KEY POINTS:
If there's a rat-a-tat-tat at the door and it's an Inland Revenue Department investigator, you could be in for a bill of tens of thousands of dollars.
The IRD's henchmen don't do dawn raids, but they can get warrants to go through a company or individual's
paper files and computer records with a fine-tooth comb.
But unless you're being obstructive, it's more likely you'll get an invitation in the mail to make an appointment to meet an investigator, says Richard Philp, IRD investigations manager.
There is an expectation that taxpayers will take "due care". Having said that, you're guilty until proven innocent, says accountant Michael McCook, of tax specialists AccountabilityNet. "If the police had the powers of the IRD there would be no crime in New Zealand."
About 12,000 individuals and businesses will be audited over the next year. Of those audits, about 3 per cent result in penalties being charged on outstanding tax, ranging from the 20 per cent standard penalty for lack of reasonable care, up to 150 per cent of the tax owing for evasion.
"The cost of an audit in accountants' fees varies massively, but you can usually budget around five times what it would cost to have a set of accounts prepared," says Mark Withers, of Withers Tsang. If you go as far as court, the cost of lawyers and accountants could add up to tens of thousands of dollars.
Not everyone is equally at risk of being audited. The IRD has limited resources and uses them to target the areas that are most fruitful in turning up tax dodgers. They include: industries where under-the-table cash payments are rife; GST fraud; aggressive tax planning, where individuals use schemes to avoid paying tax; depreciation rorts; and industries where there appears to be widespread avoidance.
The IRD's property investor crackdown has led to $100 million a year in unpaid tax, penalties and interest being collected for the past three years. Last year's Budget gave the IRD an extra $14.6 million to continue these audits and the IRD has more than 100 investigators working on this one area alone.
Although New Zealand has no general capital gains tax rules on property, property traders' gains are taxed as income.
Just because you bought and sold a property in quick succession doesn't necessarily mean you're a trader. Instead, what is important is what you intended to do - and what you told others such as your accountant, lawyer and lending manager at the time of buying.
Inland Revenue investigators have been going through real estate agents' books looking for patterns that indicate investors are in fact trading property. Withers says about 200 fishing letters have gone out to property investors in recent months, asking them to confess to any income omitted from tax returns.
Property owners who rent their own home from a loss-attributing, qualifying company are also being targeted for investigation, says Murray Brewer, director of tax at Grant Thornton Auckland. The IRD objects to them claiming rental "losses" from their own home against their own personal tax bill.
There is a general amnesty for taxpayers who make voluntary disclosures before ever receiving audit notices. "If you'fess up at the beginning of an audit before it progresses to the IRD finding anything, the penalties will reduced by 75 per cent," says Withers.
If the IRD does come calling, most people pay up, says Brewer. But by doing so, they will have a tainted tax profile that can count against them in future.
Diana Clement is an Auckland-based personal finance and investment writer