The temptation for small business owners to pocket a portion of cash takings and not declare them to IRD has existed as long as income tax has existed. Many business owners do give into temptation and skim off some cash to either use for private living, to pay for business expenses, or to squirrel away a nest egg. Increasingly IRD is doing something about this, a good example being its hospitality project that started in 2010 and has now been extended until at least 2020.
IRD’s hospitality project, like its property compliance and construction projects, are funded out of a special budget allocation by government, rather than IRD’s normal budget. So the theory is the government will only continue to fund these projects while it is getting a good return.
IRD is also very upfront that it is doing these projects – they want businesses to know these are areas of focus so that businesses regularise their tax issues without the need for audit intervention. To reinforce this voluntary compliance message IRD are advertising in the media and on billboards, and also doing softly softly messaging through its community compliance officers who liaise with businesses and their tax agents.
This upfront approach by IRD is to be commended as it allows businesses the space to rethink their tax compliance processes. For restaurants and bars that fall under IRD’s hospitality project, an obvious thing to regularise is how they deal with cash takings. The traditional ‘stick the cash in the back pocket and hope’ strategy is sub-optimal, to say the least!
If a hospitality business receives a notification of audit letter from IRD, it means IRD is pretty confident that business is not declaring all its cash takings in its GST and income tax returns. IRD has information gathering powers that allow it to access big datasets of financial information and an audit letter signifies that IRD regards the cash / electronic sales ratio of that business as significantly worse than a lot of the businesses peers. The audit letter from IRD will of course be polite, but between the lines IRD is saying ‘TAX EVASION’.
Cases arising from IRD’s hospitality project are very difficult for advisors to deal with because they need to be well versed in accounting, taxation law, statistics, and, most importantly, the nuances of criminal law. IRD frequently prosecute tax evasion cases and a bumbling along approach by an advisor (or taxpayer representing themselves) doesn’t usually end well.
General guidance is difficult to give in these sort of cases beyond the observation that they are easier, but still painful, to resolve earlier rather than later in the audit. Reaching into the back pocket to pay IRD tax, interest, and a shortfall penalty may be better than an extended battle in the criminal courts.