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February 6, 2017

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IRD Audit Survival 101

August 25, 2016


The IRD has a responsibility to all taxpayers in New Zealand to ensure that everyone is contributing their fair share. To this end, the IRD is continuing to increase its audit activity with a key focus on the 'hidden economy'. Whether you are self-employed, running a business, are a high income earner or recently sold a property, the chance of being audited by the IRD is higher than you may think.


There is no doubt that the IRD is significantly increasing its audit activity. With unprecedented levels of resources devoted to ramping up their audit activities they are able to closer inspect areas that have always been of interest to them, such as travel, repairs and maintenance and vehicle expense claims, as well as zero in on areas that they previously had little time or resource for, such as property transactions and the 'hidden (cash) economy'.


A Visit from the Tax Man

The IRD are entitled to drop in unannounced to your business premises. On many occasions this may just be a member of their community liaison team to make sure that you know about your record keeping obligations and other current issues. Visits like this are taking place across the Central Plateau region now so make sure you have appropriate record keeping in place. In particular, have a journal to record all cash sales if you do not use an electronic point of sale system. Industries with high levels of cash sales, like hospitality and trades, are under increased scrutiny as the IRD clamps down on the 'hidden economy' of cash jobs. 


However, if this visit is by an IRD Inspector for an audit they must announce themselves as such and have a warrant. It is important to remain calm, ask to see the warrant and obtain business cards from any and all of the IRD Inspectors that are present. Once you have these contact details, advise the Inspectors that you would like to get professional advice before answering any of their questions. Give your accountant a call right away. MBP prioritise all audit activities and will likely be able to meet you on-site in order to minimise the disruptions to your operations and speed up the process.


If the IRD Inspectors need any business records from you, ensure that you make copies to give to them and retain the originals for yourself.


Communication with the IRD

Whenever possible, communication with the IRD should be in writing. It is, of course, a good idea to run any correspondence through your accountant or at the very least consult with them before you compile and send any correspondence. Always ask the IRD to confirm the receipt of all correspondence and advise you of how long they will take to follow up on any matter.


Following initial communications you will likely be required to attend an interview with the IRD as part of your audit. Do not attend an interview without a professional advisor. Best practice is to ask the Inspectors what questions they intend to ask so that you and you advisor have time to prepare all of the relevant information to best answer the questions.


Minimise the Risk

A reality of being a taxpayer is dealing with the uncertainty you may be audited. This uncertainty can be alleviated by proactively discussing with your accountant the areas that you may be most vulnerable to an audit in and taking the appropriate steps to mitigate or minimise the risks. It is always cheaper to ask for advice and assistance first than to wait for an audit. Interest and penalties can considerably increase any additional tax payable, especially if the error is historic.


Voluntary Disclosure

If you have made an error that is keeping you up at night, it may be worthwhile discussing with your accountant the possibility of voluntarily disclosing an error you believe you may have made. Voluntary disclosure may help to limit the penalties that would be charged if you otherwise left it to the IRD to discover the error on their own. A voluntary disclosure may not prevent an audit but it will normally significantly reduce the penalties that would arise following an audit.


Ask for Help

Being selected for an audit is likely to be a stressful time for you and an inconvenience on your business. If faced with an audit the first thing that you need to do is contact your accountant. The law is complex and the IRD will use this complexity to their advantage. Don't go at it alone, we are here to help.


This advice is general in nature. Every situation is unique and requires tailored advice. MBP has the expertise to guide taxpayers through the audit process. If you think you may be at risk of an IRD audit, talk to our team today by calling 07 378 6655 or email diana@mercerbp.co.nz . Diana has years of experience working in the IRD prior to her past two decades in public accounting and tax advisory.


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