The tax audit process is important for New Zealand businesses to understand. The more you know about what the IR (Inland Revenue) expects and what the audit process involves, the easier It’s to avoid tax issues.
What is a tax audit?
A tax audit investigates your financial records to ensure your business complies with all relevant tax regulations.
The audit process can involve reviewing your business records and tax returns, payroll information and GST payments.
Note: If you’re struggling to meet your tax obligations due to cash flow problems, don’t wait for an audit. Contact the IR to apply for an instalment arrangement (a tax debt payment plan) that allows you to pay off your debts without further financial trouble.
Tip: MYOB gives you a real-time view of your cash flow from your dashboard, so you always know how you’re tracking.
Who conducts tax audits in New Zealand?
In New Zealand, tax audits are conducted by the Inland Revenue (IR).
Why do tax audits happen?
Tax audits usually happen when IR suspects you’ve failed to meet your tax obligations as a business owner. Sometimes, your business could be chosen randomly if you’re in an industry where IR is currently focusing its compliance activities. More often, you could be selected for an audit due to one of the following reasons:
Failure to lodge tax returns
Failure to lodge a tax return is a quick way to trigger an audit. Ensure you know your balance date – when your income tax and GST returns are due – to prepare you for this deadline.
Discrepancies between tax returns and financial records
Discrepancies between your tax returns and financial records could be reported to the IR or picked up when they process your return. For example, if you’ve incorrectly reported your income or business expenses, you could get a hefty tax bill with added penalties or interest.
To avoid this error, you must keep track of all business transactions, including expenses and income. It’s also important to regularly reconcile your accounts to ensure records are accurate. If you notice mistakes in a tax return you’ve already submitted, follow the IR’s guidance on putting your tax returns right sooner rather than later.
Significant fluctuations in income
Significant fluctuations in income can trigger an audit. If your business suddenly takes off, you’ve drastically outperformed others in your industry or you have a significant slump in income, you could attract attention from IR. Again, the key is keeping accurate, up-to-date records so you may be able to answer any questions an IR audit officer might have.
Claiming deductions you’re not eligible for
Claiming deductions you’re not eligible for can lead to a tax audit. Tax deductions must be work-related expenses, such as vehicle costs, inventory or equipment. While you may be able to claim expenses like entertainment and food in some cases, you can’t claim a tax deduction on personal expenses.
What can be audited by the New Zealand tax office?
Examples of what can be audited by the New Zealand tax office include:
Declared income
Declared income includes money your business makes from:
Cash and online sales
Interest and dividends from bank accounts and investments
Foreign investment funds (FIFs)
Some grants and subsidies
Trading stock
Carefully record all relevant transactions on your income statement and check it regularly to ensure you declare everything. IR could audit your business if it thinks you’re not declaring all your assessable income.
If you’re unsure whether your income is assessable, check the IR page for types of business income.
Employer obligations
From a payroll compliance perspective, your employer obligations include the amount you pay employees and withhold for income tax (PAYE) or ACC levy payments. You must also report and pay any fringe benefits tax or KiwiSaver contributions you owe.
Tip: With payroll software built into MYOB Business and MYOB AccountRight, you can generate and send payday filing reports to IR from your software.
GST claims
IR can also audit GST. You may be able to claim a GST refund when you’ve purchased goods and services for your business. However, if IR suspects you’ve submitted an inaccurate GST return, you could be liable for an audit. Check IR’s guidance to ensure you know how to calculate, file and pay GST for your business.
Tip: Use MYOB Business or MYOB AccountRight to record GST automatically. The software will then pre-fill your GST report, ready for you to review and send to IR.
Vehicle tax deductions
Vehicle tax deductions can be claimed for vehicle expenses if you use your car or another vehicle for business purposes. If you also use the vehicle for personal trips, you’ll need to determine how much of the vehicle’s usage you can claim as a business expense.
If IR suspects you’re claiming vehicle expenses for personal trips, they can audit your business and penalise you.
How is a tax audit conducted?
A tax audit is conducted, in most cases, by following these seven steps:
Notification from IR
Notification from IR is the first step in the audit process. They’ll notify you in writing, either by post, email or personal delivery and will clearly use the word ‘audit’ in the notification. The notice will outline which areas of your tax affairs are being audited.
Initial meeting
In the initial meeting, an IR officer generally explains the audit process. They’ll ask some questions about your business records and accounting processes. They’ll let you know what information they need to complete their investigation.
