When a review or audit hits, it is rarely a reflection of the work put into preparing the return by the accountant and is more often due to a specific crackdown by Inland Revenue (IR) targeting taxpayers in New Zealand.
IR initiated review or audit activity of your client’s lodged returns could come through a variety of data matching or other artificial intelligence sources. These methodologies have proven to work very well and there are no signs to show that IR with ease up on these.
The below pie chart shows the current distribution of claims activity in New Zealand (1 April 2021 – 31 March 2022)*.
These are just a few highlights in specific review and audit categories from claims activity data between 1 April 2021 to 31 March 2022:
GST Verifications and Income Tax Return
The Accountancy Insurance claims team noted that most Audit Shield Master Policy claims occurred in the categories of GST Verification and Income Tax Return. This accounted for a combined frequency of more than 91% of all Audit Shield Master Policy claim activity.
GST Verification claim activity increased by almost 10% while Income Tax Return related claim activity remained steady, as the second most frequent of all claim types in the 12 months to 31 March 2022.
Income Tax Return claim activity included large contributions resulting from the IR Bright-line property rules campaign and also the IR real estate salesperson/agent’s work related expense deductions campaign that started in mid-2021.
Incorporated as part of the Income Tax Return claim category in the 12 months to 31 March 2022 was data matching reviews and audits on lodged returns of taxpayers who received wage subsidy payments from the New Zealand government. Since the reviews or audits were on lodged income tax returns, this falls within the coverage of Audit Shield.
Claim proportion (frequency) 2021-2022: GST Verification Reviews and Audits
accounted for 64.63% of all Accountancy Insurance claims.
Claim proportion (frequency) 2021-2022: Income Tax Return Reviews and Audits
accounted for 26.39% of all Accountancy Insurance claims.
Client Risk Review
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 categories.
Client Risk Review claim activity decreased in the 12 months to 31 March 2022. However, these types of reviews and audits generally affect those businesses mentioned above, and these businesses were the ones that remained affected in various ways by the Covid-19 pandemic in 2021 & 2022.
Despite these reviews and audits being lower in frequency over the previous 12 months to 31 March 2022, it is expected that these reviews and audits will become more prevalent in the financial year to 31 March 2023 as IR ramps up audit activity again.
Claim proportion (frequency) 2021-2022: Client Risk Review Reviews and Audits
accounted for 4.30% of all Accountancy Insurance claims.
Who Is Being Reviewed and 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 2021-2022:
- Business Groups <$500k turnover and $1m – $3m turnover (Category E & Category G).
- Sole Trader/Partnership/Non Trading Company & Trust (Category D).
The below bar chart outlines the number of claims registered with the team at Accountancy Insurance in New Zealand, by category*.
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.
As official reviews and audits 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.
The Audit Shield Master Policy ensures your professional fees will be covered in the event of IR initiated review and 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 review and audit activity with your client.
We would love to hear from you.
About Accountancy Insurance
Thousands of accounting firms offer our tax audit insurance solution, Audit Shield to their clients. Find out why.