OPINION: The current penalties regime is largely a hangover from the excesses of the 1980s, writes Jay Changlani in Taxing Times.
In an era where tax law was interpreted literally and there was no real sanction for tax avoidance behaviour, the cards were stacked against the Inland Revenue Department.
Indeed, what we have ended up with is a rather complex regime involving late-filing penalties, late payment penalties, five different types of shortfall penalties, and an array of criminal penalties, not to mention complex use-of-money interest rules and tax intermediary rules.
For example, Inland Revenue is also entitled to impose a late-filing penalty irrespective of the taxpayer's reasons for not filing on time. However, it retains a discretion not to impose a late-filing penalty by not giving notice to the taxpayer that the penalty is payable. Early communication with the department often can mitigate this exposure.
Furthermore, if you believe you have taken an incorrect or questionable position likely to have a significant tax consequence, you may consider making a pre-emptive voluntary disclosure and get some relief from shortfall penalties. Even if a review or audit of your affairs has begun, partial relief, and some goodwill, can be achieved by front-footing issues via disclosure.
Finally, Inland Revenue has provisions to allow some relief for serious hardship. These rules aim to encourage taxpayers who encounter financial difficulty in meeting their tax obligations to front up to their issues.
In summary, for those who have either accidentally or knowingly not complied with tax obligations, the big stick of penalties, interest and criminal prosecution possibly awaits. These risks can often be mitigated through early action, even if a review or audit has started.
» Jay Changlani is a tax manager at accounting firm WHK. Phone 03 211 3355.
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