When an accountant prepares a tax return in New Zealand, it’s common for a review or audit to be triggered, but this doesn’t necessarily mean the accountant made a mistake.
In most cases, it’s likely due to a specific crackdown by Inland Revenue (IR) rather than the quality of the accountant’s work. IR uses various methods, such as data matching and artificial intelligence, to detect potential issues in filed returns, which have been effective so far. There’s no indication that IR will decrease their use of these methods in the future.
In 2022, our New Zealand team had the highest number of Audit Shield claims ever in a calendar year! This reflects just how active IR was in New Zealand over 2022 (and continues to be into 2023 as at April 2023).
This graph shows the recorded number of Audit Shield claims handled across New Zealand Jan 2021 – Apr 2023*.
The below pie chart shows the current distribution of claims activity in New Zealand for the 2022-23 financial year.
These are highlights in specific review and audit categories from claims activity data between 1 April 2022 – 31 March 2023:
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 92% of all Audit Shield Master Policy claim activity.
GST Verification claim activity increased by almost 10%. Income Tax Return related claim activity remained high, maintaining itself as the second most frequent of all claim types in the 12 months to 31 March 2023. Income Tax Return claim activity included large contributions resulting from the ongoing IR Bright-line property rules campaign and also data matching reviews and audits on filed returns of taxpayers who received wage subsidy payments from the New Zealand government. Since the reviews or audits were on filed income tax returns, this falls within the
coverage of Audit Shield.
Claim proportion (frequency) 2022-23: GST Verification Reviews and Audits accounted for 74.23% of all Accountancy Insurance claims.
Claim proportion (frequency) 2022-23: Income Tax Return Reviews and Audits accounted for 17.99% 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.
Claim proportion (frequency) 2022-2023: Client Risk Review Reviews and Audits accounted for 3.09% 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 2022-2023:
- 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**.
** Correct as at April 2023.
Changes in IR claim activity
As a comparison, the below pie charts from the 2021-22, 2020-21, 2019-20, and 2018-19 financial years show the focus division over the years between Audit Shield claim activity in GST Verifications and Income Tax Returns.
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.
For more insights on audit activity or to find out how your firm and your clients can benefit from Audit Shield, please contact the team at Accountancy Insurance.
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