How To Handle An IRD Audit - Atainz
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Transcript of How To Handle An IRD Audit - Atainz
How to handle an IRD audit
What to do if the IRD come calling
Atainz Conference
March 2013
Terry Baucher, Baucher Consulting Ltd
Tauber & Ors v Commissioner of Inland Revenue
Investigation began 2008, raid 16 March 2011
Three houses and three other premises in Remuera, Helensville and Hobsonville raided simultaneously
Homes of Tauber, Webb & accountant (who worked from home) raided together with registered offices of several related companies and a boatshed at Hobsonville
Ten officers involved in search of Tauber’s house. They were there for 8 ¼ hours.
IRD Powers - Information Gathering
Part III of the Tax Administration Act 1994
Sec 16: Commissioner may access premises to obtain information
Sec 16B: Power to remove and copy documents
Sec 16C: Power to remove and retain documents
Sec 17: Information to be furnished on request
IRD Powers – “Document”
“document” means— a) a thing that is used to hold, in or on the thing and
in any form, items of information:b) an item of information held in or on a thing
referred to in paragraph (a):c) a device associated with a thing referred to in
paragraph (a) and required for the expression, in any form, of an item of information held in or on the thing.
When the IRD come calling…
“A taxpayer (and its [advisors]) needs to be the "good guy"..., not an obstructive, unco-operative, whining and potentially non-paying tax guy, as they will characterised to be by the Revenue at any step in the investigative process if the Revenue's demands are not complied with in full as required by law."
Denham Martin, Tax Barrister
Why is this important?
Net audit discrepancies identified in 2011-12 year - $1.2 billion; $400 million from SMEs
Additional tax assessed in 2011-12 year $758.4 million
Every dollar IRD spends on investigations recovers an average of $5 additional revenue. Therefore in 2012 Budget IRD given extra $78.4 million over next four years for increased compliance activities
IRD Compliance Focus 2012-13
Released August 2012: four key themes
Everyone pays and receives the right amount
IRD receives the right information at the right time
Everyone files and pays on time
IRD provides confidence and certainty to taxpayers
IRD Compliance Focus – Tax Agents
About 5,200 tax agents registered with IRD
Tax agents handle tax affairs of nearly two million clients
Responsible for filing about 83% of all tax returns
IRD taking a harder line on agents not meeting filing percentages. Particularly concerned with those agents who are behind on own affairs.
Industry Benchmarking (1) Launched April 2012 after development in
conjunction with Statistics New Zealand
Sixteen industries included in nine sectors
Benchmark detail is for 2009/10 and 2010/11 years
Benchmarks identified include gross profit ratio, stock turnover, salaries and wages as percentage of turnover, return on total assets, return on equity
Industry Benchmarking (2)1. Cafes, restaurants, pubs, takeaway food outlets2. Gardening services3. Nursery production4. Landscape construction, painting and decorating5. Preschool education6. Electrical services, electrical and electronic
wholesalers and retailers7. Hairdressing and beauty services8. Passenger car rental and hiring and real estate
services9. Fruit and vegetable retailing, dairies & superettes
Industry Benchmarking (3)Median benchmarks for cafes and restaurants in 2010-11
Financial ratio
Business size
Small Medium Large
$60,000 - $300,000
$300,000 - $800,000
$800,000+
annual turnover
annual turnover annual turnover
Gross profit ratio 56% 61% 64%
Stock turnover per annum23 times 29 times 28 times
Salaries and wages/turnover ratio
23% 33% 34%
Balance sheet ratios
Return on total assets-1% 0% 3%
Return on equity 1% 2% 14%
Current ratio 78% 64% 66%
Quick ratio 42% 37% 47%
Liability structure 50% 21% 21%
Industry Benchmarking (4)Range of benchmarks for cafes and restaurants in 2010-11
Financial ratio
Business size
Small Medium Large
$60,000 - $300,000
$300,000 - $800,000
$800,000+
annual turnover
annual turnover annual turnover
Gross profit ratio 47 to 63% 54 to 65% 59 to 68%
Stock turnover per annum12 to 41 times 17 to 48 times 18 to 45 times
Salaries and wages/turnover ratio
9 to 34% 24 to 40% 28 to 40%
Balance sheet ratios
Return on total assets-29 to 7% -14 to 5% -3 to 19%
Return on equity-11 to 47% -8 to 40% 0 to 64%
Current ratio18 to 270% 20 to 168% 25 to 133%
Quick ratio5 to 180% 7 to 126% 12 to 109%
Liability structure-11 to 94% -17% to 74% -7 to 58%
Managing risk of IRD review
KNOW YOUR CLIENT
Build risk profile: is Industry Benchmarking data available for client, or is client one of groups already being targeted by IRD
Use annual accounts and/or GST return preparation to identify risk areas for clients
If errors identified, bite the bullet and make a voluntary disclosure
Consider Audit Shield or similar product
Review or Audit?
