Draconian law used to extract unpaid tax

The IRD's use of a Section 157 notice almost caused one company to fall over.

Inland Revenue is employing "seldom used" techniques for collecting unpaid tax more frequently and more enthusiastically, accountants say.

In one example IRD went as far back as nine years to assess a company's imputation credits - two years longer than a business is required to keep records - and concluded that it owed around $50,000 in tax.

Because of the amount of time that had elapsed it was impossible for the company to check whether IRD was right.

As the national tax take falls, tax agents say they have noted Inland Revenue getting more creative and more proactive in chasing debt.

In an advertisement last year for debt collection officers to join its complex debt unit, IRD said the role of the unit was "to explore and apply seldom used remedies" to collect outstanding tax. Part of that was "using existing remedies in a new or creative way".

Practitioners have noted freer use of Section 157 notices - a draconian law allowing IRD to require a defaulting taxpayer's clients or employer to make payments directly to it.

In one case it almost caused a company to fall over. Its bank had not been aware of the situation and called in the receivers because the 157 notices would have dried up the company's flow of funds. The company managed to negotiate a settlement.

IRD said last week that it only used 157 deduction notices as a last resort.

However, Kumeu tax agent Denise Maffey said in several cases of salary and wage clients she acts for the notices had been used as a first step.

In one case, a man was behind on student loan payments from two years ago, and despite his current payments being up to date, IRD issued a 157 notice on his wages to clear the 2007 arrears.

Maffey said the IRD employee who generated that notice had been spoken to and she was confident it wouldn't happen again. However she believed there was a lot of eagerness within the department to get work resolved. "I think what's happened is there has been a push to create movement."

Craig Macalister, tax director of the Institute of Chartered Accountants, said reviews of company imputation credits had been an ongoing issue but had mostly involved large corporates.

But Wellington sole practitioner Jeff Owens said he had had three mid-sized corporate clients being chased for historical imputation credits in the past eight months. He had never seen a case before.

In one case two companies had merged and the tax department said that had resulted in double imputation credits in 1999. "But we have absolutely no way of telling. This is nine years ago - they've changed accountants twice since then."

While taxpayers only had two months after an assessment to ask IRD to review it, the department argued there was no limit on how far it could go back in reviewing imputation credits, Owens said.

Local IRD staff had agreed to cancel two claims, but the third client decided it wasn't worth fighting and paid, he said.

KPMG partner John Cantin said he wasn't sure whether it could be said IRD was getting more aggressive, but "at an impression level you would say that there are some more novel interpretations being taken, and sometimes inconsistently".

Macalister said a case had been referred to the institute last week that was "a bit over the top".

An LAQC (loss attributing qualifying company) was about to go into liquidation, but instead of waiting for the outcome of the liquidation, IRD had issued a default assessment and was chasing the shareholder for $89,000.

Macalister said that approach was jumping the gun.

IRD said taxpayers who chose to register as an LAQC gained tax benefits, but were also responsible for the liabilities. It was up to the company to file its returns on time to avoid default assessments.

On the matter of the imputation credits, the department said there had been instances of "significant inaccuracies", and it had taken action to address the errors when found.

IRD said some people went to great lengths to avoid paying their tax.

'SELDOM USED' TECHNIQUES

* Tax agents say Inland Revenue is making more use of unusual techniques for gathering tax.

* One of these is issuing Section 157 notices under the Tax Administration Act. These are notices demanding that a defaulting taxpayer's clients - and in the case of an individual, the employer - make payments directly to IRD until informed otherwise.

* Agents are also noticing historical reviews of a company's imputation credits. This is the system which credits shareholders with tax the company has already paid, so they aren't taxed twice on dividends. IRD argues it can go back indefinitely and in one case has gone back nine years, longer than the company is required to keep records.

* Tax industry players say they're also seeing bold assessments and hurried action from the department. One agent says he's had clients with tax credits from previous tax years suddenly receive demands for the current year.

* They also say GST refunds are being looked at closely.