Penalties for tax sins soar

By BRIAN FALLOW economics editor

Penalties imposed by the Inland Revenue have risen steeply over the past three years, from $265 million in the year to June 1999 to $419 million last year.

National MP Annabel Young, who elicited the numbers through a parliamentary question, said: "The kind, friendly face [IRD commissioner] David Butler is portraying doesn't quite line up with the penalties he is extracting from people.

"That's a huge amount of money to suck out of the community. It will be businesses and self-employed people, because PAYE goes in automatically."

Inland Revenue's head of tax policy, Robin Oliver, said at least 90 per cent of those sums would be automatic late-payment penalties, rather than the "shortfall" penalties.

Shortfall penalties range from 20 per cent for lack of reasonable care through 40 per cent for gross carelessness to 100 per cent for avoidance.

Oliver said the bald numbers in the response to Annabel Young would include late-payment penalties which were subsequently forgiven by the IRD, but he could not say how much that was.

Chris Abbiss, who chairs the Institute of Chartered Accountants' national tax committee, said he had no evidence to suggest that taxpayer behaviour had altered, except maybe for the better, in the past few years.

A new penalties system was introduced in 1998.

"It may be that the IRD is becoming more stringent in its understanding and application of the new tool it has been given."

PricewaterhouseCoopers tax partner John Shewan said: "My observation would be that the department is quite rigorous in applying shortfall penalties."

The amount collected masked the big hidden cost in time, effort and angst involved in cases where in the end penalties were not imposed.

The upshot was an increased reluctance to voluntarily disclose mistakes. People were keeping their heads down and hoping they would not be caught out.

In a system depending on voluntary compliance, that was not a healthy development, Shewan said.

Legislation before Parliament should make life easier for people who fall behind with their taxes.

Among other changes, the clock could stop running on late penalties when a taxpayer contacted the IRD seeking financial relief, provided some conditions were met.