Audits Tax Articles

Audits (1)

In this edition, I will outline the overall procedure of a dispute between a taxpayer and IRD. The following steps are designed to give you some ideas, not the precise steps, when IRD has some questions on your tax affair. Largely there are three stages. The numbers below reflects this. I, in addition, list the detailed steps below. They are as follows:

1.Contacts from IRD.

2. Audit;

  1. Notice of Audit;
  2. Site visit; and then
  3. Interview;
  4. NOPA/NOR;
  5. Conference;
  6. Disclosure notice;
  7. Statement of position;
  8. Adjudication.

3. Dispute resolution by 3rd party

  1. Taxation Review Authority;
  2. Courts


Let me start with the first step – contact from the IRD. It is important to realize that not every contact from the IRD is to trigger an audit. Some of those contacts are purely to “get in touch” with you, as opposed to making requisitions of a certain information.

The 2nd stage, titled audit, is the formal commencement of the audit. A letter you receive will clearly state that the letter is to advise you that IRD is to commence an audit. “Notice of audit” is clearly declared on the letter. You need to understand the implications of this. There are a lot of differences between “prior to the audit” and “after you received the notice.” If I list one, amongst others, you will have less penalties if the dispute is resolved before you receive the notice.

Site visit may follow notice of audit. In some cases, the investigators may wish to have an interview before they make site visit. There is no fixed rule here. However, it is important to realize that, if the IRD has information to lead them to believe that there is urgency, they can make an unannounced site visit. You have to allow them to let in. Under s17 of the Tax Administration Act, the officers are delegated a power to access your business premise without notice. All you can do is to contact your solicitor and claim legal advice privilege, following that you are not obliged to disclose those information if legal advice privilege is claimable.

If the dispute is not resolved, either party may serve a Notice of Proposed Assessment (NOPA). The other party receiving the NOPA is to respond to this within certain time period, called Notice of Response (NOR). If you are late from this prescribed time period, you are deemed to have accepted the position contained in the NOPA.

What is conference? A conference is designed to exchange each party’s view on the issue at hand in order to help the parties to resolve the dispute soon. Let me introduce you a relevant experience here. Let us assume that the IRD claims $500,000 of tax shortfall and they have sufficient evidence to support the claim. Let us again assume that the taxpayer believes the tax shortfall is no more than $50,000, but there is no reliable evidence to support the defense, this step is the opportunity for the tax payer to review its position otherwise the end outcome is likely to be against the taxpayer if the dispute continues. This is the stage you need to assess your case, and this is the stage you need to “read the other party’s card” as well. What is the criteria, if the dispute continues, before the court? There are two, depending upon the nature of the dispute: civil and criminal. I plan to discuss further on the standard of proof of a case before a court. This is the moment a lawyers “judgment” skills are required.

The next step, if you are unable to finalise the dispute, is called adjudication. Please note that it is not wrong if the IRD run conference before an adjudicator. An adjudicator is appointed by the IRD, but importantly from a different department, not from the branch manager who is in charge of the audit. In this sense, there is an element of fairness. Also, it is important to be aware that the adjudicator is not allowed to make an inquisitorial questions – he is only allowed to make an adversarial questions to the parties. This may help the taxpayer because the taxpayer who is not experience in judicial dispute procedure does not have to worry about questions raised by the adjudicator if he does not understand it. Nonetheless, the adjudicator is, categorically speaking, from IRD anyway. Unlike a judicial system, you do not expect a complete impartiality. Practically speaking, if you are audited by an investigator from Hamilton office, the adjudicator is, by Operational Statement, not allowed from the same branch.

If the dispute is not resolved between the parties, the next step is to refer the case to a judicial body – Taxation Review Authority or a court. It may be too risky to forget the rule that the costs follows the decision in a judicial dispute resolution.

This article is designed to give general information to the audiences and readers of this article. This is not designed to provide a legal advice to a particular person of particular circumstance. If you have any enquiries, you should seek legal advice on that issue. A. B. Lawyers Limited does not accept any liability arising from misjudgment by the audience, without having independent legal advice on his/her case.

The writer advises that translation to Chinese, from English version, is done by one of the office legal assistant. There may be occasions you notice misinterpretation, despite we do our best to make correct translation. If you notice that, it is much appreciated you let us know that.