Voluntary disclosures (Apr 02) (WITHDRAWN)

Introduction

This Standard Practice Statement (SPS) applies to voluntary disclosures under section 141G of the Tax Administration Act 1994. It establishes guidelines for making a voluntary disclosure, the timing of notification and what constitutes a voluntary disclosure.

Application

This SPS replaces SPS INV-250 and will apply from 1 May 2002.

The major change from SPS INV-250 is in respect of the Commissioner's practice regarding prosecution in the event of a voluntary disclosure. The new practice is that prosecution may be undertaken in cases of evasion and fraud when a post-notification disclosure is made. Pre-notification disclosures will still have full immunity from prosecution.

Summary

A taxpayer may make a voluntary disclosure either before being notified of a pending tax audit or investigation ("pre-notification disclosure") or after the first notification but before the audit or investigation starts ("post-notification disclosure").

The disclosure must be full and complete. The minimum details required are:

• taxpayer's details (name, trade name, IRD number, address, date of birth/incorporation, contact telephone number and contact times);
• the nature of the errors or omissions;
• an explanation as to why the errors or omissions occurred;
• adequate information to enable an assessment of the tax shortfall to be made;
• a declaration signed by the taxpayer, if possible;
• further information as is necessary to make an assessment.

A full and complete disclosure will result in a reduction in the applicable rate of shortfall penalty.

Where a pre-notification disclosure is made Inland Revenue will not consider prosecution. For a post-notification disclosure prosecution may be considered in cases of evasion or similar offending (ie those offences listed in section 143B of the Tax Administration Act 1994).

All legislative references in this SPS are to the Tax Administration Act 1994 unless otherwise specified.

Background

The New Zealand tax system is based on voluntary compliance. It relies on taxpayers meeting their obligations under the tax laws, for example, filing tax returns and returning all income. The voluntary disclosure system provides an incentive to taxpayers to determine their correct tax liability. It also reflects the savings to Inland Revenue from voluntary admissions of irregularities and other benefits of co-operation by taxpayers. By making a full and complete voluntary disclosure, a taxpayer will get the advantage of reduced levels in any shortfall penalty imposed.

If a taxpayer makes a pre-notification disclosure, the level of any shortfall penalty will be reduced by 75%. If a post-notification disclosure is made, the reduction in shortfall penalty will be 40%.

Legislation

Sections 141G of the Tax Administration Act 1994 provides as follows:

141G 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
   (a) Before the taxpayer is first notified of a pending tax audit or investigation (referred to in this section as "pre-notification disclosure"); or
   (b) 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-
   (a) Specify the information required for a full voluntary disclosure; and
   (b) The form in which it must be provided.
   
   
3. The level by which the shortfall penalty is reduced-
   (a) For pre-notification disclosure is 75%
   (b) 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-
   (a) The taxpayer; or
   (b) An officer of the taxpayer; or
   (c) A shareholder of the taxpayer, if the taxpayer is a close company; or
   (d) A tax advisor acting for the taxpayer; or
   (e) A partner in partnership with the taxpayer; or
   (f) 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-
   (a) 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
   (b) 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.

Standard Practice

Voluntary Disclosure Methods

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

• by visiting an Inland Revenue office
• by telephone call
• by letter, fax or e-mail
• 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 Inland Revenue officer is able to record a voluntary disclosure when a taxpayer comes into or contacts Inland Revenue. Inland Revenue will request taxpayers making a voluntary disclosure to sign a form reflecting their disclosure.

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

An acknowledgment will be made that the disclosure has been received.

During the first interview
For disclosures made during the first interview, the Inland Revenue auditor will consider whether the disclosure is complete and reveals all the relevant information necessary to ascertain the correct tax position.

Notification

Subsection 141G(4) provides that a taxpayer has been notified of a pending audit or investigation or that the tax audit or investigation has started, 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 advisor 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 occur at 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.

Unannounced visits
In the case of unannounced visits, the time of the notification will be the date of first contact with the taxpayer.

