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Inland Revenue has released a draft Standard Practice Statement relating to the notification of an upcoming audit or investigation.

So why is this important?

Well, it comes from a certain amount of confusion when errant New Zealand taxpayers have, on receiving communication from Inland Revenue that they are enquiring into certain matters, decided to “come clean” in the hope of getting a reduction in any subsequent shortfall penalty.

You see, when a taxpayer comes forward with a disclosure that their tax treatment may not have been the right way to go, there is an entitlement to a reduction in the normal shortfall penalty that would be charged on the amount of tax involved.

Taxpayers naturally get a little anxious when Inland Revenue contacts them and start asking questions. A number of Australian-based taxpayers give us a call and ask us to check things out and handle matters on their behalf.

Often we find that the recording or treatment of transactions is different than we would have expected or preferred.

So the question that’s been raised was based around when an audit actually becomes an audit. Because once an audit is officially underway then it is too late to disclose matters with the expectation of a reduction in penalties for making the disclosure.

It has been agreed that, for this reason, it needs to be clear where that line in the sand is, as the reduction can amount to a significant saving in penalties for the New Zealand tax payer or, to look at it from Inland Revenue ‘s perspective, a significant amount of lost penalty revenue.

The draft Standard Practice Statement, when approved, will ensure that Inland Revenue will clearly communicate to a taxpayer when they are about to be either audited or investigated. And to make sure there is absolutely no confusion, the communication will specifically use the word “audit” or “investigation”.

The Standard Practice Statement will also clarify when a taxpayer can expect notification as opposed to when the enquiry relates only to information gathering purposes. And, perhaps most importantly, it will also clarify when the enquiry is part of a pending or existing audit.

What it may mean is that notification of an audit might come as a complete surprise without any prior contact from Inland Revenue about the matter.

The prudent thing to do, of course, is to have an experienced advisor look over things well before you receive any communication from Inland Revenue. We are here to help on 1300 791 600.

 

The information in this article is indicative of NZ tax rules and changes and not intended to be complete for all intents or purposes and does not constitute advice. It is recommended that you obtain professional advice, suited to your particular circumstances, from us before acting on anything you read.