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Inland Revenue Audits and Investigations – What you Should Know

Updated: May 21

Inland Revenue Audits and Investigations – What you Should Know

Daunting. Stressful. Time-consuming. What are we describing? Inland Revenue Investigations.

When Inland Revenue investigate your tax affairs, they may choose to send you a “Risk Review” letter, or a notification of audit letter. Investigations from Inland Revenue can be incredibly daunting, and are often very stressful. If they are not resolved quickly, they can be costly and it can become more difficult to settle the dispute.

Risk Review v Audit

During a risk review, Inland Revenue attempts to evaluate the risk of non-compliance with the New Zealand tax system. This is not the same as an audit. However, if Inland Revenue determine that further investigation is needed, then they will likely commence an audit. You should take the opportunity to resolve Inland Revenue’s concerns as early as possible. During a risk review, you can still receive the full benefits of making a voluntary disclosure, which can significantly reduce shortfall penalties, up to 100%. Engaging a tax solicitor at this point to respond to the risk review letter can help resolve the investigation to your benefit, and stop an expensive and time-consuming disputes resolution process in the long run. A risk review should not be taken lightly, and you should always seek expert advice at the earliest opportunity to try and stop the situation escalating.

Responding to an Audit

The audit stage of an investigation commences either when Inland Revenue gives you a notification of audit letter, or when Inland Revenue officers arrived unannounced at your business premises or home. Audits are grave situations, and you should immediately seek expert assistance, even if you are not aware of anything being wrong with your tax affairs. A valid voluntary disclosure can still assist if audit notification has been received but the audit is yet to commence, but the reduction in shortfall penalties will only be up to 40% at this point. It is desirable to attempt to resolve the investigation before it goes any further, as the formal processes to resolve disputes are costly, stressful and time consuming.

If Inland Revenue send you a notification of audit letter, the notice will usually provide reasonable warning of the commencement of the audit and a timeframe for the first interview or the provision of documents. This is when you should instruct a tax lawyer (if you have not done so already) so that they can consider your legal position and advise if you need to make a voluntary disclosure or not. Once the audit commences (when you provide the information or attend the meeting) there are no longer any reduction of penalties for the provision of a voluntary disclosure.

Inland Revenue has no set time for an audit to be completed. It will usually depend on the size and complexity of the business, and your level of co-operation. However, Inland Revenue should provide you an estimate of how long the audit should take, although in our experience, these are seldom accurate.

Section 17 Notices

While it is uncommon, Inland Revenue can commence the audit by turning up at your doorstep unannounced. They will provide what is known as a Section 17 notice, which means that they have authority to enter your business premises and your home. The notice also means that you must provide them with reasonable assistance, and answer all questions that they think are necessary or relevant to their investigation. Failing to comply with this is an offence. Inland Revenue will only issue a Section 17 notice where they are prepared to invoke the statutory remedies in the event of non-compliance.

If you are not home, or present at your business premises when Inland Revenue arrive, they may either call you or call a locksmith to enter the premises and conduct the investigation. We note that such action is extremely rare. Inland Revenue does have the power to remove documents or items that they think are necessary or relevant to the investigation. They will provide you with a list of things taken, but it is entirely possible to arrive home and find a Section 17 notice on your table and a list of items that have been taken directly from your home, which may include your laptop or hard drive which you need to run your business.

Audit Interviews

It is normal during the audit process for Inland Revenue to interview you. Of course, you have the right to have a solicitor present during the interview and having a tax specialist lawyer is highly recommended. A lawyer benefits from legal privilege whereas an accountant will not. A tax lawyer should be familiar with the Inland Revenue processes, and have the ability to guide the interview and intervene where possible.

We make sure that our clients are prepared for all interviews, sometimes this is in the form of a “mock” interview. Inland Revenue do their background, and they often already have a good understanding of your situation, and know what bank accounts you have and what you might spend your money on. They have usually completed a relatively thorough investigation using their powers to issue Section 17 notices to third parties such as banks and other businesses. When Inland Revenue ask questions, they usually already know the answer and have evidence to support it.

During the interview, they will takes notes and they usually request to record the interview. In over ten years of dealing with Inland Revenue audits, we are yet to provide permission to Inland Revenue to record an interview. It is normal for the Inland Revenue investigator to ask you to sign their notes to confirm they are correct, but you have the right to refuse. Again, this is something we will work with our clients on, and usually elect not to sign them on the day, if at all.

Your Rights

It is important to know your rights regarding the audit. If Inland Revenue investigators arrive at your premises and ask to enter or provide you with a Section 17 notice, you can ask them to wait until your solicitor arrives. The officers will wait for a reasonable period of time (which is generally 30-40 minutes). You can also expect the investigators to carry a delegation of authority card, showing their name, photograph, and stating their legal authority to check your records.

How Johnston Law Can Help

An experienced tax solicitor can help you in many ways. Investigations and audits are stressful affairs even when you have done nothing wrong, but often there are errors which you may not be aware of. Tax law is complex, and while you may not have intentionally done something wrong, your tax affairs may not be as squeaky clean as you think. We can look over Inland Revenue’s concerns and the information they have requested to provide you with guidance on the process, and advice as to whether or not your taxes are correct or not. If they are not, we can assist with drafting a valid voluntary disclosure in order to “put things right” and mitigate any possible shortfall penalties. If your tax affairs are correct, we can go into bat for you against Inland Revenue as we progress through the formal disputes resolution process. It is our job to remove the stress for you.

Investigations are process driven, and our experience and knowledge of these processes helps you clear it up quickly so you can get back on track. A solicitor will also inform you what documents and items Inland Revenue can and cannot take. Co-operation with Inland Revenue is the key element to resolving any concerns they may have. It is absolutely vital that you and your lawyer work with Inland Revenue to reach resolution, and do not refuse to participate in the process. We have often been asked to take over representation of a client after they have tried to complete the process themselves, or with the guidance of an accountant. Usually, it is the case that the entire situation could have been defused much quicker, easier and cheaper if they had engaged an expert from the start. Once you form a poor working relationship with the investigating officer it is much harder to reach a favorable resolution.

Always remember that any communications between you and your solicitor for the purpose of receiving legal advice are covered by legal professional privilege, meaning that such communication does not to be given to Inland Revenue. Only lawyers benefit from this privilege which often catches people out. This means you have full ability to be open and honest with your tax lawyer in order for them to best assist you.

We recommend a proactive approach to resolve any Inland Revenue investigation before it goes any further and causes you a great deal of stress and lost time.

This article is intended for informational purposes only and should not replace specific tax advice. For personalised advice on all tax issues please contact us.

This article was accurate at the time of publishing.

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