Voluntary disclosures (May 98) (WITHDRAWN)

Introduction

The voluntary disclosure system reflects the savings to the Revenue from voluntary admissions of irregularities, and other benefits of taxpayer co-operation with Inland Revenue

There are two general types of voluntary disclosure:

• voluntary disclosure prior to notification of an audit
• voluntary disclosure after notification of an audit

A taxpayer can also make a disclosure of the tax position taken in their tax return at the time of filing.

Legislation

Section 141G of the Tax Administration Act 1994:

Reduction in penalty for voluntary disclosure -

1. A shortfall penalty payable by a taxpayer under any of sections 141A to 141E may be reduced if, in the Commissioner's opinion, the taxpayer makes a full voluntary disclosure to the Commissioner of all the details of the tax shortfall, either:
   1. Before the taxpayer is first notified of a pending tax audit or investigation (referred to in this section as "pre-notification disclosure"); or
   2. After the taxpayer is notified of a pending tax audit or investigation, but before the Commissioner starts the audit or investigation (referred to in this section as "post-notification disclosure").
2. The Commissioner may from time to time:
   1. Specify the information required for a full voluntary disclosure; and
   2. The form in which it must be provided.
3. The level by which the shortfall penalty is reduced:
   1. For pre-notification disclosure is 75%
   2. For post-notification disclosure is 40%.
4. The taxpayer is deemed to have been notified of a pending tax audit or investigation, or that the tax audit or investigation has started, if:
   1. The taxpayer; or
   2. An officer of the taxpayer; or
   3. A shareholder of the taxpayer, if the taxpayer is a close company; or
   4. A tax advisor acting for the taxpayer; or
   5. A partner in partnership with the taxpayer; or
   6. A person acting for or on behalf of or as a fiduciary of the taxpayer, - is notified of the pending tax audit or investigation, or that the tax audit or investigation has started.
5. An audit or investigation starts at the earlier of:
   1. The end of the first interview an officer of the Department has with the taxpayer or the taxpayer's representative after the taxpayer receives the notice referred to in subsection (4); and
   2. The time when:
      1. An officer of the Department inspects information (including books or records) of the taxpayer after the taxpayer receives the notice referred to in subsection (4); and
      2. The taxpayer is notified of the inspection.

Voluntary disclosure methods

Taxpayers can make a voluntary disclosure in any one of the following ways:

• by a visit
• by telephone call
• by letter to the Inland Revenue
• during an interview

Visits and telephone calls

If a taxpayer makes a voluntary disclosure by visiting or telephoning Inland Revenue, as much information as possible will need to be provided by the taxpayer.

Any officer is able to record a voluntary disclosure when a taxpayer comes into or contacts Inland Revenue.  All verbal disclosures must be followed up in writing and, if possible, signed by the taxpayer.

Written disclosure

If a voluntary disclosure is received in writing between the time of notification and the first interview then it will be referred to the appropriate office for the auditor who is conducting the audit or investigation.  The auditor must incorporate this as correspondence relating to the audit or investigation.

Acknowledgement should be made to the taxpayer that the disclosure has been received.

During the first interview

Disclosures made during the first interview will be accepted by the investigator.  The investigator must consider whether the disclosure is complete and reveals all the relevant information necessary to ascertain the correct tax position.  The disclosure will then be submitted along with the audit report, to the team leader for approval.

Notification

Subsection 141G(4) provides that a taxpayer has been notified of a pending audit or investigation, if any of the following persons have received notification:

• the taxpayer;
• an officer of the taxpayer;
• a shareholder of the taxpayer (for close companies);
• a tax adviser acting for the taxpayer;
• a partner in a partnership;
• a person acting for, or on behalf of, or as a fiduciary of the taxpayer.

An officer includes a director, secretary, receiver or liquidator. It does not include an employee.

Time of notification

Notification will be the earlier of the date of receipt by the taxpayer or agent of the written advice or the time of a telephone call advising the commencement of the audit or investigation.

If the exact time of receipt of the written notice becomes crucial, it will be ascertained from the expected time for the mail to reach its destination as prescribed by section 14(2) of the Tax Administration Act 1994.  Any telephone call advising of an audit or investigation will be followed up by written advice as soon as possible, preferably the same day.

Unannounced visits

In the case of Registration Checks and other unannounced visits, the date of first contact with the taxpayer will be the date of notification.

Date an audit or investigation starts

Subsection (5) states that a tax audit or investigation starts at the earlier of:

• the end of the first interview an Inland Revenue officer has with either the taxpayer or the taxpayer's representative, after the taxpayer receives the notice; or
• the time when:
  • an officer of Inland Revenue inspects information (including books or records) of the taxpayer after the taxpayer receives notice, and
  • the time the taxpayer is notified of the inspection.

Taxpayer's representative present at interview

If the taxpayer's representative is present at the first interview, but not the taxpayer, the taxpayer is not later able to claim the benefit of a post-notification disclosure, even if the agent was not given any information by the taxpayer from which to make a disclosure.

Disclosure by a subsidiary of a company

An audit of a parent company, or a subsidiary of that company, may necessitate the audit of other subsidiaries within the group.  In such cases, disclosure would depend upon which entity had been notified.  If the parent company had received notification that the audit was restricted to that entity, then any disclosure made by the subsidiary is voluntary disclosure prior to notification of an audit.

However, if another company in the group has been notified that the audit is being extended, any disclosure made by that other company would be considered a disclosure after notification of an audit.

When a company has a branch or branches, they are considered to have been notified at the same time as the company, as they are part of the company and not separate entities.