Date an audit or investigation starts
Section 141G(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 the taxpayer or the taxpayer's representative, after the taxpayer receives the notice; and
  
  
• 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 authorised representative present at interview
If the taxpayer does not attend the first interview but instead sends a representative, the taxpayer cannot claim the benefit of a post-notification disclosure for any additional tax shortfall revealed after the interview. This is the case even if the representative 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

Any voluntary disclosure will initially be considered, subject to the applicable time bar, as a request for an amendment of an assessment under section 113 of the Tax Administration Act 1994 or section 27(2) of the Goods and Services Tax Act 1985.

The disclosure must be full and complete. It is not up to the Commissioner to elicit the required information from the taxpayer. This does not necessarily mean disclosing the discrepancies to the last dollar but does require providing enough information to enable the auditor, investigator or officer to make an assessment. Each case will have to be considered on its own merits.

If a taxpayer is not able to provide full details at the first point of contact with Inland Revenue, the Commissioner will allow the taxpayer reasonable time to obtain more information. The time period for obtaining this information will be negotiated between the taxpayer and the Inland Revenue officer. Once this information is provided and the disclosure is considered full and complete, the date of the voluntary disclosure will be the date of the first point of contact.

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

• taxpayers details (name, trade name, IRD number, address, date of birth/incorporation, contact telephone number and contact times);
• the nature of the errors or omissions;
• an explanation as to why the errors or omissions occurred;
• adequate information to enable an assessment of the tax shortfall to be made;
• a declaration signed by the taxpayer, if possible;
• further information as is necessary to make an assessment.

Where this information is not provided, the Commissioner will consider on a case by case basis whether the information provided is sufficient to satisfy the full and complete disclosure requirements. In doing so, the Commissioner will have regard to the taxpayer's reasons for not making the specified information available.

More than one tax shortfall
Each tax shortfall is considered separately. If there is more than one tax shortfall, one being the subject of voluntary disclosure and the other being detected by an audit, the shortfall detected by the audit will not come within the voluntary disclosure regime.

If the items are identical or similar they will be treated as one tax shortfall. Therefore, for a full and complete voluntary disclosure, both items will need to be disclosed prior to the end of the first interview. If one of the items is not disclosed until after the first interview this will result in the taxpayer not satisfying the requirements of a full and complete 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, the taxpayer will qualify for voluntary disclosure prior to notification of an audit as long as the disclosure meets all other requirements.

Disclosure of another period
It is common for a notice of intention to carry out an audit to state that a particular year or period is to be audited but previous years or periods may be looked at if necessary. The year or period referred to only is examined in the first instance. If the taxpayer has not been advised that an earlier year or period is being examined, the taxpayer is able to make a pre-notification disclosure for that year or period.

Disclosure where Inland Revenue already knows of the shortfall
In situations where the information provided is required by law or Inland Revenue knows there is a tax shortfall and has verification of that shortfall, the taxpayer cannot make a voluntary disclosure. An example of this is when an employer files their Employer Monthly Schedule without an accompanying payment. The employer cannot voluntarily disclose the non-payment of the PAYE as Inland Revenue will know that payment has not been made. For further information on this refer to Standard Practice Statement INV-260, Notification of a Pending Audit or Investigation published in Tax Information Bulletin Vol.12, No.2.

Disclosure Forms

Where possible it is desirable for the protection of both the taxpayer and Inland Revenue that disclosures be in writing and signed by the taxpayer. Voluntary disclosure form IR282A, which covers both pre-notification and post-notification disclosures, has been prepared for this purpose.

However, Inland Revenue will also accept other written disclosures and verbal disclosures without the need for the taxpayer also to complete the form.

Prosecution and Publication of Name

If a voluntary disclosure is full and complete:

• Inland Revenue will not consider prosecution action for pre-notification disclosures.
• In post-notification cases, prosecution may be considered in cases of evasion or similar offending (ie those offences listed in section 143B of the Tax Administration Act 1994).
• There will be no publication of the taxpayer's name in the Gazette.

This Standard Practice Statement was signed by me on 11 April 2002.

Margaret Cotton
National Manager
Technical Standards