1 April 2023 – 31 March 2024
When an accountant prepares and files a tax return in New Zealand there are a number of areas where Inland Revenue (IR) focuses their attention should they choose to scrutinise that return. When a tax return is flagged for a review or audit, this doesn’t necessarily indicate that the accountant made a mistake. In most cases, it’s due to a specific crackdown by IR rather than reflecting on the quality of the accountant’s work.
IR employs various methods, including data matching and artificial intelligence, to detect potential issues in filed returns, which have proven effective. There’s no indication that IR will reduce their use of these methods in the future.
The graph provided compares the volume of the top three recorded Audit Shield claims across New Zealand from April 2018 to April 2024.
Between 1 April 2023 and 31 March 2024, the activity related to GST Verification, Income Tax Return, and Client Risk Review claims accounted for over 94% of the total number of Audit Shield claims submitted. However, an analysis of the change in proportion of these claim activities over time reveals that these three areas have consistently represented most of the claim activity by IR.
The below pie chart shows the current distribution of all filed and finalised Audit Shield claims activity in New Zealand.
Here are the key highlights in specific review and audit categories based on claims activity data from 1 April 2023 to 31 March 2024:
GST Verifications and Income Tax Return
GST Verification claim activity decreased by almost 14%, accompanied by a more than 10% increase in Income Tax Return-related claim activity. Despite this shift, Income Tax Return-related claim activity remained the second most frequent among all claim types during the 12 months to 31 March 2024.
Income Tax Return claim activity can be triggered by various sources, including sophisticated data-matching techniques by IR, a history of non-compliance with tax obligations, specific campaigns, or it could simply be a random selection for review. Depositing undisclosed earnings into bank accounts without clear explanations can also raise suspicions and trigger investigations.
Claim proportion (frequency) 1 April 2023 – 31 March 2024: GST Verification Reviews and Audits accounted for 60.24% of all Accountancy Insurance claims.
Claim proportion (frequency) 1 April 2023 – 31 March 2024: Income Tax Return Reviews and Audits accounted for 28.68% of all Accountancy Insurance claims.
Client Risk Review
Claim proportion (frequency) 1 April 2023 – 31 March 2024: Client Risk Review Reviews and Audits accounted for 5.41% of all Accountancy Insurance claims.
Who Is Being Reviewed and Audited?
Between 1 April 2023 and 31 March 2024, among the mix of accounting firms and their participating clients working with Accountancy Insurance, the following client categories experienced the highest number of claims:
- Business Groups with less than $500k turnover (Category E).
- Sole Traders/Partnerships/Non-Trading Companies & Trusts (Category D) and Business Groups with $1m – $3m turnover (Category G).
- Business Groups with $500k – $1m turnover (Category F).
Audit Shield claims registered in New Zealand by category:
Audit Shield Master Policy
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 filed 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 filed 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.