Audits: After an audit

Assessments

We'll send you notices of assessment and statements of account showing the refund or tax to pay and when it is due. The assessment will be issued after an agreed adjustment or notice of proposed adjustment (NOPA) has been worked out.

Refund

If you have overpaid your tax you will receive the refund shortly after we send your assessments. We may also pay interest on any overpayment.

Tax to pay

If you owe tax, we will generally allow you at least one month to pay from the date the assessments are issued. If you are unable to pay any amount owing by the due date we can discuss payment options.

If you wish, you can make a payment on account during the audit of the estimated tax owing. This may avoid any further late payment penalties and will reduce the amount of interest charged.

Disputes

If you want to dispute our NOPA please read our booklet Disputing a notice of proposed adjustment (IR777).

Interest

If you overpay your tax, we may pay interest on the amount overpaid. If you underpay, we may charge you interest on the underpayment.

If you've overpaid, we will pay interest from the day after the original due date for the relevant return period.

For underpayments, we charge interest from the day after the original due date for payment.

Late payment penalties

If tax is not paid by the due date, late payment penalties will apply. For every month the amount remains unpaid, a further incremental penalty will also apply. We will also charge interest on any outstanding amounts.

An initial 1% late payment penalty will be charged on the day after the due date. A further 4% penalty will be charged if there is still an amount of unpaid tax (including penalties) at the end of the 7th day from the due date.

Every month the amount owing remains unpaid a further 1% incremental penalty will be added.

Amounts of $100 or less

Interest and late payment penalties are not charged on outstanding amounts of $100 or less.

Arrangements

If you are unable to pay your tax by the due date, please contact us to discuss an arrangement for making payments. In some situations, if you are in financial difficulties, we may agree to you paying your tax and any penalties and interest this way.

Arrangements can be agreed upon before or after the due date for payment. However, there are greater reductions in the penalties charged if the arrangement is made before the due date.

For more help

More information about penalties and interest is available in our booklet Taxpayer obligations, interest and penalties (IR240).

Periods from 1 April 1997 to 31 March 2001

For all taxes, an initial 5% of unpaid tax is charged, plus a further 2% for every month until - 31 March 2001 that the tax goes unpaid. After 1 April 2001 a further 1% is charged every month the tax goes unpaid.

Other penalties

If we find during the audit that you have wilfully or negligently made a false tax return, not filed a return, not deducted taxes or not accounted for taxes deducted, we may consider further action including further penalties and/or prosecution.

Shortfall penalties

A shortfall penalty is imposed as a percentage of the tax shortfall (the deficit, or understatement of tax) that results from certain actions on the part of a taxpayer.

The five categories of fault are:

Lack of reasonable care

The law requires you to take reasonable care in meeting your tax responsibilities. This means that you must take the same care that any reasonable person would in the same circumstances.

If you do not take reasonable care you will incur a penalty of 20% of any resulting tax shortfall.

Unacceptable tax position

The legal definition of an unacceptable tax position is one that fails to meet the standard of being, as likely as not, correct.

This means that the position taken need not necessarily be the correct position, or one that has a 50% chance of success, but must be one capable of being seriously considered by a court.

The penalty for a tax shortfall resulting from an unacceptable tax position is 20% of the resulting tax shortfall.

Gross carelessness

You can be penalised for gross carelessness if we consider your behaviour displays a high degree of carelessness or disregard for the consequences. This carries a penalty of 40% of the resulting tax shortfall.

Abusive tax position

The aim of this penalty is to deter you from entering into arrangements that have the dominant purpose of avoiding tax. This carries a penalty of 100% of the resulting tax shortfall.

Evasion

Tax evasion involves a deliberate attempt to cheat the system. This may include getting refunds knowing that you are not lawfully entitled to them.

The penalty for evasion is 150% of the resulting tax shortfall.

In addition to being charged a shortfall penalty, some offences carry a term of imprisonment and/or a maximum fine of $50,000.

If the audit relates to a period prior to 1 April 1997 different interest and penalties rules apply.

Reduction of penalties for previous behaviour

A shortfall penalty may be reduced because of your previous behaviour. This means that a shortfall penalty imposed under any of the five categories of fault may be reduced by 50% unless you have been convicted of a disqualifying offence - or been liable for a disqualifying penalty.

All taxpayers start with a "clean slate" from 26 March 2003.

Disqualifying offence

There are two categories of offences that can disqualify you from receiving the reduction for previous behaviour.

Category 1 includes knowledge offences, evasion and offences relating to enquiries. If you have a conviction for an offence entered on or after 26 March 2003, and before taking the tax position the current penalty relates to, you will not qualify for a reduction for previous behaviour at any time in the future.

Category 2 includes absolute liability offences and offences in relation to cheque duties. You will not qualify for a reduction for previous behaviour if they:

• related to the same tax type as the tax position to which the current penalty relates
• were entered on or after 26 March 2003
• were entered two or less years before you took the tax position the current penalty relates to for PAYE, GST, FBT, or RWT
• were entered four or less years before you took the tax position the current penalty relates to for any other tax type.

Disqualifying penalties

There are three categories of penalties that can disqualify you from receiving the reduction for previous behaviour.

Category 1 applies when the current penalty is imposed for evasion or a similar act, a previous penalty that disqualifies you from the reduction for good behaviour is one that:

• related to the tax type to which the current penalty relates
• was imposed for evasion or a similar act
• was not reduced by voluntary disclosure
• related to a tax position taken on or after 26 March 2003 and before you took the tax position which the current penalty relates to.

Category 2 applies when the current penalty is for gross carelessness or abusive tax position. A previous penalty that will disqualify you from the reduction for good behaviour is one that:

• related to the same tax type
• was imposed for gross carelessness, abusive tax position or evasion
• was not reduced by voluntary disclosure
• related to a tax position taken on or after 26 March 2003
• related to a tax position taken two years before you took the tax position to which the current penalty relates for PAYE, GST, FBT or RWT
• related to a tax position four or less years before you took the tax position to which the current penalty relates for other tax types.

Category 3 applies if the current penalty is for not taking reasonable care or for an unacceptable tax position. A disqualifying penalty is one that:

• was imposed for any of the five categories of fault
• related to the same tax type
• was not reduced by voluntary disclosure
• related to a tax position taken on or after 26 March 2003
• related to a tax position taken two years before you took the tax position to which the current penalty relates for PAYE, GST, FBT or RWT
• related to a tax position four or less years before you took the tax position to which the penalty relates for other tax types.

When you have had separate current penalties imposed for different tax shortfalls in the same Inland Revenue audit or voluntary disclosure, you may still be eligible for the previous behaviour reduction if you:

• took the tax position on the same date, and/or
• are not liable for a shortfall penalty within:
  • two years before you took the tax position which the current penalty relates to for PAYE, GST, FBT or RWT
  • four years before you took the tax position which the current penalty relates to for other tax types.

A standard practice statement will he published in May 2006 on our website outlining inland Revenue's views on the reduction of penalties for previous behaviour in greater detail.

 

Date published: 30 Aug 2006

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