When a person purposefully undertakes these types of transactions, it is tax evasion. If identified by Inland Revenue, not only will the person have to pay the tax they have evaded but also a penalty for tax evasion which is 150% of the tax that was evaded.
Sometime people pay cash for goods and services and sometimes the recipients may not declare it to Inland Revenue. This is called the hidden economy (sometimes called the black economy) and refers to the part of the economy that people hide by not disclosing transactions and income to Inland Revenue. Simple examples are tradespeople and the hospitality industry.
The hidden economy includes undeclared cash payments, sales that are not put through the books or till, or barter arrangements where the value of what a person receives is not included as income.
Inland Revenue is having increasing success at detecting transactions in the hidden economy and can access multiple sources of information with or without the persons’ knowledge.
Detection could result from something as simple as being “dobbed in” through a link on Inland Revenues website; an investigation of one person suggesting another person’s tax affairs should be audited; or a focus on a particular “at risk” industry, such as the hospitality industry.
Inland Revenue also uses sophisticated computer-based benchmarking tools to compare the
performance of a business with industry norms for evidence a person is not disclosing income.
When a person purposefully undertakes these types of transactions, it is tax evasion. If identified by Inland Revenue, not only will the person have to pay the tax they have evaded but also a penalty for tax evasion which is 150% of the tax that was evaded. They could also be prosecuted and fined of up to $50,000 and/or receive a term of imprisonment not exceeding five years.
What should you do?
If you have concerns about tax liabilities that may arise from income that has not been disclosed to Inland Revenue, you have the option of making a “pre notification” voluntary disclosure, or in the event that you have been contacted by inland Revenue, a “post notification” voluntary disclosure.
A pre notification voluntary disclosure, can mean a reduction in the penalties you face of between 100% and 40%, and a reduced risk of prosecution.
If Inland Revenue announce the intention to carry out an audit you have a short window of
opportunity to make a ‘post notification’ disclosure. This can provide a 40% reduction in the shortfall penalty component, and a reduced risk of prosecution.
If you have any concerns, talk to Mary Nelson to ensure you understand the implications and options that are available to you in your specific circumstances.