Audit scope
The audit scope is usually outlined in the IR’s written audit notification. However, they’ll go into more detail in the first meeting. If the audit scope changes while your audit is in progress, the IR officer will let you know right away.
Examination of records
The IR officer examines physical and digital records, including invoices, profit and loss statements, bank accounts (both business and private) and expense reports. In New Zealand, you’re legally required to keep business records for at least seven years and need to make these quickly available to the IR officer if requested. You could be penalised for obstructing the investigation if you don’t provide the requested records on time.
IR can also review your private activities and any information held by third parties if needed.
Issues identified and outlined
Issues are identified and outlined throughout the audit and communicated to you as they arise. If the IR officer finds you’re not meeting your tax obligations, they’ll discuss them with you. They’ll factor in your responses when considering what, if any, penalties to apply.
Audit report
An audit report usually follows a meeting between you and your IR officer. This meeting will cover the audit, review unresolved issues and inform you of any adjustments or penalties. After your meeting, IR will send you an Agreement to Amend Assessment outlining any tax, interest and penalties you must pay and their deadlines.
Responses and appeals
Responses and appeals are the final phase of an audit. If you disagree with IR’s Agreement to Amend Assessments document, you must file a dispute by filling out a Notice of Proposed Adjustment (NOPA).
You won’t need to pay any tax adjustments, interest or penalties until you’ve agreed to the adjustments or the dispute process has finished.
What penalties and fines can result from a failed tax audit?
The penalties and fines that can result from a failed tax audit, aside from adjustments to account for tax shortfall, include the following:
Interest charges
Interest charges are added to tax assessments you fail to pay by the due date. Interest charges can snowball, so you should pay debts quickly to keep charges to a minimum.
Interest on underpayments is calculated from the day after the original payment due date.
Penalties
Penalties are calculated based on your circumstances. If your audit finds that you’ve knowingly neglected your tax obligations, you could be charged a penalty of anywhere from 20% to 150% of your tax shortfall.
IR offers significant penalty reductions if you make a voluntary disclosure. So, if you’ve made a genuine mistake on your returns, tell them as early as possible to keep your penalty to a minimum.
Prosecution
Prosecution can include prison time if you’re guilty of tax evasion during your audit.
Tax audit FAQs
How are people selected for a tax audit?
People are selected for a tax audit for several reasons, the most common being:
Analytical discrepancies: Inland Revenue has a team of analysts who identify unusual patterns in tax returns and financial records.
Compliance focus: If you’re involved in an activity or sector that IR has a compliance focus on, your business could be audited as part of a sample.
Tip-offs: IR often receives tip-offs about unexplained income or non-compliant activity, such as cash-in-hand employee payments and poor record keeping.
Historical non-compliance: If IR knows you have a history of tax issues or underpayment, you’ll likely be selected for an audit.
Random selection: IR may choose to audit your business totally at random.
What are the consequences of a tax audit?
The consequences of a tax audit range from having your tax assessment amended to prosecution. If you fail a tax audit, you’ll probably need to pay your tax shortfall, interest and penalties.
Which businesses are most likely to be audited by IR?
Tradespeople and hospitality businesses are the most likely to be audited by IR because they use cash payments often.
What is a warning letter?
A warning letter is a written notification from IR that you have outstanding debt.
If you’ve paid all your taxes on time for the previous two years, you’re entitled to a grace period, giving you an extra 30 days to pay before penalties are charged. If this applies to your business, IR will send you a letter with a final payment date.
IR also sends warning letters if you don’t file GST or payroll returns on time.
Tidy up your tax records before Inland Revenue calls
Keeping your tax records in good order is the best way to remain compliant and avoid a tax audit.
MYOB’s cloud accounting software helps you manage tax obligations with automatic GST, income and expense tracking and PAYE reports and Payday filing. With MYOB, you have a record of all your business transactions, all in one place.
Don't let an audit take you by surprise. Sign up for MYOB and get your records audit ready.
Disclaimer: Information provided in this article is of a general nature and does not consider your personal situation. It does not constitute legal, financial, or other professional advice and should not be relied upon as a statement of law, policy or advice. You should consider whether this information is appropriate to your needs and, if necessary, seek independent advice. This information is only accurate at the time of publication. Although every effort has been made to verify the accuracy of the information contained on this webpage, MYOB disclaims, to the extent permitted by law, all liability for the information contained on this webpage or any loss or damage suffered by any person directly or indirectly through relying on this information.