Full disclosure

The disclosure must be full and complete.  This does not necessarily mean disclosing the discrepancies to the last dollar but does require the providing of enough information to enable the investigator to make an assessment.  Each case will have to be considered on its own merits.

If a taxpayer is not able to make a full disclosure at the first point of contact with Inland Revenue, they may still make the disclosure and advise the Commissioner when the remaining information will be provided.  It is considered that where taxpayers require further time to obtain more information, then adequate time should be given.

Minimum details required

To satisfy full and complete disclosure, the following minimum details must be provided:

• taxpayer's details (name, trade name, IRD number, address, date of birth, contact telephone and contact times);
• the nature of the errors or omissions
• an explanation as to why the errors or omissions occurred;
• enough information to enable an assessment to be made;
• a declaration and signature by taxpayer, if possible.

Several tax shortfalls

All tax shortfalls must be considered separately.  If there are two tax shortfalls, one being the subject of voluntary disclosure and the other being detected by an audit, then the one detected by the audit will not come within the voluntary disclosure regime.  However, the other tax shortfall will still come within the voluntary disclosure regime, assuming full and complete disclosure of that tax shortfall.

If the items are identical or similar they must be treated as one tax shortfall. Therefore, this would result in the taxpayer not satisfying the requirements of a full and complete voluntary disclosure.

Disclosure of another tax type

If an audit is being carried out on one tax type and the taxpayer makes a voluntary disclosure regarding another tax type, and they have not been notified that the other tax type is being audited, then the taxpayer will qualify for voluntary disclosure prior to notification of an audit.

Disclosure of another period

It is common for a notice of intention to carry out an audit to state that a particular year/period is to be audited but previous years/periods may be looked at if necessary.  The year/period referred to only is examined in the first instance.  If some matter arising from the audit means that earlier years/periods are to be examined, the taxpayer is advised by the investigator that this will be done.  If the investigator had not advised the taxpayer that an earlier year/period is being examined, then the taxpayer is able to make a pre-notification disclosure for that year/period.

Disclosure forms

The voluntary disclosure form is IR 282A and covers both pre-notification and post-notification disclosures.

Signing of disclosure form

Where possible the taxpayer should sign the disclosure form. However, an unsigned disclosure will still be accepted.  Although it is desirable for the protection of both the taxpayer and the department that disclosures be in writing and signed by the taxpayer, if the taxpayer will not do this an unsigned or even a verbal disclosure may be accepted.

Letter sufficient

A letter sent to Inland Revenue will suffice as a declaration without the need for the taxpayer to also complete the form, assuming it covers the required information sufficiently.

Amendments to returns

Section 113 provides the Commissioner with the broad power to amend assessments to "ensure the correctness thereof".

An amendment under this provision is appropriate to assess previously undisclosed income which is advised by a taxpayer.  The provision may also be used to reduce an assessment where an error in the assessment is apparent on the face of the claim.  For example, arithmetical errors or unclaimed rebates; claims which, had they been made at the appropriate time, would have been accepted without further consideration.

If the disclosed income is non-contentious, an adjustment may be made under section 113 and the disputes resolution process will not apply.

Time bar and reopening assessments

Before assessments are issued following a voluntary disclosure, the effect of section 108 is to be considered.

Section 108 (as amended) provides that where a taxpayer has furnished a tax return and has been assessed for tax, the amount of the assessment may not be increased more than four years from the end of the income year in which the return was furnished.

However, the Commissioner may form an opinion to reopen the assessment outside the time bar if the return either:

• is fraudulent or wilfully misleading; or
• omits all mention of income which is of a particular nature or was derived from a particular source.

Section 108A contains a similar provision relating to GST.

Disclosure at time of filing

A taxpayer can make a disclosure of the tax position taken, in relation to an unacceptable interpretation or abusive tax position, in their tax return at the time of filing.  Provided the disclosure is adequate and the position taken is not frivolous, taxpayers will be eligible for a reduced penalty if they are found to have an unacceptable interpretation.

For the disclosure to be effective, the taxpayer must provide full and relevant arguments for the tax position taken.

Disclosure form

Disclosure will be required to be made on a specified form, IR 282B.

Information required

The following information will be required in order to satisfy the requirement of adequate disclosure:

• taxpayer's details (name, trade name, IRD number, address, date of birth, contact telephone and contact times);
• overview of the position taken;
• interpretation of case law on the subject, contents of any tax opinions, legal articles and related material;
• any relevant Inland Revenue public ruling;
• a calculation, where necessary, to show the position and how it was arrived at;
• a declaration and signature by taxpayer.

Filing of disclosure forms

The disclosure form will be required to be filed in conjunction with the return in which the particular tax position has been taken.  For E-Filed returns the disclosure form will need to be forwarded separately to Inland Revenue.

Reduction rates

The level by which the shortfall penalty is reduced is:

• for pre-notification disclosure - 75%
• for post-notification disclosure - 40%

The level by which a shortfall penalty is to be reduced for adequate disclosure at the time of filing is 75 percent.

No prosecution or publication of name

If a voluntary disclosure is full and complete:

• there will not be a prosecution, and
• there will be no publication of name for any shortfall penalty for evasion or a similar act or for taking an abusive tax position.

Summary

A taxpayer may make a disclosure either before he or she receives the first notice that an audit or investigation is to be undertaken ("pre-notification disclosure"), after the first notification but before the audit or investigation starts ("post-notification disclosure") or at the time of filing a tax return.

The disclosure will result in a specific reduction in the applicable rate of shortfall penalty.

The Commissioner may at any time specify the information required for a full voluntary disclosure and advise the form in which it must be provided.


Tony Bouzaid
National Manager
Operations Policy