The IRD Appreciates Your Help. Yeah Right!

We’re from the IRD – We Appreciate Your Help. Yeah Right!

Dan Lowe for chartered accounts and business advisers Grant Thornton New Zealand, looks at the appropriateness of Inland Revenue behaviour in relation to voluntary disclosures.

We have noticed a disturbing trend that has emerged recently when clients have made voluntary disclosures to Inland Revenue – more often than not they have been “rewarded” for this compliance by being subjected to an audit.

What is even more staggering is that the Inland Revenue publicly states in its 2007 annual report that its audit activity “concentrates on the greatest risk areas, matching our responses to the scale of non-compliance. Our audit strategy introduced new work practices around risk identification, intelligence analysis and a broader range of compliance measures.”

Inland Revenue’s practice of auditing a taxpayer on the basis that a voluntary disclosure has been made should be tested against this statement.

So does auditing a taxpayer following a voluntary disclosure increase the community’s confidence that Inland Revenue can identify and take appropriate compliance action? In my view it has the reverse effect and clearly undermines taxpayer confidence.

It is imposing additional compliance costs and uninvited stress on businesses that are trying to do the right thing. That is, it sends the message to taxpayers that Inland Revenue is so bereft of clear audit strategies in targeting non-compliance that it is relying on taxpayers coming forward to admit errors to commence audits.

Overall, such an audit strategy does nothing to encourage “voluntary compliance”. Taxpayers who make voluntary disclosures and are then penalised by Inland Revenue undertaking further audit activity are likely to reconsider their alternatives.

It is clear that those taxpayers who come forward and disclose their errors are being fully compliant and should not be punished for making these disclosures.

Voluntary disclosures actually provide a huge benefit to Inland Revenue in that they narrow down the potential taxpayers and transactions that require attention. Although it might seem so at times, Inland Revenue does not have unlimited resources, and it can not possibly be expected to audit every taxpayer or every transaction.

It is also natural to expect, that in a system of self-assessment, there is an obligation on taxpayers to correct their assessments where they detect errors post assessment. The Department is sending “mixed messages” when taxpayers, in making such voluntary disclosures, appear to be inviting the taxman into their house.

One argument that may be raised is:

What is so wrong with targeting a taxpayer with an audit if that taxpayer has just made a voluntary disclosure? Doesn’t the fact that the taxpayer has made one error mean that there will be certain other areas where it is likely the taxpayer has made an error?

That may be so, but they clearly have systems in place that have identified the error, and they were willing to confess. Does this not illustrate their desire to comply? Would it also not leave you to draw the conclusion that if a further error was identified that they would voluntarily disclose this as well?

Targeting taxpayers who have admitted errors to Inland Revenue does not appear to be a focused use of scarce resources. Although Inland Revenue claims an audit that uncovers no discrepancies are a painless exercise for the taxpayer – they couldn’t be further from the truth. Joe Public is petrified of the tax authorities, and the costs of a formal investigation can accumulate rapidly – not to mention the emotional stress that it creates.

The auditing of a taxpayer merely due to the fact that they have made a voluntary disclosure runs counter to New Zealand’s voluntary compliance model, Inland Revenue’s published statements and audit strategies. Taxpayers should be encouraged to admit their mistakes and correct their errors in the clear knowledge that they will not be penalised for doing so.

If Inland Revenue continues with the strategy of harassing those that admit to their errors, voluntary disclosures will go the same way as second tier finance firms…into oblivion.

ENDS

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