How you’re selected for a tax audit
Here are some of the reasons that can cause an audit of your affairs:
- Manual analysis of your business accounts or tax returns.
- Computer analysis of your business accounts or tax returns.
- Information received from another investigation which suggests that your records should be looked over.
- When checking someone else’s tax records and it is necessary for them to be matched with yours.
- Information that other people supply about you.
- Local knowledge which may come about from media or other reports suggesting that you may have gained wealth that is not taxed.
- Where you live or run your business.
- When following through particular issues or problems that have arisen and affecting a certain group of taxpayers.
- When an audit is done of a particular industry.
- When your payment records do not tie up.
- Where your compliance records show that you have consistently not followed the tax regulations in the past.
- You can also be chosen purely at random.
IRD may also select for any of these reasons
IRD has advised that they may select you for audit for any one of these reasons:
- Desire to look over your business accounts and/or tax returns
- to check someone else’s records (your employer or a bank) to match to your records
- due to information received in another audit which recommends your records should be checked
- due to your past compliance track record (whether you have consistently complied etc)
- to check your payment record (payment of tax or GST taxes on time in the past)
- from planned selection of a particular industry (and you are in that industry)
- when examining particular issues and problem affecting a group of taxpayers
- because you live or run your business in a selected area being audited
- matters arising from media reports
- due to unexplained wealth
- due to information IRD gets from other people
- or you may be chosen totally at random
IRD review their methods regularly. Unfortunately and maybe a little unfairly IRD does not have to give you any reason for their selection of you for audit.
When is an audit notification given?
Not all contact that Inland Revenue has with taxpayers will relate to an audit.
Although IRD is not required either to alert taxpayers when considering whether to audit or advise that an audit has begun, the IRD’s practice is that a taxpayer will generally be given notice, in writing, advising them that they have been selected for an audit, or that an audit is underway. The notice will set out which areas of their tax affairs are being audited. Taxpayers will also be informed of the direction and focus of an audit as it progresses. If the audit’s scope widens during the audit and other tax types and/or periods are to be reviewed, the taxpayer will be promptly notified of this change.
Instances where no notice will be given will be limited but may include-
- where the visit is intended to be unannounced such as a spot check or
- Inland Revenue holds anonymous information there are strong indications the taxpayer is involved in an aggressive tax practice; or
- It is impractical to send a letter due to time constraints.
Notwithstanding, where the Commissioner establishes a tax shortfall but no notice was given, a taxpayer will not qualify for a pre notification or post notification disclosure reduction in shortfall penalties. This is because a taxpayer cannot disclose a tax shortfall when Inland Revenue has already identified the shortfall and advised them of it.
Responsibilities on receipt of the notice of tax audit
You can expect to be given reasonable warning of a tax audit, except where IRD wish to carry out an unannounced visit.
- You are required by law to let the tax investigator into your business premises when they call. You are also required to supply all records, including private records or bank accounts when so requested unless these are covered by legal privilege.
- The IRD people are not entitled to force their way into your premises and they have no right to seize records that you do not produce for them. They can, however, take action against you if you don’t allow them access to the information they need in order to carry out a full audit.
- They also have the right to enter your private dwelling if an access warrant has been obtained from the courts.
- The Inland Revenue Department audit staff members are required to keep confidential and private any information they see or receive in the course of their audit work. You can therefore feel confident that all your records will be kept strictly confidential.
- During an audit they may also collect information about you from interviews, discussions or from your records. This information may be needed to assess your tax liability under the tax laws. You have to answer all the questions that are asked and you must provide any information requested. All this data is kept private under the Privacy Act 1993.
Types of notices for audit
When a taxpayer is first notified of a pending audit the conversation could go like this:
- “I intend to conduct an audit on. I will telephone you shortly to arrange a suitable time for the initial meeting.”
- “I am ringing to advise that Inland Revenue intends to audit your and I will be writing to you shortly about the audit.”
- “I am ringing in relation to your recently filed GST return and your claim for a refund, Inland Revenue wishes to check this return before the refund is paid.”
- “I am writing to inquire about a claim made in your? return”
- I am from Inland Revenue? I am a Payroll Investigator and I would like to examine your payroll records to see if you are complying.”
Where taxpayer is not “notified” beforehand
- “Inland Revenue would like to visit you to discuss any issues you may wish to raise”
- “Inland Revenue is likely to audit you some time in the next year as we have a high audit coverage in your industry”
- “Inland Revenue would like to visit you and examine your records as part of our large company risk analysis programmes. Following the analysis this may, or may not, result in an audit. If an audit is to commence following this risk analysis I will advise you”.
- Scenario – Inland Revenue makes inquiries of a head contractor and suspects an audit is needed on a subcontractor. Prior to Inland Revenue notifying the sub-contractor they are to be investigated the sub-contractor advises Inland Revenue that they intend to make a full voluntary disclosure.
Who receives notification of a tax audit
Tax Law provides that a taxpayer has been notified of a pending audit or investigation or that the tax audit or investigation has started, when any of the following persons have received notification:
- the taxpayer;
- an officer of the taxpayer;
- a shareholder of the taxpayer (for close companies);
- a tax advisor acting for the taxpayer;
- a partner in a partnership;
- a person acting for, or on behalf of, or as a fiduciary of the taxpayer.
An officer includes a director, secretary, receiver or liquidator. It does not include an employee.
What information is in the audit notification?
A notification of audit will advise you first of all that you are being audited and then set out the various areas of your tax affairs that would be looked at. As the audit moves on you will be kept informed on what is being focused on and where the audit is at. If the audit’s scope widens during the audit so that other tax types and/or periods are included in the investigation you will be notified of the change.
The audit may require cooperation from others such as partners in a partnership or shareholders in a company if they have a connection to the matters and areas being reviewed.
Date and time of audit notification
A notification will occur at the earlier of the date of receipt by you or your agent of the written advice or the time of a telephone call advising the commencement of the audit or investigation. If the exact time of receipt of the written notice becomes crucial, it will be ascertained from the expected time for the mail to reach its destination as prescribed by section 14(2) of the Tax Administration Act 1994.
A telephone call advising an audit or investigation will be usually followed up by a written advice.
So time of notification runs from:
- the time you receive a letter of audit notification
- the time you receive a telephone call notifying you of the impending audit
- the time and date when an officer from IRD calls in person on you in an unannounced visit
Unannounced visits by IRD officers
In the case of unannounced visits, the time of the notification will be the date of first contact with the taxpayer.
The law states that a tax audit or investigation starts at the earlier of:
- the end of the first interview an Inland Revenue officer has with the taxpayer or the taxpayer’s representative, after the taxpayer receives the notice; and
- the time when:
- an officer of Inland Revenue inspects information (including books or records) of the taxpayer after the taxpayer receives notice, and
- the time the taxpayer is notified of the inspection