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Tax Audit

Are you under a tax audit?

Many business owners in New Zealand believe that the chances of being audited by the Inland Revenue (the “IRD”) are so slim that they don’t need to worry about it.

Well, speaking as someone who has been with the IRD for over 16 years as a senior solicitor advising the IRD Investigations Unit at some stage, I can tell you that they have extremely wide investigative powers.

An investigation of your potential non-compliance can take place without a formal notification. But a formal audit is often preceded by a “risk review”. A risk review is where the IRD request information from you in order to evaluate the risk of non-compliance. This isn’t the same as an audit and the IRD’s initial contact with you should clearly identify whether they are carrying out an audit or a risk review. Where a risk review detects an issue that requires more in-depth inspection, the IRD officer should advise you that an audit will be commenced. As a general rule, the IRD investigators are required to give you reasonable warning of an audit.

Then the IRD will issue formal or informal information requests. Sometimes it will demand access to business premises and records (including computers) without notice. Sometimes they may make an unannounced visit. They are entitled to full and free access to your business premises without warrant and, with an access warrant, to private homes. Failure to respond to information requests can lead to serious consequences, including criminal penalties.

Sometimes as part of an investigation the IRD can compel a person to undergo an interview on oath which is recorded.

You have no right against self-incrimination in such interviews. Many business owners and employees often feel intimidated by an IRD investigation and are unsure of their rights. So, it is important to take advice from a tax lawyer on the scope of an information request to be sure that what is supplied conforms with the notice and that no competing interests (such as claims of legal privilege) are compromised.

If the IRD investigation process is not managed carefully they can lead to substantial cost and increased tax risk for you and your business. You have to comply with your obligations to assist the IRD but at the same time be sure that the IRD is only given access to material it is entitled to, and with the least disruption possible to your business.

There are some communications between you and your solicitor that you don’t have to give to the IRD. This right, known as legal privilege, is allowed under the Tax Administration Act 1994. Privileged communications must be for the purpose of getting or giving legal advice or assistance and must not relate to an illegal or wrongful act. If you’re not sure whether a document is covered by legal privilege, the IRD will usually give reasonable time to consult a solicitor. This applies even on an unannounced visit.

A tax investigation may end with the IRD notifying you that it proposes to adjust your taxes. The IRD cannot normally assess you without first giving you notice of a proposed adjustment (a “NOPA”). The issuing of a NOPA starts a complicated statutory tax disputes process.

If you don’t agree with the proposed adjustments in the NOPA you must respond to it within a strict time frame. If you miss that, you can lose all your rights to dispute what the IRD want to do. Later stages of the tax disputes process require you to provide the IRD with a binding statement of position (“SOP”) which locks you into a position in subsequent litigation. If you get that wrong, your case can be severely compromised.

For the above reasons, it is highly recommended that a specialist tax lawyer is consulted as soon as the IRD commence an audit. Your accountant’s advice is helpful in keeping your books in line for tax reporting, ensuring compliance with accepted accounting principles, as well as completing tax returns and, depending on the accountant’s professional designation and experience, representing you in limited types of contested tax matters with the IRD.

As a specialist tax lawyer, my focus is on advising clients who are engaged in business transactions, in need of estate planning or are in need of representation before the IRD. I spend most of my time researching various tax laws, the IRD’s Standard Practice Statements. As well, I do a fair amount of drafting disputes documents and legal opinion to professional firms on tax related matters.

In the end, my goal is to work together with accountants to achieve our clients’ goals as efficiently as possible.

Ismail Rasheed was a senior tax lawyer for the IRD for over 16 years.

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