This document provides guidance on handling an IRD (Inland Revenue Department of New Zealand) audit. It discusses IRD's information gathering powers, what constitutes a document, tips for cooperating with an audit in order to be viewed favorably. It outlines industry benchmarks and notes that every dollar spent on investigations recovers an average of $5 in additional tax revenue. The document warns that interest charges can significantly increase tax owed and tips ways to mitigate interest risk such as making early voluntary payments. It also discusses shortfall penalties and the reductions available for voluntary disclosures. The disputes process is outlined if agreement cannot be reached.

1. How to handle an IRD audit
What to do if the IRD come calling
Atainz Conference
March 2013
Terry Baucher, Baucher Consulting Ltd

2. Tauber & Ors v Commissioner of Inland Revenue
 Investigation began 2008, raid 16 March 2011
 Three houses and three other premises in Remuera,
Helensville and Hobsonville raided simultaneously
 Homes of Tauber, Webb & accountant (who worked
from home) raided together with registered offices of
several related companies and a boatshed at
Hobsonville
 Ten officers involved in search of Tauber’s house. They
were there for 8 ¼ hours.

3. IRD Powers - Information Gathering
 Part III of the Tax Administration Act 1994
 Sec 16: Commissioner may access premises to
obtain information
 Sec 16B: Power to remove and copy documents
 Sec 16C: Power to remove and retain documents
 Sec 17: Information to be furnished on request

4. IRD Powers – “Document”
“document” means—
a) a thing that is used to hold, in or on the thing and in
any form, items of information:
b) an item of information held in or on a thing referred
to in paragraph (a):
c) a device associated with a thing referred to in
paragraph (a) and required for the expression, in
any form, of an item of information held in or on the
thing.

5. When the IRD come calling…
“A taxpayer (and its [advisors]) needs to be the
"good guy"..., not an obstructive, unco-operative,
whining and potentially non-paying tax guy, as they
will characterised to be by the Revenue at any step
in the investigative process if the Revenue's
demands are not complied with in full as required
by law."
Denham Martin, Tax Barrister

6. Why is this important?
 Net audit discrepancies identified in 2011-12 year -
$1.2 billion; $400 million from SMEs
 Additional tax assessed in 2011-12 year $758.4 million
 Every dollar IRD spends on investigations recovers an
average of $5 additional revenue. Therefore in 2012
Budget IRD given extra $78.4 million over next four
years for increased compliance activities

7. IRD Compliance Focus 2012-13
Released August 2012: four key themes
 Everyone pays and receives the right amount
 IRD receives the right information at the right time
 Everyone files and pays on time
 IRD provides confidence and certainty to taxpayers

8. IRD Compliance Focus – Tax Agents
 About 5,200 tax agents registered with IRD
 Tax agents handle tax affairs of nearly two million
clients
 Responsible for filing about 83% of all tax returns
 IRD taking a harder line on agents not meeting filing
percentages. Particularly concerned with those
agents who are behind on own affairs.

9. Industry Benchmarking (1)
 Launched April 2012 after development in
conjunction with Statistics New Zealand
 Sixteen industries included in nine sectors
 Benchmark detail is for 2009/10 and 2010/11 years
 Benchmarks identified include gross profit ratio,
stock turnover, salaries and wages as percentage
of turnover, return on total assets, return on equity

10. Industry Benchmarking (2)
1. Cafes, restaurants, pubs, takeaway food outlets
2. Gardening services
3. Nursery production
4. Landscape construction, painting and decorating
5. Preschool education
6. Electrical services, electrical and electronic wholesalers
and retailers
7. Hairdressing and beauty services
8. Passenger car rental and hiring and real estate services
9. Fruit and vegetable retailing, dairies & superettes

11. Industry Benchmarking (3)
Median benchmarks for cafes and restaurants in 2010-11
Financial ratio
Business size
Small Medium Large
$60,000 -
$300,000
$300,000 -
$800,000
$800,000+
annual turnover annual turnover annual turnover
Gross profit ratio 56% 61% 64%
Stock turnover per annum
23 times 29 times 28 times
Salaries and wages/turnover ratio
23% 33% 34%
Balance sheet ratios
Return on total assets
-1% 0% 3%
Return on equity 1% 2% 14%
Current ratio 78% 64% 66%
Quick ratio 42% 37% 47%
Liability structure 50% 21% 21%

12. Industry Benchmarking (4)
Range of benchmarks for cafes and restaurants in 2010-11
Financial ratio
Business size
Small Medium Large
$60,000 -
$300,000
$300,000 -
$800,000
$800,000+
annual turnover annual turnover annual turnover
Gross profit ratio 47 to 63% 54 to 65% 59 to 68%
Stock turnover per annum
12 to 41 times 17 to 48 times 18 to 45 times
Salaries and wages/turnover ratio
9 to 34% 24 to 40% 28 to 40%
Balance sheet ratios
Return on total assets
-29 to 7% -14 to 5% -3 to 19%
Return on equity
-11 to 47% -8 to 40% 0 to 64%
Current ratio
18 to 270% 20 to 168% 25 to 133%
Quick ratio
5 to 180% 7 to 126% 12 to 109%
Liability structure
-11 to 94% -17% to 74% -7 to 58%

13. Managing risk of IRD review
 KNOW YOUR CLIENT
 Build risk profile: is Industry Benchmarking data
available for client, or is client one of groups already
being targeted by IRD
 Use annual accounts and/or GST return preparation
to identify risk areas for clients
 If errors identified, bite the bullet and make a
voluntary disclosure
 Consider Audit Shield or similar product

