SURVIVING AN IRD AUDIT
IRD steps up monitoring of tradies around the country to find those not declaring income
Construction is a hotbed of activity in what is dubbed the ‘Hidden Economy’. There has been a high level of non-compliance by smaller operators in the sector not declaring part (or in some cases) all the cash payments they receive. That’s why IRD is interested in tradies’ affairs.
Behind the scenes, IRD is running detailed analytics over large volumes of third-party data to find taxpayers who may be underreporting their income, so compliance officers can make targeted interventions. While IRD maintains its first assumption is to believe the taxpayer may need help getting their taxes right, or may be unaware of their obligations, it will act if it becomes evident someone isn’t complying.
But how can they tell? Cash doesn’t leave a trail, right?
Wrong. It does, as it is likely to be spent at some point. IRD is comparing taxpayers’ spending habits (think living expenses, mortgage re-payments and other purchases) with their income tax returns to identify any outliers. If tradies can’t explain where the money to pay for those things came from, IRD’s suspicions may be aroused.
There are serious repercussions if you are caught.
Any additional tax obligations that arise from undeclared income carries IRD interest (currently 8.22%) and shortfall penalties. These penalties range from anywhere between 20 to 150% of the tax shortfall, depending on the seriousness of the breach. Criminal prosecution may also follow.
Below are a few pointers to help you out if IRD decides there are grounds to investigate your affairs further.
Know your rights
IRD investigators are entitled to visit your business without warning. Should one show up, ask to see their identification and take their business card.
Refrain from answering any questions. Take their contact details and arrange a time to meet with them along with your accountant.
Don’t let them take original documents, as these can get lost or misplaced. Insist they make copies if they require any information.
Don’t go it alone
IRD audits are a specialist area and legally complex, so it’s wise to engage the services of someone who has expertise in both. Sure, they’ll charge fees, but it’ll be worth every cent given the considerable time, stress and money you’ll save.
Respond to IRD swiftly
Deliver any information IRD wants by the deadlines imposed. If you require more time, let IRD know as soon as possible and negotiate a new date to supply what is required. Doing this shows you take your tax compliance seriously.
Make a voluntary disclosure if you haven’t been entirely honest. Doing so has some advantages.
Firstly, it can reduce any shortfall penalty. This can be by 40%, 75% or even 100% in some cases, depending on what stage of the investigation you make the disclosure.
Secondly, you can reduce the chances of criminal prosecution.
Use tax pooling
If you receive a notice of reassessment from the taxman, an IRD-approved tax pooling provider can reduce the interest cost by up to 30% on any additional tax payable. Savings are considerable.
You also receive an extra 60 days from the date the notice of reassessment was issued to pay.