Taxes aren’t a part of life most people would consider fun. Keeping track of all your receipts and records can be tiresome and tedious at the best of times, and infuriating and confusing at the worst. But unless you want the Inland Revenue Department (IRD) to come knocking on your door with audit papers in hand, it’s important that you complete your tax returns accurately, honestly and on time.
With that being said, people make mistakes with their taxes all the time. Some mistakes will cause the taxpayer to be penalised, while others can actually cause the taxpayer to lose out on money that is rightfully theirs.
In the interest of making sure you don’t have to fork over any additional money to the IRD, while also making sure you get every cent owed to you, let’s take a look at the most common tax mistakes New Zealanders make and what can be done to fix them.
1. Simple inaccuracies
Failing to keep accurate records or simply making a calculation error can lead to you report the wrong totals on your income tax returns. The IRD’s reaction to these errors depends on their severity. If the error causes a large enough loss in tax revenue, the IRD can charge fines and penalties. But if the error is minor and determined to have been an honest mistake, the IRD might simply correct the error without levying any additional charges.
If you notice that you’ve made a mistake, you should immediately contact the IRD and tell them the amount of tax you missed, the type the error, how and why the error occurred, how you noticed your mistake, and what figures need to be amended to correct the assessment.
You’ll have to pay whatever amount you owe and do so before the due date to avoid any penalties. If the amount you owe exceeds $100, the IRD will most likely charge interest.
Most mistakes on tax returns stem from inaccurate records. So, be sure to maintain clear and complete records of all incoming and outgoing money.
2. Late payments
As mentioned in the previous entry, failing to pay taxes by the due date may lead to the IRD charging you with penalties. The initial penalty for late taxes is then followed by monthly penalties for any remaining unpaid taxes. These monthly penalties can easily pile up if you don’t deal with them promptly.
Luckily, if your unpaid taxes total less than $100, there are no added penalties. But if your arrears total more than $100, then interest rates on penalties can be severe. Normally, they start at 1% monthly per month, which means you’d be paying 12% for the year if your penalties go unpaid for that long. These rates are harsher than what banks charge, so it’s best to avoid them wherever possible.
Whatever the cause of your late payment, it’s best to file a return as soon as possible to reduce the penalties you have to pay. The quicker you pay off your debts, or the quicker you enter a payment schedule agreement with the IRD, the sooner you can get out of the hole. Ignoring the problem is not a viable option.
3. Forgetting to file
This mistake is pretty self-explanatory, and the obvious solution is to remember to file your taxes. The more important question is, “What can I do now that I’ve already forgotten to file my taxes?”
If you’re only slightly late, the IRD may grant you an extension if you explain to them why you missed the due date.
If you don’t file a return at all, the IRD estimates what they think you owe and sends you what’s called a default assessment. Since this assessment is based on estimates – often made with insufficient information – you can easily be overcharged and/or charged with supplementary late penalties.
4. Filing under the wrong tax code
Before you file your taxes, it’s important to determine what your tax code is. If you’re filing under the wrong code, you’ll likely be taxed too much or not enough. While not being sufficiently taxed might sound nice, under taxation can lead to penalty fines and interest. This only works in one direction, of course. If you’re being overtaxed due to your own filing error, the IRD won’t be going out of its way to return your overpayments, and you certainly won’t be able to charge them penalties or interest.
Generally, filing under the wrong tax code comes from filling out the wrong tax code declaration form, or IR330, when you start a new job. Occasionally the IRD catches these mistakes and will notify you, but ultimately it’s your responsibility.
5. Unclaimed charitable donations
Most people are well aware that charitable donations are tax deductible. In fact, you can claim 33.33 cents for every dollar you donate to an approved charity. But many citizens fail to submit the appropriate supporting documents required to claim their donations.
For a donation to be tax deductible, it must be more than $5. An accompanying receipt must also be filed that demonstrates the following information:
- The amount and date of donation
- The name(s) of the donor(s)
- A clear statement of donation
- An authorised signature and official stamp from the approved charitable organisation
- If the submitted document is not the original, the words “replacement” or “copy” should be prominent
Whenever you give to charity, be sure to request a receipt that contains all the relevant information. Also, be sure to only donate to registered charities that are approved donee organisations. Obviously, donations to unregistered charities are not tax deductible. To make absolutely sure your charitable donations are being put to good use, visit the GiveWell website. Through extensive research and data analysis, the organisation determines which charities offer the best giving opportunities.
6. Not declaring cash income
All income must be declared on tax returns and that includes any cash income. Not declaring cash income can be considered tax evasion, which is a criminal offence. The IRD is developing increasingly sophisticated techniques for identifying undeclared income and cracking down on the black market.
Let’s say a deli was purposely not recording sales in order to make cash under the table. In such a case, the IRD can bust them by comparing their recorded sales with the amount of raw materials they purchased.
This isn’t to say that the IRD is opposed to cash businesses or individuals being paid in cash, as long as all taxable income is reported. So if you get paid in cash, be sure to record the income, include it in your GST, and most importantly, declare it as income on your tax return.
7. Not claiming all possible deductions
This mistake only applies to self-employed individuals who work from home. But since self-employment and working from home are becoming more common in New Zealand, we thought it would be a good idea to include it.
If you work from home, many home expenses can be tax deductible. If you have an office, and use internet, power and a phone line, all these things can be claimed on your return, and portions of the expenses may be returned to you. Just make sure not to overclaim here. Only the portions that relate directly to your business are deductible.
Avoiding future mistakes
The above list is by no means exhaustive and is merely meant as a guide to help you avoid some common tax mistakes. For the complete IRD tax regulations for individuals, visit the IRD website.
Filing your tax returns online can help you avoid simple errors. The online tax return software programmes available all have built-in calculators, so simple calculation errors aren’t an issue. They also offer a streamlined presentation of the documents to help you avoid confusion. Of course, mistakes are still possible, but using online software will definitely mitigate the risk of easily avoidable errors and oversights.
It’s also vitally important that you keep extensive records of all your income and expenditures and keep track of all receipts. We know this is easier said than done, but it will be much easier to fill out your return if all your documents are in order.
If you still have your doubts about your ability to accurately complete your tax return, it might be a good idea for you to enlist some professional help. A good accountant will make sure you comply with all the personal income tax regulations, while minimising the amount you have to pay and maximising reductions and returns.
It’s important to remember, however, that even with an excellent accountant, it is still possible for the IRD to conduct an audit on you. For that reason, you should be sure that you are covered with a comprehensive audit protection solution.
Audit Shield provides relief from the professional fees associated with government initiated revenue audit activity. Accountants offer Audit Shield as an optional offering to their clients, so they can focus all their efforts on assisting their throughout the process without their client needing to worry about additional professional fees during an IRD initiated audit.
Remember that honest mistakes do happen, but it’s best to try to not to make these mistakes with the tax man.