IRD Disputes: What Might Happen and What Can You Do?

16 January, 2020 | Smith and Partners

There are two main reasons Inland Revenue (IRD) might be taking dispute resolution action against you.

1) If you fail to comply with your obligations to file tax returns on time, fail to disclose information or fail to make tax payments;
2) If you enter into an arrangement to avoid or evade payment of tax, or in order to receive tax refunds that you are not entitled to.

Failing to comply

The first type of issue can include:

• failing to keep appropriate business records;
• failing to file tax returns; and
• failing to make payment of the relevant taxes when they are due.

There are a range of civil and criminal penalties available to Inland Revenue (criminal penalties can include fines ranging between $4,000 and $25,000 and in some cases imprisonment for up to 5 years) but there will be a number of interim steps they will take prior to taking you to court, including a referral to the IRD Disputes Review Unit

There may also be mitigating steps you can take to reduce your exposure to the level of penalties being claimed, depending on the period of time that has elapsed. While Inland Revenue are legally obliged to collect as much revenue as possible there are some circumstances, for example where you have made a genuine error, where they are permitted to waive the penalties.

The key to reducing your exposure to penalties is to be proactive in communicating with Inland Revenue, and Smith and Partners can help you to negotiate with Inland Revenue to prevent any further penalties and potentially remit those that already have been claimed.

Avoidance versus evasion and is there a difference?

Tax Avoidance

There is a common misunderstanding that differentiates between tax avoidance and tax evasion by claiming that avoidance is legal and evasion is illegal – the implication being that if you’re only avoiding tax you won’t have any trouble. The reality is more complex.

The better understanding is that avoidance is the use of practices that are not illegal (such as using business or trust structures to distribute professional income) but because the purpose is to avoid paying tax, Inland Revenue have determined — and the courts have confirmed — that the relevant taxes are still due, plus any penalties.

Tax Evasion & Fraud

On the other hand, tax evasion or tax fraud involves intentional practices aimed at not paying tax, or receiving a refund that you are not eligible to receive. This can be as simple as not declaring income from the sale of goods on TradeMe but could also include deducting PAYE from employees’ wages and failing to pay it to Inland Revenue or failing to record the employees at all and paying them ‘under the table’.

How to Resolve Disputes

The key to resolving these types of issues with Inland Revenue, once they arise, is to speak to Smith and Partners as soon as possible to ensure we have the opportunity to mitigate any further issues arising (for example by helping you draft a response to their notice and thereby avoiding being deemed to have accepted it).

The key to ensuring you are not prosecuted for avoidance or evasion is to ensure you understand and comply with your obligations – and talk to us early about structuring your affairs correctly.

5 reasons to avoid having a dispute with Inland Revenue

Dealing with demands from Inland Revenue is not high on anybody’s bucket list and here are 5 reasons to stay in their good books.

1. You’ll sleep better at night if you focus on making your business successful rather than trying to avoid your tax obligations;
2. Where Inland Revenue consider you are being deliberately non-compliant they will use the “full force of the law” to prosecute you;
3. Some disputes will leave you liable for both civil and criminal prosecutions, and Inland Revenue can still apply civil penalties even if they lose the criminal prosecution;
4. In civil prosecutions, apart from those for evasion or obstruction, the onus will be on you to prove Inland Revenue is wrong;
5. If convicted you could be liable for a hefty fine and/or a period of imprisonment.

Are you in dispute with Inland Revenue over tax debt? Get your dispute sorted quickly and efficiently, contact our Dispute Resolution team today to set up an appointment. Email: partners@smithpartners.co.nz or Phone: 09 837 6849