Inland Revenue audits are fun and friendly! – Or so Inland Revenue’s latest video suggests
Tax Alert - March 2016
By Kylie Saunders
Inland Revenue (‘IR’) has just released an informative video explaining how IR audits operate for small and medium enterprises. If the high-vis vest worn by the video’s key actor doesn’t spark your attention, the British accent combined with the fun and friendly delivery definitely will.
The video entitled “All about Inland Revenue Audits” outlines what IR perceives a business needs to know about the risk review and audit process. It intends to allay fears and answer taxpayer concerns about how investigations occur in practice. It is part of IR’s new suite of YouTube videos helping to make tax easier, which all feature (surprisingly) actual IR employees.
The video is clear and summarised and it recognises and respects how nervous people can be about receiving a risk review or audit letter from IR. In trying to put taxpayers at ease, it states “We’ve found that most businesses are doing the right thing”, and that “the purpose of an audit is to ensure you pay the right amount of tax”. Sounds fine so far, right?
What the video does not explain is that investigators have certain audit performance targets to achieve and that there is an objective of obtaining a tax adjustment against the taxpayer in almost all investigations. The rate of return required on an investigation is over $600/hour to meet Treasury’s expected return on the Government’s investment in IR audit resources. It is important to note in this respect that, in the year ended 30 June 2015, IR’s audit division achieved 100% of its performance targets for the year.
Having moved to Deloitte after eight years as an IR investigator only six months ago, I can tell you that the commercial and professional side of life is very different from being part of IR as the investigator. There is a considerable difference in terms of how investigations are viewed and experienced from the taxpayer/client perspective. What the video portrays is a very positive and helpful audit experience. It even goes so far as to suggest that a refund might be assessed if a business has paid too much tax.
When a business receives a risk review or audit letter, this can create a lot of stress, even in businesses whose tax affairs are well managed. The best way to get through an audit is to know what to expect and how to go about making the experience easier for you and your business.
If you receive a risk review or audit letter, I definitely recommend watching the video to at least give you an understanding of the audit procedure, and maybe something to laugh about.
I do however offer the following reality checks, so you can go into the process with eyes wide open:
- The video mentions the interview that will be conducted and depicts a nice casual meeting with the investigator. I have been part of meetings that were just like this, but certainly not all meetings will be like this. Also be aware that for the last couple of years all investigators have each been undergoing at least three days’ worth of police investigative interviewing training, which can include recording of interviews. In light of this fact, it’s likely that you’ll feel far more comfortable having an experienced tax advisor attend the meeting with you. Two sets of eyes and ears in these situations are always better than one.
- One of the most frustrating questions arising for businesses undergoing an audit is - “How long will the audit take?” The video states that every audit is different and that when the investigation starts, the investigator will provide an estimate of the time the audit will take. This is a fairly vague statement, but the reality is that the timeline will align with the investigator’s timeliness performance targets; they will generally be unable to notify any timeline exceeding 12 months in the initial audit letter. This is despite knowing that they will likely be in the lives of some businesses for years. Whilst Deloitte have had great success in reducing the length of audits, sometimes it is just easier to understand and accept they could be around for a long time. The potential for disruption of your business, if an audit is not carefully and strategically managed with expert assistance, should not be underestimated.
I also warn, to not think for a second, that when delay in an audit is caused by the investigator, that they will not bring out the thumb screws when they want a time bar waiver signed to hold open their ability to reassess a tax return that is over four years old. Again, decisions around whether to sign a time bar waiver should be fully informed; that harmless looking form can have significant consequences.
- My favourite statement in the entire video is that “We do everything we can to minimise the demands on your time”. In dealing with some of the risk review and audit request lists received for clients, I have found incidences where different investigators on the same audit will have their own separate request lists and timeframes, with the extremely frustrating result of having to repeat the same information over and over to different people. Often these requests come with response dates set for the first week of January, or anytime in March: neither of which is helpful for businesses and their tax advisors.
If you are faced with these issues, please don’t be afraid to discuss with investigators straight away any unreasonable timeframes or delivery targets, and if dealing with the investigator does not work out, try their team leader and manager. Their phone numbers are in the initial audit letter for good reason, and due to workloads and their management focus they do generally get more pragmatic the further they sit up the chain.
We suggest the following important actions in order to seek to reduce the length, breadth and potentially the cost of any audit:
- Involve your Deloitte tax advisor early on in any audit interaction. Sometimes just a sense check over what the investigator is asking for, and the timeframes involved, can be modified to save time, reduce stress in busy periods and reduce energy spent in compiling answers. There are also definite “do’s” and “don’ts” to be aware of when investigators are on your premises in terms of managing access to staff and records.
- Have Deloitte review all responses before providing to IR. If an error has occurred, we can voluntarily disclose this to the investigator which can reduce penalties. This also signals to the investigator that you want your taxes to be correct.
- Evidence of internal tax reviews, such as tax governance reviews, fringe benefit tax and goods and services tax reviews can be another signal to an investigator of an intention to comply with all taxes. Whilst the full output report of the review would generally not be provided to an investigator, sometimes a redacted version can assist in speeding up an audit.
- Just generally have a chat with us. There are often workarounds, allowances and remissions provided for in the tax system as well as published standard practice that IR staff should be complying with, which are not necessarily common knowledge that could save you money when it comes to finalising an audit. Sometimes IR can also deliver a technically incorrect assessment proposal – so tapping into the breadth of knowledge and depth of experience of the national Deloitte tax group could eliminate any assessment at all.
Despite my cynicism, overall this is an informative video which may allay some IR audit fears and eliminate some sleepless nights. However, our message is to watch the video with a grain of salt and not be lulled into a false sense of security. Audits can easily turn into long drawn-out, stressful affairs if not handled correctly from the outset. Best practice is to be forewarned and invest time in managing your tax affairs well in advance of any audit.
For more information about IR audits, please contact the author or your usual Deloitte tax advisor.
Tax Alert March 2016 Contents:
- Inland Revenue audits are fun and friendly! – Or so Inland Revenue’s latest video suggests
- Peering into tax: bad debts and P2P lending
- Engaged in R&D? The R&D loss tax credit regime is a go!
- What information should you file with your tax return?
- Comical Australian employee deduction case highlights New Zealand’s pragmatic rules