There are a few things to keep in mind if you are a New Zealand taxpayer preparing for an IRD residential property tax audit:
- Understand the different types of property tax audits the IRD has jurisdiction over;
- Know what documents you must provide to the auditor; and
- Follow your accountant’s advice on dealing with questions that could arise from the audit.
What Triggers an Audit?
Any evidence of inconsistencies in tax and financial affairs may trigger an IRD audit, hence the reason to work with a tax advisor from the outset of the investigation.
Having worked with clients and the IRD for several years, I’ve seen many investors invite an audit (and investigation) by simply being ignorant about the process and the triggers officials look out for in tax returns.
While the chances of an audit are slim, there are several ways for your return to be flagged, triggering an IRD risk review. Red flags can include things like
- Excessive write-offs compared with income;
- Round numbers for claims or income;
- High repairs and maintenance claims;
- Variable or low rentals;
- Distributions to minors and low-income earners;
- Distributions to beneficiaries of a trust;
- Frequent buying and selling of property; and
- Increased interest claims and more.
While there is typically a statute of limitations for an IRD audit, there’s no time limit on how long the agency can pursue fraud or non-filers. There is usually a legitimate reason for the investigation, even if it is not disclosed.
What is the Audit Process?
An audit of IRD residential property tax will involve several activities, including but not limited to
- Checking whether there are any inconsistencies with legislation
- Checking for irregularities in bookkeeping and accounting
- Checking for compliance with rules and regulations
- Checking for potential negligence on the part of owners or occupiers
- Checking for potential breaches of contract with tenants
- Checking for potential tax evasion, missing income or inappropriate claims
- Reviewing documentation to support claims
How to Prepare for IRD Residential Property IRD Audits.
Engaging an experienced residential property accountant is important to ensure that all aspects of your return are well-prepared. This will include but is not limited to
- The scope and risk of an audit;
- Review of your tax return to provide supporting documentation; and
- Prepare a response to IRD queries or voluntary disclosure if necessary.
Management of the scope and risk of an audit is key, as incidents can happen at any time that could impact your investment and personal assets. By actively managing this risk, you give yourself the best chance to pass an audit without incurring excessive cost/loss. Consider the following steps, and when preparing supporting documentation, collate information from previous years; this could save time later.
- Understand what the IRD is looking for;
- Considering making a voluntary disclosure;
- Understanding what the audit process will involve;
- Make sure you have all the information required for an audit; and
- Preparing for any potential surprises that may occur during the audit process.
Understanding the Scope of the Audit
The audit scope usually reflects particular areas of concern for the IRD. Knowledge and a good understanding of these areas will help you prepare your responses and fulfil IRD’s document requests.
Ultimately, however, understanding and performing your tax obligations are your best insurance against an IRD audit.
Tips to Avoid an Audit
It is always best to avoid the stress and expense of an audit. Here are my tips:
- Be aware of tax rules when renting out your property;
- Keep good records and make sure they are complete, up-to-date and accurate at all times;
- Identify your deductions, know what is allowable, and only claim legitimate expenses;
- Keep all receipts, invoices and bank statements for seven years; and
- Check with your accountant when buying and selling, claiming for expense or refinancing.
Key risk areas.
The key risk areas are outlined below with accompanying IRD guidance documents:
The IRD has been employing some aggressive tactics lately and is not showing any signs of slowing down or reversing course.
Typically, the IRD will send correspondence notifying the taxpayer of a risk review where they explore limited areas of concern. To minimise the risk of escalation to a full audit, promptly respond to all queries.
Your accountant will generally have a good working relationship with the IRD and can respond promptly with your assistance by providing full and adequate disclosures with relevant supporting documentation on all areas reviewed. Their understanding of the tax law is critical in responding to the queries and providing guidance on whether a voluntary disclosure should be made. Voluntary disclosures trigger a statutory obligation on the IRD to reduce penalties that would otherwise apply if subsequent investigations uncover a tax default. In some cases, the penalties can be cancelled completely. In many cases, you can obtain an assurance of non-prosecution.
Our tax team has extensive experience managing and dealing with tax investigations ranging from simple verification queries to full in-depth tax audits. Talk to us if you are in the audit space or have identified an error in your tax affairs that you want to rectify. We can assist with reviewing historical tax positions, preparing submissions to IRD and finalising the agreement to close the audit so you can move on. If you have a problem, don’t ignore it; seek advice as soon as possible. It is best to leave communications with the IRD to the experts rather than deal with the IRD yourself. Our experience in resolving issues with the IRD could save you thousands, not to mention the stress and disruption of your personal life.
If the IRD comes calling, the sooner you contact BDS Chartered Accountants, the better. We will discuss your affairs in the strictest confidence and work with you to find the best solution.
Peter Taylor, CA, CPP, MBA
Peter is the director of BDS Chartered Accountants.