14. Review or Audit?
 Generally refer to initial approach as “risk review”
 Triggered by any one of the factors mentioned above
 Many GST refunds go into “review” but no clear rule as
to what triggers a review
 Approach is to “encourage” voluntary disclosure with
carrot of penalty remission
 If escalated to audit voluntary disclosure option no
longer available

15. Risk Reviews (1)
“A risk review is a preliminary review of your clients’
records to determine whether or not a formal audit is
necessary. While this may also involve a discussion to
clarify information provided, this letter does not
constitute notice of a pending tax audit under section
141G(1) of the Tax Administration Act 1994. Following
my review a decision will be made as to whether an
audit is needed and you will be notified accordingly in
writing.”

16. Risk Reviews (2)
“Our records show that during the 2010 income
year your client:
 Acquired from his employer unrestricted
shares valued at NZ$60,000 in Vodafone
Group Plc for no consideration;
 Worked as a consultant for ABC Consulting”

17. Managing Reviews & Audits (1)
 Keep client informed – meet with him/her and discuss
frankly risk areas and response strategy.
 Advise client of potential risks of criminal prosecution. In
2000 IRD prosecuted 314 cases for “criminal” breaches of
TAA. In 2008 the number was 9,563 and in 2009, 8,316
 Keep control of the audit. IRD have extensive powers but
don’t be intimidated.
 Keep copies of ALL materials sent to the IRD
 Keep to timetable and keep pressure up on IRD to respond
once information submitted

18. Managing Reviews & Audits (2)
 Not all reviews/audits will involve a site visit but if so ensure
that has own office away from other staff. Warn staff that
IRD are on premises.
 Alternatively, accompany IRD investigator to visit of client
premises but then conduct the review at your office.
 Do not allow IRD investigator to wander around client’s
premises or free access to photocopying. Keep copies of
ALL material copied.
 If review stalls, suggest meeting to resolve
issues/understand IRD’s concerns.

19. Managing Reviews & Audits
Problems with investigators?
 Meet with IRD investigator and determine what is
causing concern
 If unhappy with how investigation is being handled
involve Team Leader (should be identified on any
designated audit)
 If still not satisfied can escalate to Investigations
Manager or their superiors
 Ultimately can be referred to the IRD Case Director

20. If it doesn’t end well…
 If tax shortfall is found then income tax/GST liability
 Generally IRD will usually be prepared to issue a
reassessment (if an assessment has been made
previously)
 But…
 Use of money interest will still apply from original due
dates as will late payment penalties
 Can apply for remission of late payment penalties

21. Interest: the IRD’s secret weapon
 As interest will be accumulating in any dispute
therefore wise to resolve/settle early.
 For example, I recently acted for company which
failed to declare rental income for the 2007 to the
2011 years. Mistake only found when property sold.
 Tax due for 2007 $3,400; the UOMI was $2,200.
 Total tax due for 2007 to 2011 years: $19,260; the
total UOMI was $8,350

22. Mitigating Interest Risk
 Quantify risk as soon as possible
 Consider making voluntary payment as soon as
possible
 Alternatively, deposit funds in general tax pool with
Tax Management New Zealand Ltd (or similar
provider). Funds can then either be transferred as a
“normal” payment or used to purchase tax if IRD issue
a reassessment

23. Shortfall Penalties
Type of penalty
Sec 141A Not Taking Reasonable Care
Sec 141B Unacceptable Interpretation
Sec 141C Gross Carelessness
Sec 141D Abusive Tax Position
Sec 141E Evasion or Similar Act
Sec 141K Increased Penalty for Obstruction
20% of tax shortfall
20% of tax shortfall
40% of tax shortfall
100% of tax shortfall
150% of tax shortfall
25% increase in penalty
Penalty

24. Reductions in Shortfall Penalties
Under 141G Commissioner has option to reduce shortfall penalty
for voluntary disclosure if, in the Commissioner’s opinion, the
taxpayer makes a full voluntary disclosure of all the details of the
tax shortfall.
If pre audit notification disclosure is made the reduction is:
i. 100%, if the shortfall penalty is for not taking reasonable care,
for taking an unacceptable tax position, or for an
unacceptable interpretation; or
ii. 75%, if subparagraph (i) does not apply (gross carelessness):
If disclosure is made post-notification of audit reduction is 40%.

25. Finalising Audit
 If any adjustments are determined the IRD investigator
will request that the client sign an Agreed Adjustment
Form
 Don’t sign this until position of shortfall penalties clear.
IRD have been known to impose shortfall penalties
AFTER agreed adjustment form signed – there is no way
to protest about the penalties in that situation

26. How not to run an audit:
Krukziener v C of IR
20091991 1999
Investigation
begins
TRA
Hearing
First year in
question
2005-6?
Reassessment
1997-2000
2004
KPL voluntary
Disclosure

27. If you can’t agree – Disputes Process
1. Notice of Proposed Adjustment
2. Notice of Response
3. Conference stage (optional)
4. Statement of Position
5. Adjudication
6. Challenge proceedings

28. Conclusions
Prevention is better than cure – know your client
identify risks and make voluntary disclosures if
appropriate
Familiarise yourself with IRD Compliance Focus
programme
Check clients against Industry Benchmarking
information
In event of review, be firm but co-operative and expect
surprises!

29. “And remember, let’s be careful out there”