OPINION: The taxman cometh on steroids
It was with little anticipation that tax consultants nationwide had their annual gathering to watch the budget announcements, suspecting it was going to be a steady as she goes, non-tax focused event based on all the pre-Budget comments.
And so it was...
Other than the reduction in some rebates, perhaps the most interesting component is yet more funding for our friends at IRD to focus on collecting the "right amount" of tax, especially from non-declaring cash industries and questionable (in their mind) tax structures.
Overlay this with the expectation of $6 recovered for every $1 spent by IRD on investigations and it is timely to consider: what does this mean for the ordinary taxpayer in business?
Without question, if you are seeking a larger refund (GST or tax), have significant tax losses, operate in an industry where there is an opportunity (and evidence of a propensity) to pocket some cash, you have mixed-use assets, you are involved in the personal services industries and use a business structure (eg, dentistry), or just deal with such taxpayers, your chances of IRD audit activity continues to get greater.
Although the IRD is continually improving its targeting mechanisms, we have found instances that it is not your actions, but the actions/nature of associates, that result in queries to you, which can be expensive and frustrating.
It may even be as simpe as a minor inconsistency in your returns that drives the initial query.
For example, they have detailed statistical analysis across many industries against which they will benchmark your business. If your GP ratio is low, for example, this may trigger a query.
Such queries could also be as a result of a project on your industry, such as hospitality.
If you receive a letter or a call from IRD you should assume they already have some knowledge or a concern. It is unlikely to be random.
If they ask a specific question, then presume they have already got an idea of what the answer could be from other sources.
Accordingly, don't be glib or obstructive or consider "fudging" the truth.
Whatever the reason, our strong advice to our clients is seek support and specialist guidance. We deal with this every day.
It is not our role to frustrate the IRD but to ensure the process is as painless as possible without creating additional issues inadvertently.
Something some advisers offer is IRD audit insurance which covers professional fees arising from IRD audits.
Given IRD’s increased focus, such a product becomes more relevant for businesses and may reduce the pain of an audit.
Scott Mason is the managing principal for tax consulting at WHK