COUNT ON IT

With Bevan Spalding

Staples Rodway

IRD Audits - The basic things to get right

If you are in business, irrespective of the size or nature of your business, you can expect to be subjected to an IRD audit sometime in the life of your business. These IRD audits can be a costly and lengthy experience. However if you have committed some time and effort into reviewing any potential risks in your record keeping procedures you can reduce the impact of an IRD audit on your business.

Before joining the Staples Rodway Tauranga tax team I was a former investigator with IRD, for approximately ten years, which involved conducting IRD audits of all types of entities within a vast range of different industries. In my opinion, the most common errors that are identified could have been mitigated if people had committed some time and effort to reviewing their record keeping procedures to ensure that the correct information was presented to IRD.

I would like to provide you with three basic tips that may assist you in ensuring you have taken the necessary steps to minimise the cost to your business, including IRD penalties and interest, when you are subjected to that inevitable IRD audit.

1. Record Keeping

One of the most common issues that results in adjustments in an IRD audit is poor record keeping.

If you have the mind set that you can just throw your invoices, receipts, etc in a shoe box and let your accountant sort it out at the end of the year, you may want to revisit this approach. It is inevitable that with this approach some of the documentation crucial to preparing your tax returns, to ensure you pay the correct amount of tax, will be lost. If you do not have the required documentation the IRD may disallow an expense or assess something as income, for tax purposes. And such a simple thing may result in you paying a considerable amount more tax than if you had been able to provide the required documentation.

I strongly recommend that you work with your advisers and learn what documentation should be retained then design a system, which suits your needs to ensure this information is retained. Once you have a system in place you will find that the time you spend each time filing GST returns, tax returns or providing information to your accountant is significantly less. More importantly, when an IRD audit eventuates you are easily able to locate those vital records and you feel comfortable that your tax returns are fully supported by the correct documentation.

What you may also want to think about is the impression that is given to the IRD investigator at the commencement of an IRD audit. A tidy well referenced filing system that allows easy location of the supporting documentation indicates to the investigator that the risk of errors may be far less than if the records are simply thrown in a shoe box.

2. Accounting System

Another common issue is the incorrect coding of transactions. Furthermore, this risk can be multiplied when using a computer software package. Don't be fooled by anyone who tells you that all you need is a flash computer software programme and the programme will simply spit out the correct calculations for both GST and Income Tax. The important issue here is that you need to understand how the computer system works and treats certain transactions. You will also need to understand how you should input the transactions to ensure they are treated correctly for tax purposes.

I suggest that you work closely with your advisers to obtain some guidance as to how transactions should be entered and what reports should be used for tax purposes.

You should also carry out regular checks to test the correctness of the reports printed and used for tax purposes. One way would be to select all of the transactions in a particular month and perform the calculations manually. You then match the amounts with the computer generated totals to verify their accuracy. This should mitigate any penalties or interest that may result if errors are found.

Another option is to have your advisers carry out a 'Health Check' on your accounting system. A 'Health Check' is like an IRD audit but carried out by your adviser. This means that if there are any errors in your system they can be identified, and corrected before an IRD audit.

3. Tax Legislation

If you started in business some years ago, and obtained advice at that stage on the correct tax treatment of particular transactions, you may find that the tax treatment has changed due to a legislation change.

The government is continually reviewing the tax legislation, in consultation with IRD, Accountants, Solicitors and other interested parties in the community. Consequently Bills are passed, on average twice a year, introducing new legislation and making changes to existing tax legislation.

It is unrealistic to expect a business person, with all of the other pressures of running a business and trying to make a living, to keep up with changes in tax legislation and to attempt to identify what particular changes are relevant for their business. This is where the role of your adviser becomes very important.

Your adviser should ensure they are familiar with your business and advise you of any changes in the tax legislation that may impact on your specific business. However, you can't leave this all to your adviser. You need to be proactive in ensuring any changes in your business or irregular transactions are brought to your advisers' attention. Furthermore, and just as important, the adviser should be consulted on any irregular transactions before they occur to ensure they are treated correctly for tax purposes, or alternatively, whether a more tax efficient opportunity is available.

By ensuring that you have reviewed these three areas and have the appropriate procedures in place you should find that an IRD audit is less costly and disruptive.

I am finding my role in the tax team at Staples Rodway Tauranga far more enjoyable as I am assisting clients in all of the areas discussed above, thus mitigating the effects of IRD audits and complying with taxation requirements. Taxation legislation requires compliance and if taxpayers are not paying the correct amount of tax they will be punished for any errors disclosed during an IRD audit.

Bevan Spalding is from Chartered Accountants, Staples Rodway Tauranga.

Disclaimer

No liability is assumed by Staples Rodway Tauranga Ltd for any losses suffered by any person relying directly or indirectly upon the article above. It is recommended that you consult your advisor before acting on this information

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