NBR Rich Listers are to be ranked according to their risk of dodging the taxman, as IRD steps up its scrutiny of tax compliance.

Taxpayers who control more than $50 million of assets will be ranked according to their likelihood for tax evasion or avoidance to help channel the IRD’s efforts in tax audit cases.

The risk profiling is detailed in the IRD’s new compliance focus for 2010-2011, outlining IRD’s spotlight on the hidden economy and debt and in the year ahead.

The 2010 NBR Rich List is published on Friday (July 30).

Tax director at financial services company Ernst & Young Aaron Quintal said those deemed high risk could expect to face a lot more scrutiny from the IRD.

“While you can’t fault that logic, the important point will be how fair and robust that ranking process will be and what rights the taxpayer has to object to their rating as a high risk individual.”

Mr Quintal said Ernst & Young was concerned about how the IRD would conduct the ranking – typically based off the National Business Review’s annual Rich List.

Some of the firm’s high wealth clients had, in the past, felt unfairly targeted by the IRD for tax audits when they believed they had done nothing wrong and were therefore punished for being publically wealthy, he said.

“We don’t think Rich Listers should have to engage in audits every year to prove they are not as risky as the IRD said they were,” he said.

Although fewer audits would mean Ernst & Young would potentially earn less in audit fees from these high-wealth clients, Mr Quintal said it was good they would no longer be subject to random selection.

“Tax audits are an expensive, time consuming and a stressful experience for any taxpayer. I wouldn’t like to see increased scrutiny simply because an individual’s tax return doesn’t match their supposed wealth reported in a newspaper story.”

The IRD’s compliance focus was also helpful in giving taxpayers and auditors clarity about what IRD considers inappropriate tax planning and where the department will focus its audit activity.

IRD said it worked with more than 160 high-wealth individuals - each averaging 36 associated entities such as companies, trusts and partnerships

While these individuals did register, file and pay on time, their business structure and entities were often complex and accurate reporting could be an issue

Stems from problems those in this wealth bracket often pay little tax in their own name and general concern about paying tax in trust, people with reported wealth returning little or nothing in their tax return.

Off the back of the Penny & Hooper Court of Appeal decision, IRD will also be targeting income diversion through companies, trusts and PIEs.

The Commissioner of Inland Revenue, Robert Russell, said the new compliance focus would help ensure everyone paid their fair share of tax.

“It’s about making sure people are fully aware of their tax obligations as well as understanding what their social entitlements are,” he said.

“We aim to help people know how to get it right and most do. On the other hand, a small number of people are not compliant and we have to respond to them.
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“Some people avoid paying the top tax rate by diverting personal income to companies or trusts or using other techniques. We are aware some high-wealth and high-income individuals use internal restructuring and business shelters with no underlying commercial benefit to get a tax advantage. Also there are people doing jobs for cash without paying any tax. We’re increasingly using a range of tools to provide intelligence to detect those kinds of behaviours.”

Mr Russell said the hidden economy, debt and enhanced online services were among areas Inland Revenue will place additional focus on over the next year.