Case Study | How a NZ$4 Million IRD Tax Audit Was Resolved

Ysquared Chartered Accountants dealt with a complex IRD tax audit involving multiple companies and several family members in the construction industry.

Over a number of years, errors had been made in the client's tax filings. Family members had also regularly withdrawn funds from the companies for personal purposes, including the construction of a private residence, without the associated tax obligations being correctly accounted for.

How We Helped

After receiving correspondence from Inland Revenue, the client approached us for professional assistance. We reviewed and reconstructed eight years of GST returns and income tax returns, while also reassessing the individual income tax positions of several family members. The total tax amount involved in the case was approximately NZ$4 million.

Given the amount involved, the number of years under review, and the combination of company and personal tax issues, the risks extended well beyond additional tax and penalties. If Inland Revenue considers that conduct amounts to deliberate tax evasion, criminal prosecution may also follow. Under New Zealand tax law, a conviction for tax evasion can result in significant fines and, in serious cases, prosecution.

Recent Inland Revenue enforcement cases have also involved taxpayers in the construction industry being prosecuted and sentenced for deliberate tax evasion involving significantly smaller amounts.For this client, therefore, the key issue was not only ultimately how much tax would need to be paid, but also whether criminal prosecution could be avoided.

The Outcome

Following a detailed review, recalculation of the tax position and extensive communication and negotiation with Inland Revenue:

• No criminal prosecution was brought against the client

• The matter was ultimately resolved with approximately NZ$2 million in tax payable

• The tax position of one company was reduced by approximately NZ$690,000

• Tax amounts relating to several individuals were reduced by approximately NZ$100,000 to NZ$700,000 each

Complex IRD Audits Require a Review of the Entire Tax Position

In a complex tax investigation, the figures initially raised by Inland Revenue should not necessarily be viewed in isolation. Historical accounting records, transactions between companies and individuals, the nature of particular payments, and the tax treatment applied in previous years can all affect the final tax position. A comprehensive review can help establish the client's actual tax obligations, identify adjustments that may legitimately be available, and avoid unnecessary tax costs.

If your business has received an IRD Audit or Risk Review notice, particularly where the matter involves several years of historical records, company funds used for personal purposes, or multiple related individuals or entities, obtaining professional advice early can be important.

Ysquared Chartered Accountants specialises in assisting clients with complex Inland Revenue issues, including IRD audits, tax debt and penalty relief, voluntary disclosures, negotiations with Inland Revenue, and FIF and overseas income reporting.