Topical from last week’s Budget 2018, the Government are increasing their investment in audit activity. Of course, it makes sense to spend more when you ‘raise’ $4 – $7 for every $1 spent by IRD… if only all business investments had that rate of return!
How do IRD select their tax audit targets?
The reality is that there is a raft of ways in which IRD selects audit targets. Some are sophisticated like patrolling land titles with a program that compares transactional activity with other metrics across IRD’s own database of taxpayers. Some are much less sophisticated, including a ‘tip off’ by an aggrieved ex-spouse.
Industry Targeting
The industries that IRD target change from time to time. In the past, taxi operators were a regular target, but with the advent of the digital economy more transactions have moved away from cash, leaving less room for abuse. Other industries such as hospitality, property and construction are getting more focus at present.
Unusual Patterns
Obviously, IRD receive financial reports from every business tax payer within their annual tax return. This breadth of information by industry provides a benchmark which you can be analysed against. If you stand out your risk of audit may increase.
History
If you have a history with IRD of tax abuse, non-compliance, or even making mistakes, then it’s more likely that you’ll be selected for audit, or ‘risk review’, more frequently.
Third Party Information
This includes a ‘tip-off’, but it also can flow from an IRD investigation into a taxpayer that you’ve done business with and who got caught by IRD. With there being two sides (at least) to a transaction, and potentially more than one way a transaction can be accounted for, if one side of a transaction treats it one way, while the mirror to that transaction treats it differently, a mismatch can result.
Random Selection
Sometimes it can just be your turn – a bit like jury duty (except you can’t apply to miss your turn!)
How to best ‘manage’ an IRD tax audit?
It’s not a ‘deal’ to be done.
Tax for the Commissioner is a matter of principle, and so it’s not about doing a deal as you might expect in normal commercial arrangements. Resolution is also not driven by materiality. In fact, such an approach can aggravate matters. In reality, it’s a matter of fact. There is still negotiation that takes place, but this tends to be around tax legislation interpretation.
Don’t allow the IRD audit to take your mind off ‘the main thing’ – business
IRD audits, no matter what IRD says to you, can take 1-2 years, and some go on for much longer. Instead, use your team of professionals to manage the process with skill and expertise for you. Not only will it likely reduce the financial cost of the audit (tax, penalties, interest and professional fees), but also the stress of dealing with IRD which we’re trained to do. The professional team at Ascension RCA Group can manage information flow and IRD interactions to achieve the best outcome.
Ensure your tax returns are filed on time
There are time bars that can limit how far IRD can go back to review tax returns. These are linked to when tax returns are filed. A time bar can be your best friend.
Understand what to expect
When reality matches expectation, there are no surprises. Your professional team can brief you on what to expect throughout the process. There are eight phases to one audit, or ‘risk review’, and seven phases to a tax disputes process. There are five levels of shortfall penalties and three potential penalty discounts, so penalty management can be an important aspect to any tax audit.
Know IRD powers
Regulations around tax administration are there to empower IRD but also bring legal certainty and protection to taxpayers. These can be your ally when navigating the IRD audit process.
Tax Audit Assurance
It is now possible to carry insurance to cover the cost of professional services incurred in a tax audit or review. Up to the prescribed cover limit, your professional fees can be paid by the insurer. This is of particular relief when, as has been the case for a couple of clients at Ascension RCA Group, on completion of the audit all was found to be “in order” with no tax to pay, but a bunch of professional fees for the audit management process.
So, with reference to the latest Star Wars cinematic release… don’t go SOLO in dealing with the Dark World of IRD Audit.