Every accountant will know that reviews of your client’s tax returns can sometimes be unavoidable. This is seldom a reflection of the work put into preparing the return and is more often due to a specific crackdown by Inland Revenue (IR). This could be through a variety of data matching or artificial intelligence sources used to assist in initiating audit activity of your client’s lodged returns and these methodologies are proven to work very well.
Just like in previous years, the Accountancy Insurance claims team have identified some noteworthy claim statistics over the past 12 months that may be of interest to your accounting firm. Read on to see these statistics and insights.
Overall Claim Frequency
The total number of Audit Shield Master Policy claims in all categories saw a 31% increase in the 2020-2021 financial year when compared to the 2019-2020 financial year. This demonstrates that despite the Covid-19 pandemic and multiple local New Zealand lock-downs in 2020, IR was still active in reviewing taxpayers.
These are just a few highlights in specific categories from the latest claims activity data:
GST Verifications and Income Tax Return Audits and Reviews
The Accountancy Insurance claims team noted that the majority of Audit Shield Master Policy claims occurred in the categories of GST Verification and Income Tax Return. This accounted for a combined frequency of 83% of all Audit Shield Master Policy claim activity.
GST Verification claim activity increased by 48% and Income Tax Return related claim activity increased by 67% in 12 months to 31 March 2021. Income Tax Return claim activity included the two projects that IR commenced in 2020, including the Bright-line property rules in November / December 2020 and the Automatic Exchange of Financial Account Information program in November 2020.
It is also interesting to note that GST Verification claim activity accounted for over 90% of all Audit Shield Master Policy claim values across New Zealand.
Claim proportion (frequency) 2020-2021: GST Verification Audits and Reviews accounted for 55.00% of all Accountancy Insurance claims.
Claim proportion (frequency) 2020-2021: Income Tax Return Audits and Reviews accounted for 27.69% of all Accountancy Insurance claims.
Client Risk Review Audits and Reviews
IR has multiple data sources that leads them to flag high-risk industries, especially those that handle cash as a frequent payment method. These industries can include (but are not limited to) hospitality, trades, or other high turnover businesses.
Client Risk Review claim activity decreased by 62% in the 12 months to 31 March 2021. Although this is a significant reduction on paper, it is one that was not unexpected. These types of audits and reviews generally affect those businesses mentioned above, and these businesses were the ones that were most affected by the multiple Covid-19 lockdowns in 2020. However, despite these audit and reviews being lower in frequency over the previous 12 months, it is expected that they will return to normal throughout 2021 as IR ramps up audit activity.
Claim proportion (frequency) 2020-2021: Client Risk Review Audits and Reviews accounted for 9.74% of all Accountancy Insurance claims.
Who is being audited?
Throughout the mix of accounting firms and their participating clients working with Accountancy Insurance, the following client categories had the highest number of claims in 2020-2021:
- Sole Trader/Partnership/Non Trading Company & Trust
- Business Groups <$500k – $3m turnover
For a detailed breakdown of the claim frequency in New Zealand based on claims processed by the Accountancy Insurance Claims team click here.
Protect your accounting firm and your clients
IR will continue to find new and innovative ways to deal with those taxpayers that are intentionally or unintentionally not paying their fair share of tax – that much we can be certain of.
As official audits and reviews of taxpayer lodged returns and their taxation affairs in general continue to remain prevalent, the best course of action is to ensure that your accounting firm has a comprehensive tax audit insurance solution such as Audit Shield Master Policy in place.
Audit Shield Master Policy ensures your professional fees will be covered in the event of IR initiated audit activity with respect to lodged client tax returns. It also means that you can avoid the awkward conversation concerning additional fees incurred when dealing with IR initiated audit activity with your client.
It’s a win-win and no net-cost solution for your accounting firm and your clients.