Be ready for a tax audit
Getting audited by the IRD can be a surprise but is no cause for alarm so long as you are prepared.
The process usually starts with a letter from Inland Revenue informing you that you have been selected for an IRD tax audit and inviting you to make a voluntary disclosure.
It is at this point you should have two things in place: audit insurance and access to a tax pooling firm.
Audit insurance enables you to insure against the extra costs of professional fees incurred in an IRD tax audit.
A taxpayer doesn’t have to have done anything wrong to be audited, and even if the IRD finds no extra tax is payable – or that perhaps even a refund is due – the client will still have extra professional fees.
Audit insurance covers not just an official audit but any examination, telephone inquiry or review in respect of a filed tax return. It covers most tax types. There is no excess on the policy and no minimum claim. Once you have signed up, all previously lodged returns are also covered. If, at the end of a tax audit, it is found there is additional tax to pay, access to tax pooling can be helpful.
Additional tax owed was due at the original due date, so late payment penalties and interest will apply, and it is these penalties that compound.
Let’s say a GST return for September 30, 2014 is revised by the IRD after five years and it is found an extra $1000 tax is owed. Tax pooling allows the person to pay the $1000, with some interest cost, and buy the $1000, which was paid by another taxpayer at a period closer to the original due date.
The payments are managed through a bank account managed by an independent trustee. Tax pooling firms are registered with the IRD under legislation set out in the Income Tax Act 2007 and the Tax Administration Act 1994.
As always, you should contact your chartered accountant or financial adviser before making a financial commitment.