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Standard practice statements: Investigations
This item also appears in Tax Information Bulletin (TIB) Vol 19 No 3 (April 2007).
- This Standard Practice Statement ("SPS") sets out the Commissioner's practice for notifying taxpayers of a pending audit or investigation. For many taxpayers, notification of a pending audit will be by letter without any prior contact by Inland Revenue on the matter.
- For the purpose of this SPS, the words "audit" and "investigation" have the same effect, ie, Inland Revenue may undertake a variety of tasks to review a taxpayer's compliance with their tax obligations but these will all be referred to as "audits".
- Not all contact by Inland Revenue officers with taxpayers about their tax affairs relates to an audit or will necessarily lead to one. Often, Inland Revenue will contact a taxpayer to gather information for tax administration purposes only.
- Similarly, not all contact by Inland Revenue officers (investigators) is related to an audit already under way. An investigator may contact a taxpayer for information but no decision has been made to audit them. General enquiries by Inland Revenue investigators are not considered part of an audit unless the taxpayer has been clearly notified that one is pending or has begun. Taxpayers will be encouraged to voluntarily disclose any errors or omissions.
- This SPS applies from 20 March 2007. It replaces SPS INV-260 Notification of a pending audit or investigation which was published in TIB Vol 12, No 2 (February 2000) which expired on 1 March 2002 but was still being applied.
- This SPS should be read with SPS INV-251 Voluntary Disclosures and any subsequent SPS issued in replacement.
- This SPS has been produced because of a number of situations where an audit notification was in dispute and as a consequence, whether a taxpayer was entitled to a reduction of the shortfall penalty for a pre-notification voluntary disclosure. These situations show a need for Inland Revenue to communicate clearly when giving notification of a pending audit or when one has begun.
- Notwithstanding the above, there will be occasions when Inland Revenue will not give notice of a pending audit. For example, if it holds anonymous information, suspects tax avoidance/evasion, or it is appropriate to make an unannounced visit to verify a taxpayer's compliance with the law.
- Unless specified otherwise, all legislative references in this SPS refer to the Tax Administration Act 1994 ("TAA").
- A shortfall penalty payable by a taxpayer, under any of sections 141A to 141EB, may be reduced in accordance with section 141G where the taxpayer makes a full voluntary disclosure to Inland Revenue about the details of the shortfall.
- The time that a taxpayer receives notice of a pending audit is important when considering their ability to claim to a shortfall penalty reduction for making a full voluntary disclosure. Information about this is set out below.
141G. Reduction in penalty for voluntary disclosure of tax shortfall-
141G (1) A shortfall penalty payable by a taxpayer under any of sections 141A to 141EB may be reduced if, in the Commissioner's opinion, the taxpayer makes a full voluntary disclosure to the Commissioner of all the details of the tax shortfall, either–
- Before the taxpayer is first notified of a pending tax audit or investigation (referred to in this section as "pre-notification disclosure"); or
- After the taxpayer is notified of a pending tax audit or investigation, but before the Commissioner starts the audit or investigation (referred to in this section as "post-notification disclosure").
141G (2) The Commissioner may from time to time–
- Specify the information required for a full voluntary disclosure; and
- The form in which it must be provided.
141G (3) The level by which the shortfall penalty is reduced–
- For pre-notification disclosure is 75%:
- For post-notification disclosure is 40%.
141G (4) A taxpayer is deemed to have been notified of a pending tax audit or investigation, or that the tax audit or investigation has started, if–
- The taxpayer; or
- An officer of the taxpayer; or
- A shareholder of the taxpayer, if the taxpayer is a close company; or
- A tax adviser acting for the taxpayer; or
- A partner in partnership with the taxpayer; or
- A person acting for or on behalf of or as a fiduciary of the taxpayer,–
is notified of the pending tax audit or investigation, or that the tax audit or investigation has started.
141G (5) An audit or investigation starts at the earlier of–
- The end of the first interview an officer of the Department has with the taxpayer or the taxpayer's representative after the taxpayer receives the notice referred to in subsection (4); and
- The time when–
- An officer of the Department inspects information (including books or records) of the taxpayer after the taxpayer receives the notice referred to in subsection (4); and
- The taxpayer is notified of the inspection.
What is an audit or investigation?
