Voluntary disclosures to Inland Revenue

As a cash-dominated industry, ‘tradies’ have been under the watchful eye of Inland Revenue since 2012. A recently-launched media campaign warns tradespeople that doing ‘cash jobs’ may comprise tax evasion, and that every cash job leaves a trail (or lack of a trail) that can be tracked by IR.  

Tradespeople risk substantial financial consequences if caught understating taxable income in their tax returns. Fines, penalties, use of money interest, and potential prosecution are all within IR’s power.

This begs the question, what should a business do if it identifies an error and has not paid the correct amount of tax? Contrary to some views, it does not comprise a windfall gain. A business must disclose if it has underpaid its tax by more than $1,000. No business owner will take joy in having to proactively contact IR, so here are a few points to help smooth the process.

The best way to proceed is by making a written voluntary disclosure. With any reassessment to increase a person’s tax liability, IR will consider whether to charge shortfall penalties. If charged, the amount is based on a percentage of the tax shortfall and the percentage varies depending on the nature of the error and the taxpayer’s culpability. The taxpayer should therefore use their written disclosure to clearly set out what the error is, how it arose and what actions will ensure it will not happen again. The disclosure provides an opportunity to explain the facts in the most favourable way possible. It reassures IR of the taxpayer’s willingness to comply with the tax rules and demonstrates they understand the seriousness of the matter.

The disclosure should also set out the amendments required, with reference to the actual box numbers in the tax return. Broad statements regarding the ‘fix’ run the risk of IR amending the return incorrectly, which will only give rise to more contact with IR – the taxpayer should make it extremely easy for the person processing the change to get it right.

In most cases, a voluntary disclosure made results in no shortfall penalty.

In a small number of cases, IR may receive the disclosure and commence an investigation, potentially taking the view that if there is one error, something else might be wrong. This reinforces the need to word the initial disclosure carefully to ensure there is an appearance of ‘there is nothing to see here, move along’.

If there is no voluntary disclosure, and IR finds the error, the situation could be much worse. Shortfall penalties, that otherwise may not have been applied, could be charged and a more comprehensive investigation undertaken. So, we would always recommend full disclosure at the earliest opportunity. Being able to sleep at night is worth some temporary discomfort.  Get in touch if you would like to discuss any aspects with a Moore Stephens Markhams advisor.

Published summer 2017.

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