the audit process to a satisfactory conclusion.