It’s important to know that you don’t have to be doing something ‘wrong’ for the Inland Revenue Department (IRD) to start an investigation. There is always the possibility that lodged returns may be reviewed or audited by IRD at any time and for a range of reasons. When a New Zealand tax return is filed there are several areas where IRD focuses their attention should they choose to scrutinise that return. When a tax return is flagged for a review or audit, this doesn’t indicate that there is a mistake in the return. In most cases, it’s due to a specific crackdown by IRD.

IRD employs various methods, including data matching and artificial intelligence, to detect potential issues in filed returns, which have proven effective and there’s no indication that IRD will reduce their use of these methods in the future.

Accountancy Insurance started its New Zealand Operations in 2011 with the opening if its Auckland office and they specialise in “Audit Shield”, a comprehensive tax audit insurance product which covers the professional fees incurred because of an official audit, enquiry, investigation, review or examination instigated by IRD.

Chester Grey teamed up with Accountancy Insurance in 2019 to offer Audit Shield to all our clients, because we were concerned about the increasing investigations across all tax types and businesses and the accounting costs involved with assisting clients with these enquires.

The following figures have been compiled by Audit Shield and are based on the number of claims they have dealt with across all accounting firms. IRD do not release details on the total number of requests for more information, IRD initiated reviews or audits. We know from our experience that we have dealt with more IRD initiated actions for clients who don’t have Audit Shield cover then do have cover.

The graph compares the volume of the top three recorded Audit Shield claims across Accountancy firms who have an Audit Shield Master Policy in place from April 2018 to April 2024. Between 1 April 2023 and 31 March 2024, the activity related to GST Verification, Income Tax Return, and Client Risk Review claims accounted for over 94% of the total number of Audit Shield claims submitted. However, an analysis of the change in proportion of these claim activities over time reveals that these three areas have consistently represented most of the claim activity by IRD.

In our experience two most common types of investigations by IRD are (but are not limited to);

IRD Enquiry/ Request for More Information: This request from IRD comes when a return has been filed with IRD but not processed. Income Tax, Donation Credits and GST returns are the tax types we see most commonly selected, but IRD can request more information on any type of return filed.

If we have filed the return, we will receive a request from IRD. If a client has filed the return themselves, then they can receive the IRD request directly. A request for more information could take as little as 30 minutes to deal with and doesn’t always require further information from our clients.

However our latest experience of a request for more information for a clients GST return filed in May 2024, was more comprehensive; copies of receipts and invoices needed to be supplied to IRD, explanations of why they were included; expert 3rd party advice on the legality of the questions asked and what we needed to supply was obtained; etc. What started off as IRD requesting more information on one GST return, is still currently ongoing and now covers 3 more GST returns and the client has still not received the refund for the May 2024 return. Our client is covered under Audit Shield and the IRD claim to date is over $8,000 and the ‘investigation’ is still ongoing.

IRD Audit: A full audit can be very confronting for clients as IRD have powers to enter your business and home; take books, paperwork and computers etc; get your bank statement details directly from the bank etc. In our experience a full Audit can be very stressful for our clients even with our assistance with the collection of documents and information requested, meeting with the client and IRD, obtaining 3rd party legal advice, etc and can take months to work through resulting in a very high accounting bill for our time. A full Audit we assisted our client with went on for 8 months and had a total accounting bill of just over $28,000. This client did not have Audit Shield to cover this unexpected expense.

This is why we offer the Audit Shield Master Policy cover to all our clients as it ensures you don’t have to dip into business or personal funds to handle the expenses associated with an IRD investigation. The Audit Shield Master Policy starts on the 1 March each year and ends 12 months later on the last day of February. We have already sent all our clients Audit Shield Master Policy documents to consider. Some of our clients take advantage of the Audit Shield Master Policy offer and some don’t. As with all Insurance policies, we only really see the benefit of a policy if we need to make a claim.

IRD Investigations and Audit Shield

Stephen Grey and Andrew Bayly