12 Ways to Avoid a Tax Audit
A tax audit or enquiry is a most unpleasant experience that you would not wish on your worst enemy, yet many taxpayers invite these by carelessness, being downright stupid, not thinking or by not protecting the confidentiality of their affairs. They can be costly, stressful, can last for months or years and can, and often do, result in bankruptcy, dire poverty or divorce. You would think then that it would be worthwhile taking a few simple steps to reduce the chances of these occurring:
- Don’t make mistakes in your returns. Some use the wrong returns, some miss bits out, others can’t add up or divide, write daft things on the returns and just using paper returns increases the risk of something being spotted or something being out of place.
- Submit all your returns in time. Nothing unsettles the IRD more than submitting your returns late, especially if you make a habit of this. Many thousands even have accountants who habitually submit their clients’ returns late. Come on now, it’s not difficult and why on earth would you use an accountant who is so badly organised?
- Pay all your taxes on time. This is like sticking your head above the parapet in the trenches when the IRD are uphill with a sniper rifle! You will be in their sights and it will cost you plenty even if they miss in terms of penalties and interest.
- Use an experienced, modern accountant who has a good reputation with the IRD. Many accountants, Chartered or otherwise, are downright old-fashioned, dishonest, careless or just not organised. Using one with any of these tendencies will substantially increase the risk of an IRD audit.
- Show a reasonable income or drawings to meet your living expenses. The IRD go shopping too, and have mortgages and cars. They keep asking me what clients are living on when income or drawings are low. If you can’t explain your lifestyle away be ready to suffer!
- Don’t try and prepare your returns yourself. Tax is very complicated and getting more so. Even accountants with many years experience in tax struggle with the greyness and complexities of Income Tax, GST, FBT, RWT, LTC’s, overseas income and Working for Families. Can you really say you are confident in doing these yourself?
- Don’t be fooled by “G & T” tax advice. Whilst sipping their gin and tonic, many claim to pay little or no tax, or that they have a fabulous accountant who knows all the latest dodges. Bear in mind that their circumstances may be different to yours, their preference to risk much higher than yours or just have an accountant who is putting his or her clients in the firing line unnecessarily.
- Keep accurate and full records updated regularly. Just takes organisation and getting systems and routines into place. If you hate books or are no good at it, delegate it out, it’s cheaper than you think. Sloppy and careless record-keeping leads to sloppy and careless tax and GST returns.
- Don’t make low profits or losses. OK yes, on occasion unavoidable I recognise, but if happening regularly it’s like a red rag to a bull, sooner or later you will be on the receiving end of a charge!
- Make sure your performance matches the IRD’s benchmarking figures. The IRD are now using benchmarking figures to decide who to audit, comparing your figures with industry-specific performance figures. See where you fit before they do.
- Don’t be greedy and let others go out on a limb. Be a little cautious with your tax affairs. Yes, paying tax is not nice and yes, let’s pay as little as possible but it’s always best to keep in the crowd and let others who are pushing the boundaries be in the spotlight with the IRD.
- Don’t let anyone else know what’s happening with your tax affairs. A very obvious mistake yet repeated the world over. Disgruntled ex-employees and spurned or aggrieved (both ex-life and business) partners are a fertile source of information for the IRD on their confidential 0800 Information Line.
If you’d like help to avoid a tax audit or would like a confidential review of tax affairs to safeguard you and your loved ones call Nick on 0800 ASK NICK or send an email.