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Audits: About audits
At Inland Revenue an audit is an examination of your financial affairs to check you have paid the correct amount of tax, and you are complying with the tax laws. It might simply be a check of a GST registration, or it could be a full examination of business and personal records.
Types of audits
This covers audits and checks on people who are not in business.
Small - medium business audits
This covers audits and checks on businesses with a turnover of up to $100 million.
This covers audits, reviews and checks on the tax affairs of corporate customers with turnovers of over $100 million and industries with specific tax legislation.
We focus on specific areas of risk such as income tax, payroll, and GST through to full audits that cover all tax types.
How we select you for an audit
We may choose to audit you for any one of the following reasons:
- to analyse your business accounts or tax returns
- to check someone else's records (such as your employer or a bank that pays you interest) and match them to your records
- information received in another audit which suggests your records should be checked
- your compliance record (whether you have kept to the tax laws in the past)
- your payment record (whether you have paid your taxes on time in the past)
- selecting a particular industry
- examining a particular issue or problem that affects a group of taxpayers
- where you live, or run your business (if we are auditing a particular area)
- local knowledge, perhaps arising from media reports or unexplained wealth
- information we get from other people about you
- we may choose you randomly.
We review our methods regularly to keep them up-to-date. Please note however, that we do not tell you the reason we select you for an audit.
Telling us what's wrong with your tax affairs is called a voluntary disclosure. Any person or organisation liable for paying tax can make a voluntary disclosure.
Making a voluntary disclosure has more advantages than waiting for any discrepancies to be found out during an audit. A major advantage is that the penalty charged on any related tax shortfall may be reduced by 75% or even 100% in some instances.
If you are considering making a voluntary disclosure please read our booklet Putting your tax affairs right (IR280).
Disclosure during an audit
If you have already received a notice from Inland Revenue to say that you have been chosen for an audit it is still not too late to make a voluntary disclosure.
You can tell us what is wrong with your (or your organisation's) tax affairs at the initial interview or at the inspection of records stage (whichever is earlier). If you do this, the amount of any related penalties charged may be reduced by 40%.
How long does an audit take?
There is no set time for an audit. How long it takes is affected by:
- the size and complexity of your business
- the standard of your records, and
- your cooperation.
If we need to extend the audit timeframe we will tell you.
We know that an audit can affect your business routine so our investigators will try to cause as little disruption as possible.
How are audits carried out?
Each type of audit is done differently although the basic procedures are the same. Some audits may require only one visit while others will involve more regular contact. This may include our investigators working on your premises.
Computer tax auditing
Computer tax auditing is the examination of computerised accounting systems from a tax perspective.
Computer tax audit (CTA) helps Inland Revenue investigators by applying computer-assisted auditing techniques to any size of computer system, from PC to mainframe. The main techniques are:
- general ledger
- data download
- systems audits.
General ledger/data download
CTA can access your general ledger financial information in electronic format. It's downloaded from your system onto Inland Revenue's computers then converted to a readable format. Our investigators can then review this information before they visit your workplace.
A data download involves specific electronically stored accounting data being downloaded from your system onto Inland Revenue's computers. The data is then analysed by a computer tax auditor using specialist audit software. Data analysis will vary with every audit and will largely depend on the audit objectives. Essentially, tests are used to help identify and quantify any issues in the computer system.
A systems audit involves a detailed analysis and evaluation of a complete system, often the accounts payable or accounts receivable system. We observe and document how transactions are processed, from source document through to posting to the general ledger. We will talk to members of your staff who have day-to-day knowledge of the system and an understanding of the computer programmes and their operation. We also consult your accounts people who use the system. After documenting and evaluating the system for tax purposes, the CTA investigator will discuss their findings with you. To test the findings, the CTA investigator might ask for data to be downloaded.
What does this mean for you?
If the investigator wants to use computer-assisted auditing techniques they will advise you that a CTA investigator will be contacting you. They may also ask you to complete a computer tax audit questionnaire. This gives an overview of your computerised systems and the electronic financial data you have available. The CTA investigator will then discuss with you what they require and work out the best way of achieving this.
Using computer tax audit techniques can mean:
- less disruption to your business
- fewer demands on your staff
- reduced audit costs
- fewer and more specific requests for information.
For more information about CTA go to Computer tax audit
Starting the audit
You can expect us to give you reasonable warning of an audit. Sometimes we will make an unannounced visit. If we do you are required by law to let the investigator into your business premises. You are still required to supply records (including private records or accounts) when requested, unless these are covered by legal privilege.
How much advance warning do we give?
If you're linked to a tax agent for the tax type we're going to investigate we'll contact them first and follow up with a letter to both of you.
We also make unannounced registration checks of both payroll and GST records to ensure that businesses are in the tax system. These checks will not take much of your time and we try to deal only with a senior member of your staff.
The first visit
The first visit is an opportunity for the investigator to meet you and discuss the audit in general.
Our investigator will ask you a number of questions relating to the records you keep, your accounting system and your business activities. Our investigator may also check your records and look at some parts of your return(s).
Checking records, such as ledgers, journals, invoices and bank accounts (both business and private) is an important part of an audit and usually takes the most time.
Sometimes the investigator will need to take your records back to our office to go through them fully. If we remove records we'll give you a receipt detailing every item that we've taken. You can view these records and request copies if you need them.
If your business is quite large we may check the records at your premises or use CTA.
Our investigator may contact third parties, including your suppliers and employees, for additional information.
They may also review your private activities during the audit.
Our investigator will check that you have correctly applied the tax laws in self-assessing your tax liability.
There might be other meetings during an audit to ask more questions and resolve any outstanding issues.
Finalising the audit
We usually arrange a meeting with you near the completion of the process to discuss the audit, cover any issues that haven't been resolved, and to let you know about any adjustments to your tax. We will send you a final audit letter in all cases, whether or not an adjustment is made.
If your tax is being adjusted and no agreement is reached, or any other circumstances apply, we will issue you with a Notice of proposed adjustment. This will explain the adjustments and the reasons for them. If you don't agree with this notice you can dispute it but you must follow the disputes process to ensure your rights are protected if the matter goes to court. Firm rules and time limits govern the disputes process so it is important for you to understand what you need to do. Our booklet Disputing a notice of proposed adjustment (IR777) and Disputes process initiated by the Commissioner explains the process.