- The terms "audit" and "investigation" are generally used by Inland Revenue to have a similar, if not same, meaning. Inland Revenue officers, usually referred to as investigators, carry out the audits.
- An audit is any examination of a taxpayer's financial affairs to verify that they have paid the correct amount of tax and complied with their tax obligations as required by law. For example, an audit may simply be a review of a GST registration, or it may be a full examination of business records.
- Inland Revenue undertakes various types of audit activities. These include income tax or GST audits, payroll audits, GST refund checks, payroll and GST registration checks and any other type of review.
- For further information about audits please see Inland Revenue's guide Inland Revenue audits - Information for taxpayers (IR 297). You can get this at http://www.ird.govt.nz/forms-guides or by calling INFOexpress on 0800 257 773 between 6am and 12 midnight , seven days a week .
Situations that are not audits
- Inland Revenue investigators often call taxpayers for background information on GST returns without having decided whether to carry out an audit. These situations are not considered part of an audit unless the taxpayer has been clearly notified that an audit is pending or has begun.
- Return processing and non-investigative service staff often contact taxpayers for information omitted or incorrectly entered on filed returns, to enable the self-assessment process to be completed. This SPS does not cover the activities of these Inland Revenue officers. Affected taxpayers can follow up these requests by making voluntary disclosures to correct earlier non-compliance.
- When analysing risk generally, Inland Revenue officers routinely request information from various sources, including individual taxpayers, to research and prioritise tax compliance risk areas . In these circumstances, the purpose of the Inland Revenue officers' call is to collect information and their contact with taxpayers is not an audit nor is it notice of a pending audit.
Notice of a pending audit
- Inland Revenue officers will clearly communicate the purpose of their contacts with taxpayers or their agents. When Inland Revenue investigators contact taxpayers or their agents to notify them of a pending audit, the communication will use the words "audit" or "investigation". Notification of a pending audit will only follow when a decision has been made to audit the taxpayer.
- Requests for information to enable Inland Revenue to decide whether to carry out an audit are not part of an audit or notice of a pending audit.
- When notice of a pending audit is mailed to the taxpayer without earlier verbal notification, Inland Revenue will consider the taxpayer to have been notified within a normal mail delivery period.
Notification of an audit
- Not all contacts by an Inland Revenue officer with a taxpayer will be about an audit. If the purpose of the contact is to notify the taxpayer of an audit, this will be brought clearly to their attention by using the words "audit" or "investigation". This is to ensure there is no misunderstanding about the purpose of the contact.
- Notification of a pending audit will generally be made in writing.
- If notification is given to the taxpayer by some other form – for example, by telephone – it will usually be confirmed by a letter advising details of the audit. The letter will also advise taxpayers they can make post-notification voluntary disclosures at any stage prior to the end of the first interview.
- There will be few exceptions to the practice of notifying a taxpayer of a pending audit, or confirming a notification of an audit, by letter. Instances where this may happen are:
- where Inland Revenue holds anonymous information;
- there are strong indications the taxpayer is involved in an aggressive tax practice;
- where the visit is intended to be unannounced (i.e. a "spot check");
- where it is impractical to send a letter due to time constraints.
- The time of notification of an audit will be at the earlier of:
- when the taxpayer receives a letter;
- when they receive a telephone call;
- when an Inland Revenue officer makes an unannounced visit.
- For many taxpayers, notification of a pending audit will be by letter without any earlier contact by Inland Revenue.
- An audit is pending when Inland Revenue decides it will audit a taxpayer and has notified them. As well as confirming verbal notifications by letter, Inland Revenue officers are required to record details of any verbal notification given to a taxpayer in case a dispute arises.
Details of audit notification
- Notification of an audit will inform the taxpayer, first, that they are being audited and, second, which areas of their tax affairs are to be audited. Taxpayers will also be informed of the direction and focus of an audit as it progresses. If the audit's scope widens during the audit and other tax types and/or periods are to be reviewed, the taxpayer will be promptly notified of this change.
- Audits sometimes involve considering compliance by other parties that are connected. For example, a partnership and the individual partners, a company and its shareholders. Subject to paragraphs 8 and 25, notification of an audit will be made to each party subject to a pending audit.
This Standard Practice Statement is signed on 20 March 2007.
Group Tax Counsel, Assurance