As a business in NZ, there are a range of tax regulations you need to get through and one of the most unpleasant and daunting things among these is the possibility of an audit by the Inland Revenue Department (IRD). Understanding what an IRD audit entails can help you stay prepared and compliant. In this blog, we’ll explore what you need to know about IRD audits, why they occur, and how you can best prepare with the support of our professionals at PAS. Let’s jump right in:
Do I Need to Worry About Being Audited?
The idea of being audited often stirs up anxiety for many business owners. However, it’s essential to understand that an audit is not necessarily a reason for concern. Audits are a part of the IRD’s routine process to ensure compliance with tax laws and to verify the accuracy of tax returns.
An audit doesn’t automatically imply wrongdoing; it’s simply a way for the IRD to verify that businesses are adhering to their tax obligations. The key to minimising stress during an audit is maintaining accurate records and being transparent in all your financial dealings. If you have been diligent in your bookkeeping and have followed the tax laws, an audit is usually just a formality.
At PAS, we emphasise the importance of proactive compliance. By keeping accurate records of your financial records and ensuring all filings are correct and up-to-date via an IRD risk review, we can help you face audits with confidence, knowing you have nothing to hide.
How Often Do Businesses Get Audited in NZ?
While it’s difficult to pinpoint an exact number due to the IRD’s evolving strategies and focus areas, we do know that the IRD conducts thousands of audits each year, targeting businesses across different industries.
The likelihood of an audit depends on various elements such as the size of your business, your industry, and your financial activities. For instance, businesses in high-risk industries or those with complex financial transactions are more likely to be audited. Additionally, the IRD has a risk assessment system that flags businesses that display certain inconsistencies, like significant changes in income or expenses, or those consistently declaring losses.
It’s worth noting that while some audits are targeted based on these risk factors, others are random. This randomness ensures that all businesses have a fair chance of being audited, regardless of their risk profile. Whatever the reason is, IRD will not be disclosing it when you’ve been chosen.
What Triggers an IRD Audit?
While some of these triggers are within your control, others are not. Here are some common triggers to be aware of:
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Discrepancies in Tax Returns:
Inconsistencies between the information reported in your income tax return and the data IRD holds can prompt an audit. This could include mismatches in income figures or expenses that seem unusually high for your business type.
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Large or Unusual Transactions:
Significant one-off transactions, such as large asset purchases or sales, can get IRD’s attention. It’s essential to have proper documentation and explanations for these transactions.
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Consistent Losses or Declining Profits:
If your business consistently reports losses or a significant drop in profits, IRD may conduct an audit to ensure you’re not underreporting income or inflating expenses.
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Incorrect GST Filings:
Filing incorrect or inconsistent GST returns can be a red flag. IRD may investigate to ensure you’re accurately reporting your GST amount.
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High-Risk Industries or Cash-Based Businesses:
Certain industries, especially those that are cash-heavy, are more prone to audits due to the higher potential for income to go unreported.
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Sudden Changes in Income or Expenses:
If there are significant changes in your income or expenses from one year to the next, the IRD might want to investigate the reasons behind these fluctuations.
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Anonymous Tips or Complaints:
In some cases, the IRD may initiate an audit based on tips or complaints from third parties, such as disgruntled employees or customers.
What Happens During an IRD Audit
If your business is selected for an IRD audit, here’s what you can expect:
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Notification:
IRD will notify you in writing that they intend to conduct an audit of your business. This letter will outline the scope of the audit and what records they will need to review.
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Preparation:
You’ll need to gather the requested documents and information. This might include bank statements, invoices, tax returns, and other financial records.
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The Audit:
IRD will review the provided information to ensure tax compliance. They may conduct interviews with you or your staff and ask for additional information if needed.
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Duration:
The length of an audit can vary depending on the complexity of your business and its scope. It can range from a few weeks to several months.
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Outcome:
After reviewing your records, the IRD will issue their findings. Possible outcomes include no changes, adjustments to your tax liability, or penalties for non-compliance.
How to Prepare for an IRD Audit?
The best way to handle an IRD audit is to be prepared ahead. Here are some steps you can take to ensure you’re ready:
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Accurate and Organised Records:
Maintain accurate and organised financial records. This includes keeping track of all income, expenses, and supporting documents like receipts and invoices.
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Compliance with Tax Laws:
Stay up-to-date with the latest tax laws and regulations. Ensure your business complies with all tax obligations, including filing accurate returns on time.
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Regular Internal Reviews:
Conduct regular internal reviews or audits to identify and correct any discrepancies in your records. This proactive approach can help you catch errors before the IRD does.
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Professional Guidance:
Engage a professional accounting firm like PAS to help manage your financial records and provide expert advice on tax compliance. Our team can assist you in preparing for an audit and ensuring all your records are in order.
Ensure Your Business is Audit-Ready – Talk to PAS Experts!
While the prospect of an IRD audit can be daunting, understanding the process and being prepared with the right professional guidance can significantly reduce the stress involved.
At PAS, we specialise in helping businesses in NZ manage their tax obligations and prepare for audits. Whether you need assistance with compliance, record-keeping, or representation during an audit, our team is here to support you. Contact us today to learn more about how we can help you stay audit-ready.
