What is a voluntary disclosure?
A voluntary disclosure is when a taxpayer tells Inland Revenue about an error in their tax returns (such as underreported income or over claimed expenses) before IRD find out in some other way.
A taxpayer may voluntarily disclose an error for any tax type including GST, income tax, tax deductions (PAYE, Kiwi Saver, RWT, NRWT etc), as well as other types of payments monitored by IRD including child support, student loan repayments or working for families tax credits.
The voluntary disclosure may be prompted by a letter from Inland Revenue seeking information on overseas income. Sometimes Inland Revenue receive anonymous information. Other times IRD may be investigating another taxpayer and your name comes up. Sometimes a taxpayer discovers funds they have been receiving should have been taxed. A classic example is rental income. Or perhaps there are debt issues, and a taxpayer has cut corners in their tax returns.
There are 2 types of voluntary disclosures:
- A pre-notification voluntary disclosure is made any time before IRD notify the taxpayer of an impending IRD audit or investigation.
- A post-notification voluntary disclosure is made after IRD notify the taxpayer of an impending tax audit/ investigation, but before the IRD audit/ IRD investigation begins. Notification from IRD can be written or verbal.
IRD Shortfall Penalties
If a taxpayer underpays tax because their tax return is wrong, Inland Revenue may impose a shortfall penalty. There are 5 shortfall penalties that range from 20% for not taking reasonable care, to 150% for tax evasion.
Making a voluntary disclosure to IRD can substantially reduce the risk of Inland Revenue imposing shortfall penalties.
- A pre-notification voluntary disclosure may earn a percent reduction in shortfall penalties from 75% to 100%
- A post-notification voluntary disclosure may earn a percent reduction in shortfall penalties of 40%.
Why make a voluntary disclosure to IRD
It is important to manage tax correctly. The New Zealand tax administration system is based on voluntary compliance. Under tax laws, a taxpayers’ basic obligations are to work out the correct amount of tax to pay, keep all relating records, then file the tax returns and pay tax on time.
Inland Revenue routinely audits the tax affairs of people and businesses. An IRD audit may be well underway before a taxpayer is even aware they are under investigation. IRD has very wide powers. By the time a taxpayer has been notified of an audit, IRD may already have a lot of information including bank statements, interviews. Even photographs of people at cash machines withdrawing or depositing funds.
Under the tax administration laws, tax evasion is a criminal offense. Making a pre-notification voluntary disclosure to IRD will significantly reduce the risk of a criminal prosecution.
What does the voluntary disclosure need to include?
The voluntary disclosure needs to contain enough information for IRD to make an assessment, including:
- name and IRD number
- contact details (postal address, telephone numbers, email address)
- the tax periods and tax types involved, eg: income tax/ GST.
- an explanation as to why the error occurred.
- sufficient information for IRD to make correct tax assessments of the tax shortfall.
- statutory declaration.
Ideally the tax position and the tax payable as a result of the disclosure should also be calculated.
How we can help
Crawford Nelson has a proven track record in resolving debt ssues with Inland Revenue. We understand the IRD’s tax technical requirements for the voluntary disclosure and IRD audit process. If you have received an IRD letter, or think your tax returns may be incorrect, please call us for an obligation free discussion. We can remove the stress and contact IRD on your behalf.