From time to time the IRD picks out some firms (or individuals) to audit their taxes. Many entrepreneurs don’t like it when this happens to their firms. However, it is your legal duty to oblige. Resisting or unlawfully declining to cooperate could land you in big trouble.
Once selected for a review, IRD will sample your records and use this information to judge if a full-scale audit is necessary. If it is, you will receive a letter informing you about the audit, the records they need and how it will happen.
We spoke with tax lawyer Julia Johnson of Saunders & Co Lawyers concerning businesses taxes and the IRD.
If you are wondering what triggers such a move by the IRD, here are a few red flags you should watch out for and tips on how you can fix them.
The red flags
Inconsistent records
The first red flag IRD will pick up on is inconsistent records. If the information on your business taxes such as income tax statements does not tally with your business records like the payroll, it may trigger a full-scale IRD audit. Other inconsistencies on GST and PAYE remittances may also prompt IRD investigators to probe further.
Discrepancies in your supplier payments
Your dealings with suppliers can also attract attention from the IRD investigators. Discrepancies in outflows such supplier payments are common and could trigger a full-scale probe.
Late or missing tax returns
When you fail to file your tax returns or file them late it signals to IRD investigators that all’s not well with your business’ systems. They may probe further to find out if your business taxes are in good shape.
Deviations from the norm
IRD often use available data from their sophisticated analytics system to compare your spending habits with business taxes and other businesses in your industry and area. If your declarations are lower than your peers, it may raise eyebrows. GST may seem simple but as Julia puts it “GST is the most common cause of PI claims for lawyers each year. My number one take home for clients is that GST is not simple and you should always seek advice.”
What to do if there’s an impending tax audit
Don’t panic, reach out for help
If IRD investigators have sampled your records and feel that there’s need for a deeper inquiry, don’t panic. Instead, reach out for help. If your records are up-to-date and your business’ taxes are compliant, there’s no need to worry. However, they very rarely proceed to audit when there is no concerns from Inland Revenue. In most cases they have spotted unpaid tax. You need to act quickly in engaging a tax lawyer to enable you to utilize the opportunity to provide a voluntary disclosure in order to mitigate shortfall penalties.
You may incur fees, but it’ll save you considerable time, and resources as well as keep stress at bay. As Julia puts it, “I don’t have to spend hours researching basic things. I know what questions to ask the client to ascertain the issues, and I know where to look to find the best solutions.”
You don’t have to wait until the IRD comes knocking at your door. It’s better to engage tax experts right from the start. Tax lawyers are particularly important, in Julia’s words, “I analyse the law to ascertain and advise on the client’s tax position and structure and then work with the accountant so that advice flows into the financial accounts, tax returns and business plans.” A Tax Lawyer will also benefit from legal professional privilege whereas an accountant does not. This is especially important when structuring, or during an audit.
Face the issues on your business taxes head-on
If you suspect that IRD will discover stuff that could put you in trouble, it’s better to own up, this is done via a legal process known as a voluntary disclosure. There are financial benefits to doing this, and it can also protect you from criminal prosecution in certain circumstances. Always discuss this with your tax lawyer and seek advice from someone who knows the process and works with it frequently. They should have dealt with the IRD on similar issues before and will be well versed in the process and how to get the best result for you. As Julia says, I spend a lot of time working for clients in negotiations with Inland Revenue, be it voluntary disclosures, tax audits, risk reviews or negotiating payment arrangements and remission of penalties and interest.
Julia says, “Often with a voluntary disclosure, penalties will be reduced to zero, so it is beneficial to go to Inland Revenue before they come to you. If you do not make a voluntary disclosure prior to the notification of an audit, you can still make a voluntary disclosure prior to the commencement of the auditwhich can reduce any penalty by 40 per cent.”
Lastly, form new partnerships going forward
The red flags mentioned above could trigger a full-scale IRD audit. They are often due to operational lapses when handling business taxes. Although a tax lawyer can help you mitigate the effect and impact of a tax audit, you should set your eyes on a better solution. You should avoid recurrence. Consider entrenching the services of a tax lawyer in the business strategy building. It’ll help you to streamline taxation in the long-run. Plus, it’s much cheaper, and less stressful. As Julia puts it, “It is often cheaper to involve a tax expert from the early stages of any financial advice or structuring, as they will usually provide valuable assistance with efficiency and accuracy, and thus complement the services provided by the accountant.”
Important; This article is high level and does not cover all of the possible issues on this topic. It is intended for informational purposes only and you should seek specialist tax advice for personalised advice.