Few things in the life of a business owner are as unwelcome as an Inland Revenue review or audit. Regardless of the care and attention a business owner puts into their accounting and tax affairs, there is always the possibility that one day Inland Revenue may take a closer look. In this article I will outline what to expect should this occur, as well as precautionary steps to make the process as painless as possible.
Recently the Inland Revenue released a Standard Practice Statement (SPS 23/01) that sets out the ‘disputes process’ in some detail. The document describes the phases that occur when a tax dispute arises, starting from the initial tax assessment (the filing of a return) and ending with resolution of the issue at one of several potential stages, or adjudication if a resolution cannot be reached.
The process is designed to encourage an “all cards on the table” approach, aiming to come to an agreement between the taxpayer and Inland Revenue at an early stage and without the need for costly litigation.
The Inland Revenue will first undertake the review or audit activity. This may involve going through business records and interviewing the business owner. After this is completed, if the Inland Revenue decides that the tax returns filed by the taxpayer were incorrect, the following phases will occur:
Phase 1: A notice of proposed adjustment (NOPA)
NOPA is issued by Inland Revenue. This is a formal document that advises the taxpayer that the tax returns they filed were incorrect. The document states what the corrected tax returns will be, along with the tax shortfall to pay.
Phase 2: A notice of response (NOR)
NOR is issued by the taxpayer if they disagree with the NOPA. Alternatively, the taxpayer may choose to agree to the NOPA, in which case the dispute will come to an end.
Phase 3: A disputes conference
A disputes conference is held if there is still no resolution. This can be one or more formal or informal meetings between the parties aiming to resolve the matter.
Phase 4: Should no resolution result from the disputes conference, a Statement of Position (SOP)
SOP is issued by each party. This is a more thorough form of the NOPA, providing an outline of the issues, facts, evidence and law.
Phase 5: The SOPs are referred to Inland Revenue’s Tax Counsel Office (TCO) for adjudication
The TCO is set up to provide an internal but impartial review of the unresolved dispute. Adjudication is the final phase of the disputes process before the tax assessment is amended.
In an ideal situation, the review will stop before Phase 1 even begins. When an Inland Revenue officer asks for further information about some aspect of the business and there turns out to be no issue identified, there will be no need to go through these phases. For this reason, keeping tidy records, ideally in a bookkeeping system such as XERO or MYOB, will ensure you can provide the requested information with minimal time and effort.
Receiving notice of a tax review or audit is a daunting prospect for most business owners. Knowing that there is a well-defined process can help alleviate the stress. Guidance from your accountant is also highly valuable. He or she will be used to dealing with Inland Revenue and will be well placed to help you navigate the steps to resolving the issue.