What if You Get Audited by the IRD?

The words tax audit can strike terror at the heart of many business people. Yet it’s not an unusual practice by the IRD. Each year, the IRD randomly selects thousands of companies (and individuals) for audit.A tax audit on your business does not necessarily mean that you are on the wrong. According to the IRD, an audit is just a check of business records to make sure you’ve paid the correct taxes and the correct amount.

In some instances, if some eligible expenses were left out an audit could result in refunds (although this is very unusual as this requires a discretionary process).

We spoke to tax lawyer Julia Johnson on some of the tax issues business people face and why it is important to get help from a tax lawyer. Here’s more on what to do, if you receive a notification of a tax audit for your business.


How IRD Audits Happen

IRD select audits based on focus industries which are identified as high risk – such as property, construction and hospitality, discrepancies within returns filed which sit outside of their analytics models, and they also conduct audits at random. Rather than commencing an audit immediately, IRD more frequently commence a “risk review”. This is a pre-cursor to an audit and allows the taxpayer the opportunity to right any wrongs (via a legal process known as a voluntary disclosure) or satisfy IRD that everything is okay and that an audit is not required.

However, if an audit is commenced, IRD officials won’t necessarily come to your business and turn everything around. It is more common that they will first request a your business records for the period under audit.. It is important to note that the notification of an audit means that the reduction in shortfall penalties offered for a valid voluntary disclosure will reduce. After the audit has commenced, there is no reduction of shortfall penalties for a voluntary disclosure. The commencement of the audit is usually the first supply of information, or the first meeting. It is recommended that you seek legal advice as soon as you receive notification of a risk review or an audit.  Note that a tax lawyer benefits from legal professional privilege whereas an accountant does not. This is a huge bonus during a risk review or tax audit.

You should reach out for help, especially from a tax lawyer. As Julia says, “People usually seek tax advice when they are undertaking a large transaction, or they need support with Inland Revenue. These are big (and often stressful) moments in their lives, and so they aren’t best placed to be thinking about the details. I am able to take that pressure off them by providing them with the information they need and have Inland Revenue deal directly with me rather than my client.”


What a tax audit on your business can cover 

A tax audit on your business can focus on a small part of the business. In which case, you may not meet with the IRD officials at all. Rather, they may interact with you through email or letters. If you have legal representation they need to liaise directly with your lawyer and not come to you directly. In most audits, IRD look deeper into your business records including ledgers, journals, invoices, payroll, and bank statements. IRD may request for more documents depending on the nature and depth of the tax audit on your business. In most cases, IRD will have already done a large part of the audit before the taxpayer is even aware. They often start by requesting documents from third parties such as banks, and have started to draw their conclusions at the time the taxpayer is notified. You should cooperate with the IRD and provide the information promptly with the assistance of your tax lawyer. The provision of information is very strategic. In all cases, co-operation with IRD is essential. If you do not provide items requested, they will issue a section 17 notice which is a legal document requiring you (or a third party) to provide the information. They can also require you to be interviewed under oath. If you cannot provide within the dates on the request, ensure that your tax lawyer communicates with the IRD.

What to do 

In case you receive a notice of a risk review or tax audit on your business from the IRD, try not to panic. Instead, you should reach out for help.

As Julia observes, “When working on an IRD audit with a client they may be at risk of losing their home or even criminal prosecution. It is an extremely emotional time for them, and so they aren’t best placed to be thinking about the details.”

A tax lawyer can help to take the pressure away from you by dealing with the IRD directly and negotiate on your behalf.


How to move forward after the audit 

The duration of a tax audit on your business will often vary. It depends on the depth and nature of the audit. However, , the IRD officials will give an estimate of how long the exercise will last in their initial letter.


If you go through the process without the assistance of a tax lawyer, then the IRD will disclose what the tax audit on your business revealed. They will discuss the issues such as whether you are due for a refund or you’ve missed paying some taxes (to which they will add penatlies). It is always best to engage a tax lawyer to assist during this process as they can determine if you have unpaid your tax, and if so, assist with drafting a voluntary disclosure in order to minimize the penalties. This is always a strategic move and must be made swiftly in order to mitigate as many penalties as possible. Whatever the case, you shouldn’t panic. A tax lawyer can help you out. As Julia puts it, “Mistakes can still happen, and facing them head-on will usually be the most cost-effective and simple way to proceed.”


If you do not make a valid voluntary disclosure and you are found to have underpaid your taxes, you can be liable for penalties or even criminal prosecution. A tax lawyer can also help you to streamline taxation in your business strategy. You’ll no longer feel that cold sweat should the IRD notify you of another tax audit on your business.


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.


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