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With a noticeable increase in IRD audit activity recently, it has got me thinking about first impressions and how these can impact on the outcome of an audit.
A while back I rented “We’re Here to Help”; the movie about David Henderson’s battles with the IRD. The story starts in February 1994 where an unhappy David Henderson walks into the Christchurch IRD with some harsh comments for the IRD officer who had earlier that day made some suggestive comments to David’s girlfriend when she was collecting a company GST refund. The battles with IRD for David Henderson and his companies then kick off in earnest after this scuffle.
I do not profess to be an expert on David Henderson’s issues with the IRD or the business issues that have been highlighted in the media since the release of his movie. However, the movie certainly did portray quite an unfair treatment of Mr Henderson. Given the “honest Kiwi bloke” portrayed in the movie, the IRD response did seem excessive.
Facts aside, what really struck me was that Mr Henderson did not seek any advice until he was a long way down the track with the IRD dispute – almost too far. It seemed that with each meeting he had with the IRD, the further he seemed to land himself in the proverbial. I couldn’t help thinking that had he sought advice from the outset, the matter may have turned out differently.
First impressions count. The movie demonstrated this classic fact, particularly when faced with the IRD. A client may well take the approach that “they have nothing to hide” so why not respond directly to the IRD? The problem with this approach is the old adage of “you don’t know what you don’t know”. Comments made innocently could be sending red flags to the IRD. You can depend on the IRD reading between the lines of what is being said by the client. Whether the message received is “tax evasion” or “innocent error” may very well depend on what explanations are being provided by the client in the initial interview.
Even if the IRD does not actually identify any tax shortfalls, the first impression a client makes may determine what approach is taken to the audit. This could mean the difference between a stressful and drawn out process where all the company and private affairs are reviewed with a fine toothed comb or one which is completed in a timely manner with minimal interruption.
Too often, we see clients who are at the disputes stage with the IRD when the issues could have been resolved from the outset. Unfortunately misunderstandings over the facts do occur; a client may make an inadvertently misleading statement and the IRD’s response could be to commence a full investigation into the client’s affairs. Whereas an initial meeting with a tax advisor would establish all the facts and clarify exactly what the client’s intentions were; this could then be accurately disclosed to the IRD. The audit in this case is likely to be resolved quickly with no misunderstandings of the facts.
Or, if there are issues with a particular client’s tax affairs, a full review by a tax advisor prior to the first audit meeting would provide an opportunity to identify any potential issues, tidy up the documentation, ensure appropriate resolutions are in place, and if appropriate make a voluntary disclosure to the IRD. Again, this approach is far more likely to result in a fast resolution of the audit and less stressful process for the client. A voluntary disclosure made before the end of the first audit meeting will also qualify the client for a 40% reduction in any shortfall penalties.
In all cases the first impression is important. Getting this right from the outset could save time, money and sleepless nights. If you have clients who have received IRD audit or risk review letters we encourage you to contact your usual nsaTax advisor in the first instance for assistance.
Maggie Jaques
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