Penalties and interest: Shortfall penalties

How penalties can be reduced or increased

Shortfall penalties may be reduced or increased under certain circumstances. A shortfall penalty may be reduced for tax positions taken on or after 1 April 2000, if you have a past record of good behaviour. This may include:

• not taking reasonable care
• taking an unacceptable tax position
• gross carelessness or
• taking an abusive tax position
• evasion if this is the first time

A shortfall penalty may be reduced by 50% if you haven't been liable to pay within the previous four years. For PAYE, FBT, GST and/or RWT, the four year period is reduced to two years.

When considering whether or not to reduce shortfall penalties, only those for the same tax type are taken into account. For example, a shortfall penalty imposed for PAYE in the last two years won't prevent a shortfall penalty relating to FBT being reduced for previous behaviour. In addition:

• penalties reduced as a result of voluntary disclosure aren't taken into account
• a shortfall penalty for not taking reasonable care and for taking an unacceptable tax position isn't counted in deciding whether a shortfall penalty for gross carelessness, taking an abusive tax position or evasion should be reduced for good behaviour
• a penalty imposed for tax shortfalls identified in the same investigation or voluntary disclosure are treated as a single penalty.

Note
Some convictions may result in the previous behaviour reduction not applying. If the conviction is recorded within a specified period there will be no reduction of a shortfall penalty. If the conviction is recorded outside the specified period a reduction of shortfall penalties for previous behaviour may apply.

From 21 December 2004 consideration must also be given to disqualifying offences before allowing the 50% reduction. Disqualifying offences are convictions under section 141FB Tax Administration Act 1994 in a court on or after 26 March 2003.

Note
Some convictions result in removal of the previous behaviour reduction from all tax types for any future period.

Making a voluntary disclosure before an audit starts

You can reduce a shortfall penalty by making a full voluntary disclosure of all details of the shortfall, either:

• before you receive the first notice of a pending tax audit or investigation, in which case the penalty will be reduced by 75%, or 100% in some instances, or
• after the first notification but before the tax audit or investigation begins, for which the penalty will be reduced by 40%.

For registration checks and other unannounced visits by Inland Revenue, the date of first contact will be the date of notification. So, if you make a voluntary disclosure during the visit, any resulting penalty will be reduced by 40%.

If, during an Inland Revenue audit of one tax type, you disclose a discrepancy in another tax type, any penalty for the second tax will be reduced by 75% or 100% if you weren't notified that it would also be audited.

Voluntary disclosures eligible for the 100% reduction are those:

• made by customers before they are advised of a pending tax audit or investigation
• with a tax shortfall due to the customers "not taking reasonable care", "making an unacceptable interpretation" or "taking an unacceptable tax position"
• made from 17 May 2007 onwards.

In all other instances the customer is entitled to a 75% reduction of the shortfall penalty.

How to make a voluntary disclosure

You can make a voluntary disclosure at any time in writing or by calling us.

If you wish to make a disclosure in writing, you can use either a Voluntary disclosure form (IR281) or a Notice of proposed adjustment (IR770), or you can write us a letter. Please note that an IR770 can only be used if you are adjusting a return you've already filed.

For further information see our booklet Putting your tax returns right (IR280). You can find all  these publications at "Forms and guides".

Disclosure at the time of filing

You can make a disclosure relating to an unacceptable or abusive tax position when filing your tax return.

Your disclosure must be made using the Statement in support of a tax interpretation (IR282) form. You can find this form at "Forms and guides".

Obstruction

A shortfall penalty may be increased by 25% for obstructing an Inland Revenue officer.

Obstruction may include:

• refusing reasonable access to your business premises
• destroying relevant records
• lying and falsifying details
• deliberate delays to frustrate enquiries.

There is also a criminal penalty for obstruction.

Note
It is not obstruction to exercise your legal rights, contest an assessment or maintain an opinion contrary to that of Inland Revenue.

Temporary shortfall penalties

A penalty for a tax shortfall will be reduced by 75% if you have permanently reversed or corrected the shortfall.

If it appears you have taken steps to remedy the tax shortfall, or the matter will reverse itself through operation of law or circumstances, you may qualify for a reduced penalty for temporary shortfall.

You do not have to have filed a return containing the reversal before notification of an audit, but we must be satisfied that, had the following return been received, the reversal would have been made.

After 1 April 2008, a tax shortfall is a temporary tax shortfall if the Commissioner is satisfied it has or will be permanently reversed or corrected. The shortfall must be permanently reversed or corrected:

• before the end of the 4 year period beginning the day after the customer took the tax position, and
• the customer has paid or returned the correct total amount of tax for the periods involved.

However, if it appears an arrangement exists with the purpose or effect of creating for another return period a tax deferral or advantage related to the tax position.

Limitation on reductions

If you're entitled to reductions for both a voluntary disclosure and a temporary shortfall, one reduction only will be allowed. The reduction will be either 75%, or 100% if it relates to one of the applicable voluntary disclosures.

Example

Temporary shortfall Clayton, a property developer, enters into an unconditional sale and purchase agreement to sell his block of townhouses. He's on the invoice basis of accounting for GST. The GST return for the period ended 31 May 2004 was audited and it was noted that only the deposit had been returned. Clayton advised he's going to return the balance of the sale in the next return as that is when he'll receive the balance of the property sale. At the time of supply (for GST purposes) on receipt of the deposit there's a tax shortfall for the balance of the property sale not returned. Clayton advises he wasn't sure whether he should return the entire sale and had intended making an inquiry but just didn't get around to it. It's considered that a reasonable person in his position, when unsure, would have obtained advice prior to preparing his GST return so he is liable for a shortfall penalty for not taking reasonable care. Clayton prepares his returns from his bank statements so the internal system will pick up the receipt of the balance of the sale of the property. It's clear that the output would have been returned in the next period so the tax shortfall has been reversed even though the following return hadn't been received, because of the timing of the audit. In this case, the 75% reduction to the shortfall penalty would be warranted.

Example - How a shortfall penalty is calculated
Shortfall in income returned	$10,000
Tax shortfall ($10,000 x 0.33*)	$ 3,300
Penalty at 20% ($3,300 x 0.20)	$ 660
If the company makes a voluntary disclosure after notification and before commencement of the audit, the penalty is reduced by 40% (from 20% to 12%), making it $396. *The company tax rate is 33%.

 

 

Date published: 26 Mar 2008

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