Tax audits stressful and expensive

Last updated 08:54 03/10/2012

Taxing Times is a weekly column that looks at various aspects of tax and money management.

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OPINION: Italian tax authorities sent tax auditors to popular holiday destinations to check on businesses that hire sun umbrellas, changing cabins and sun loungers to beachgoers, writes Murray McClennan in Taxing Times.

The Italian tax authorities suspect many of the business operators of having evaded tax for many years and have deposited cash sales in overseas banks.

The Italian government has declared “a state of war” against tax evaders and attributes many of Italy's economic problems to the many rich Italians who systematically do not pay their taxes.

Some New Zealanders knowingly and deliberately evade tax. Others engage in avoidance arrangements to pay less than the proper amount of tax. In addition, some do not return income out of ignorance of the law.

How then does Inland Revenue decide who to audit? The main triggers are: Software that compares GST to income returns and matches information from banks and other financial institutions as well as land transactions. Spin offs from other audits. Participants in abusive tax arrangements.

Reviews of selected industry types, particularly those with mainly cash sales or professions. Being a high net worth individual considerably increases the odds of being audited. Returning very low levels of income.

Anonymous information. Typically this comes from estranged spouses and partners, and former employees or business partners, but it could be as a result of boasting about paying little tax. Inland Revenue has a dedicated toll-free number for this “service” 0800 225 610.

If income has been omitted from a tax return or no tax return has been filed, Inland Revenue is not prevented from auditing a taxpayer many years after the income year in question. A tax audit can be very stressful and expensive; in addition to any underlying tax, the resulting interest and penalties are often more than the tax, especially if several years have elapsed since the tax shortfall.

» Murray McClennan is director of Tax Central Ltd, a specialist tax consulting firm.

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