Generally refer to initial approach as “risk review”
Triggered by any one of the factors mentioned above
Many GST refunds go into “review” but no clear rule as to what triggers a review
Approach is to “encourage” voluntary disclosure with carrot of penalty remission
If escalated to audit voluntary disclosure option no longer available
Risk Reviews (1)
“A risk review is a preliminary review of your clients’ records to determine whether or not a formal audit is necessary. While this may also involve a discussion to clarify information provided, this letter does not constitute notice of a pending tax audit under section 141G(1) of the Tax Administration Act 1994. Following my review a decision will be made as to whether an audit is needed and you will be notified accordingly in writing.”
Risk Reviews (2)
“Our records show that during the 2010 income year your client:
Acquired from his employer unrestricted shares valued at NZ$60,000 in Vodafone Group Plc for no consideration;
Worked as a consultant for ABC Consulting”
Managing Reviews & Audits (1)
Keep client informed – meet with him/her and discuss frankly risk areas and response strategy.
Advise client of potential risks of criminal prosecution. In 2000 IRD prosecuted 314 cases for “criminal” breaches of TAA. In 2008 the number was 9,563 and in 2009, 8,316
Keep control of the audit. IRD have extensive powers but don’t be intimidated.
Keep copies of ALL materials sent to the IRD
Keep to timetable and keep pressure up on IRD to respond once information submitted
Managing Reviews & Audits (2)
Not all reviews/audits will involve a site visit but if so ensure that has own office away from other staff. Warn staff that IRD are on premises.
Alternatively, accompany IRD investigator to visit of client premises but then conduct the review at your office.
Do not allow IRD investigator to wander around client’s premises or free access to photocopying. Keep copies of ALL material copied.
If review stalls, suggest meeting to resolve issues/understand IRD’s concerns.
Managing Reviews & Audits Problems with investigators?
Meet with IRD investigator and determine what is causing concern
If unhappy with how investigation is being handled involve Team Leader (should be identified on any designated audit)
If still not satisfied can escalate to Investigations Manager or their superiors
Ultimately can be referred to the IRD Case Director
If it doesn’t end well… If tax shortfall is found then income tax/GST liability
Generally IRD will usually be prepared to issue a reassessment (if an assessment has been made previously)
But…
Use of money interest will still apply from original due dates as will late payment penalties
Can apply for remission of late payment penalties
Interest: the IRD’s secret weapon
As interest will be accumulating in any dispute therefore wise to resolve/settle early.
For example, I recently acted for company which failed to declare rental income for the 2007 to the 2011 years. Mistake only found when property sold.
Tax due for 2007 $3,400; the UOMI was $2,200.
Total tax due for 2007 to 2011 years: $19,260; the total UOMI was $8,350
Mitigating Interest Risk
Quantify risk as soon as possible
Consider making voluntary payment as soon as possible
Alternatively, deposit funds in general tax pool with Tax Management New Zealand Ltd (or similar provider). Funds can then either be transferred as a “normal” payment or used to purchase tax if IRD issue a reassessment
Shortfall Penalties
Type of penalty
Sec 141A Not Taking Reasonable Care
Sec 141B Unacceptable Interpretation
Sec 141C Gross Carelessness
Sec 141D Abusive Tax Position
Sec 141E Evasion or Similar Act
Sec 141K Increased Penalty for Obstruction
20% of tax shortfall
20% of tax shortfall
40% of tax shortfall
100% of tax shortfall
150% of tax shortfall
25% increase in penalty
Penalty
Reductions in Shortfall Penalties
Under 141G Commissioner has option to reduce shortfall penalty for voluntary disclosure if, in the Commissioner’s opinion, the taxpayer makes a full voluntary disclosure of all the details of the tax shortfall.
If pre audit notification disclosure is made the reduction is:
i. 100%, if the shortfall penalty is for not taking reasonable care, for taking an unacceptable tax position, or for an unacceptable interpretation; or
ii. 75%, if subparagraph (i) does not apply (gross carelessness):
If disclosure is made post-notification of audit reduction is 40%.
Finalising Audit
If any adjustments are determined the IRD investigator will request that the client sign an Agreed Adjustment Form
Don’t sign this until position of shortfall penalties clear. IRD have been known to impose shortfall penalties AFTER agreed adjustment form signed – there is no way to protest about the penalties in that situation
How not to run an audit:Krukziener v C of IR
20091991 1999
Investigation begins
TRA Hearing
First year in question
2005-6?
Reassessment 1997-
2000
2004
KPL voluntaryDisclosure
If you can’t agree – Disputes Process
1. Notice of Proposed Adjustment
2. Notice of Response
3. Conference stage (optional)
4. Statement of Position
5. Adjudication
6. Challenge proceedings
Conclusions
Prevention is better than cure – know your client identify risks and make voluntary disclosures if appropriate
Familiarise yourself with IRD Compliance Focus programme
Check clients against Industry Benchmarking information
In event of review, be firm but co-operative and expect surprises!
“And remember, let’s be careful out there”