Accountant Tax Audit Insurance

How Important is Audit Insurance?

Previous government budgets have included funding to support the IRD in implementing and enforcing measures to close the burgeoning gap in lost tax revenue due to non-compliance. This action has been spurred on by numerous factors, not least of which include the active hidden economy in New Zealand.

With compliance rules shifting and becoming more stringent, more SMEs with nothing to hide are considering Tax Audit Insurance in response to the IRD’s aggressive new measures to close the tax gap.

The four most common audit actions from the IRD are:

• Client Risk Reviews
  Often audits are preceded by a risk review where the IRD requests information in order to evaluate the risk of non-compliance.

• GST Verifications
  The IRD's recent business transformation program has meant that their systems can handle larger data sets and transactions. Along with their new systems and a more automated process, their compliance teams are using more data analytics to screen GST returns and refunds.

• Personal and Company Income Tax Returns
  The IRD is constantly monitoring for ‘’triggers’’ around areas such as; reported income, home office deductions, successive year business losses, increased business expenses, and large charitable donations.

• Tip-Offs
  IRD anonymous online form for reporting tax evasion or fraud has increased significantly. These were from honest taxpayers whose frustrations at those they suspect are avoiding or evading their taxation obligations reached a breaking point. The most common tip-off issues included not declaring income, cash payments to staff, or simply a mismatch between a certain lifestyle and a supposed income.

  With fewer people transacting in cash and ATM average withdrawals dramatically lower now than ten years ago, it is becoming increasingly difficult to operate this way in our effectively cashless society.

• Other trending areas
  Investigations of employer obligations and rental property activities.

Is Tax Audit Insurance worth the investment?

Aided by newer and more advanced technologies, the IRD has become more creative in how it goes about enforcing taxpayers' financial obligations to the community, underscoring the renewed need for taxpayers and their accountants to look more closely at having the appropriate Tax Audit insurance in place in preparation for a future crackdown and increasingly inevitable tax audit.

The idea of being audited probably sends chills down the spines of most business owners whose primary focus is growing a profitable business. Nobody wants to get notified by the IRD of an impending audit, especially if the accountant or their clients have no audit insurance protection in place, and it occurs smack bang in the middle of the busiest part of the year.

Consider the ramifications of having to cease all business activity to prioritise collating the necessary paperwork while managing business-as-usual activities. It is not difficult to envision a costly and chaotic situation as a result of this oversight.

As automation and the obvious benefits of AI further support the IRD in carrying out its tax-collecting activities, we are witnessing a shift in the importance of being insured against the costly risks of a tax audit. Tax Audit insurance, typically considered an add-on, is becoming an essential mix in the various forms of protection leveraged by taxpayers in seeking advice from their advisors.

What are the costs of compliance?

It isn't easy to accurately estimate the incurred costs on a business being audited by the IRD. Still, we can assume it will cost a considerable amount of employee hours, which can add up quickly and without notice or any forecasting.

Lacking adequate protection through Tax Audit insurance means advisors must level with their clients in explaining these unforeseen costs. For some taxpayers that choose to go down the path of self-insurance, it sometimes translates to moderate upfront savings with more substantial (and unexpected) costs down the road.

While some accountants, financial advisors and wealth managers may instruct their clients to self-insure as a method of protection, this can leave them underprepared and exposed to the litany of fees and employee costs that result from a comprehensive tax audit. By self- insuring instead of using a Tax Audit insurance solution, business owners are limited in how efficiently and effectively they can respond to the IRD's reporting requirements and discovery of documentation.

The obvious risk for advisors is losing out on their professional fees as a result.

Food For Thought

In summary, the IRD has adopted various new initiatives aimed at better compliance and more accurate reporting from New Zealand taxpayers. As a result, those relying on unsubstantiated claims or failing to keep up with tax obligations like rent or GST are being targeted. While education and engagement are pillars of the IRD's approach to addressing the issue, the buck stops with enforcement.

Now more than ever, tax advisers must keep up with the shifting legislative and technological tax landscape to ensure their clients are receiving the greatest possible protection.

With lodgement methods changing and new online services, it is more important than ever that tax advisers are across these changes, adept at spotting vulnerabilities and seriously considering the advantages of Tax Audit insurance for their clients.

The Future of Tax Accounting

This trend of more frequent and effective IRD auditing directly results from more intuitive and automated data analysis systems. As technology gets better at detecting misbehaviour (intentional or otherwise) via systems, Tax Audit insurance will become more of a necessity than a luxury in an ever more vigilant environment.

The IRD is also highlighting tax agents whose claims are consistently high. This kind of attention can have an impact on brand protection and reputation. As more taxpayers rely on pre-filled returns in their tax lodgement, practitioners are being forced to shift their business models and come up with new value-add offerings while providing access to the broad range of deductions or concessions to which they are legally entitled.

Tax Audit Insurance offers a comprehensive way of ensuring no stone is left unturned in reviewing a client's tax compliance if (or when) it gets that ominous letter in the mail or phone call from the IRD audit task force.

For further information, please contact:
P: 04 333 0432
E: [email protected]