By Campbell Rose & Robyn Walker
The additional Inland Revenue (IR) funding for “investment in compliance activities” in Budget 2024 and the subsequent press releases from both the Minister of Revenue and the Commissioner of Inland Revenue should leave taxpayers and their advisors with little doubt that IR is going to become considerably more visible. This approach follows a significant period of time during which IR’s focus was less on checking compliance, and more on bedding in a significant technology transformation (and associated workforce changes) and then dealing with the need to support taxpayers through the COVID period (particularly through administering associated relief packages).
This period of diverted focus has meant that many taxpayers have not had much or any contact from IR, or if they have it’s been a request for information which never seemed to result in any follow-up questions or actions. Add to that a feeling that there has been a blind eye turned to non-compliance with fringe benefit tax (FBT), and some taxpayers may have become more complacent or even less “voluntarily compliant” with tax laws, and more willing to take a gamble on whether IR will “ever find it”. The need for IR to enforce tax rules and for voluntary compliance to prevail is key to the integrity of the tax system. Anyone wanting a greater appreciation of current perceptions of the tax system and enforcement activity should read the draft first report under the Taxation Principles Reporting Act (now repealed): you can find the data on pages 17-22.
In terms of recent IR activity, we are already seeing a clear increase in requests for information, more extensive information requests and the use of questionnaires, as well as letters advising that matters have been put straight into audit. Over recent years audit activity (and funding for it) has waned, but IR is back and planning to make up for lost time.
Both the Minister and Commissioner have indicated particular areas of immediate focus, but the clear message for all taxpayers is that if there are skeletons in your tax closet, then you should be clearing them out and getting your tax affairs tidied up – both in terms of high-level governance as well as focussing on relevant areas from an operational perspective.
Voluntary compliance
It’s a much better outcome when taxpayers voluntarily comply with tax laws. However, there will always be occasions where a taxpayer either makes a genuine error, or there is a dispute over how the law is intended to operate. IR’s new computer system, combined with much more extensive data collection, data analytics capability and cross-government information exchanges, have significantly increased the ability of IR to detect genuine errors, other anomalies or focus areas, and more deliberate non-compliance.
To encourage compliance, the IR has a range of penalties it can impose on taxpayers who have taken tax positions at odds with the law. These can range from 20% to 150% of the tax shortfall. However, the IR can also reduce these penalties, sometimes by as much as 100%, if the taxpayer makes a voluntary disclosure. Voluntary disclosures can be made at any time, but making them before you’ve been notified of an audit materially improves the opportunity to secure a penalty reduction.
Making voluntary disclosures also has the potential to lower the risk of audit selection. A voluntary disclosure can demonstrate to IR that the taxpayer is undertaking some form of self-review, has governance processes in place, and is making efforts to voluntarily comply.
Other forms of assurance
When it comes to complex commercial arrangements, or just really big value transactions, the only way to get absolute certainty on how the tax rules apply is to apply for a binding ruling from IR. The binding ruling regime allows taxpayers to provide IR with all the details of an arrangement and to have IR rule on how the tax legislation applies. As the name suggests, provided a taxpayer has been accurate (and not misleading) in the application and has complied with any conditions, the ruling will be binding on the IR for the stipulated timeframe (unless there is a law change). Advance pricing agreements in a transfer pricing context also fall into this category.
Another approach is to seek professional advice and review, and regular tax “health checks”. While this doesn’t have the same level of assurance as a binding ruling, following the advice of a specialist tax advisor is a mitigating factor when it comes to penalties if the IR subsequently disagrees with the approach taken. IR is also undertaking a pilot programme, whereby if certain tax compliance processes are reviewed by accredited specialists using a methodology agreed with IR, then IR generally won’t also seek to undertake their own review of those processes. This puts the taxpayer more in control of the experience and timeframes for resolution, and is most effectively undertaken proactively ahead of a potential IR review.
Get your house in order
With the expected (and already experienced) increase in IR activity, taxpayers should take a few essential steps to prepare in case IR should knock at their door. These include:
For more advice on any of these topics, or guidance on what to do if you’ve received an audit notification, please get in touch with your usual Deloitte tax advisor.