We have been noticing increased IRD investigation and review activity over the past year. This is not unexpected because the government has been putting increased funding into this area from the last few budgets.
While you may be lucky enough to escape the attention of IRD, there are things that you can do to reduce the impact of an IRD investigation. There is no denying it can be a stressful experience so if you end up having an IRD review or audit then there is some comfort to take from knowing at the outset that you’re in pretty good shape.
Here are our Top Five Actions to minimise the stress and impact of a tax audit
1. Have good financial records.
Being able to provide information quickly & easily in a format that looks neat and tidy is priceless. It gives the IRD confidence that you are organised, probably have good processes in place, and probably understand that you have responsibility for calculating your tax obligations accurately. It also makes it easy for them to undertake their review quickly and so the review does not drag on.
Xero is the financial recording system that suits most small businesses, rentals, and investment- based family trusts. There are a number of subscriptions that are available depending on your needs- with the cheapest one being only $10 pm. And our experience has been that using Xero will reduce internal & external accounting costs by about 20%.
Not only that, your banker will also feel more comfortable if they know that you are managing your finances well so there are improved opportunities to obtain finance when you need it.
2. Document agreements and decisions.
One of the things that we have noticed is that IRD is looking closely at whether transactions between related parties are properly documented. There was a recent case where IRD disallowed a significant interest deduction quite simply because there was no documentation of a loan between a family trust and a business. And that was despite the fact that there was a very clear trail of where the money came from and where it was used.
A simple agreement would have significantly reduced the tax bill.
But documentation doesn’t stop there. In order to get deductions for some costs, the decision often has to be made before year end so being able to prove when a decision was made can be important.
3. Talk to your accountant/tax adviser
We’ve seen a few instances where responding to what seem like an easy question about a GST claim has resulted in an unexpected outcome as IRD digs deeper into the matter. Often the question being asked is a lead-in to the real question, so making sure that you understand the wider issue us important. That way, you can frame your response so it cuts off all further investigation and enables that GST or income tax refund cheque to be released.
4. Be Ready for an IRD Audit
It might not happen, but having a tax audit contingency plan means that you can shift quickly and easily into response mode. An audit is a stressful experience but you can reduce some of that stress by having a plan already in place.
Last year IRD made unannounced visits to a number of motor mechanics in the Wellington region, following on from an approach that had been used (not doubt, successfully) in the Auckland area. IRD has always been prepared to go on fishing trips, and are also looking at specific industry groups where they think that they will get a reasonable return on investment from their activities.
Being aware of the risks that you are carrying in your business is important – claiming expenses because you want to “give it a go” or because you have got away with it in the past is no guarantee of future success. We have known IRD to give incorrect advice to our clients in the past, and there is no certainty that their verbal advice can be relied upon. And taking advice from your mate at the pub is worth nothing, unless he is a reputable tax consultant.
5. Get Audit Insurance
Managing a tax review can be an expensive process - a recent review we have been involved with has taken nearly two years to come to a conclusion. In the past few years it has been possible to get Audit Shield insurance cover for government reviews, investigations and audits through some accountants. For a small premium you will be able to remove the stress of unexpected accounting & legal fees managing the process.
Audit Shield insurance could cover responding to simple IRD queries as part of their review of a normal GST return or an income tax return, as well as a more formally notified review or audit. Not only that, it covers the wider taxpayer group so if the review starts with a review of a rental company before continuing on to a review of the business, then both will be covered with the one premium. It only covers new reviews started in the year, but that is regardless of how long ago the return was filed.
As Benjamin Franklin once said, in this world nothing can be said to be certain, except death and taxes. While there is no certainty that you will ever be the subject of a tax investigation, the odds are increasing.
If you need any assistance in implementing any of the other top five actions, then give us a call.