In our recent discussion with Matt Harris, we explored what happens during an IRD audit - from the triggers that spark an investigation to the common mistakes taxpayers make and the penalties that can follow. This candid conversation offers practical insights for anyone wanting to stay on the right side of Inland Revenue.
The IRD Compliance Approach
New Zealand’s tax system relies on voluntary compliance. Inland Revenue applies pressure to those who avoid paying, which in turn encourages others to file correctly. By focusing on prosecuting high-risk cases – and rarely losing in court – the IRD ensures that the compliance system stays effective.
Matt highlighted that our tax system is relatively straightforward compared to other countries, with a broad-based, low-rate structure that leaves little room for creative deductions. Still, an IRD audit often begins when certain red flags have caught their attention
Triggers That Attract Attention
There are clear triggers that may lead to an IRD audit or risk review:
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Late or missing returns – consistently failing to file draws attention.
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Unusual transactions – especially involving property or large cash movements.
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Outliers in GST or profitability – sharp changes can signal further investigation.
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Cash-heavy industries – such as restaurants, which often face industry-wide reviews.
The IRD also has wide-ranging powers to collect information, from bank and phone records to notes from real estate agents. Property transactions are a particular focus, especially given the absence of a general capital gains tax.
Common Mistakes Taxpayers Make
Matt has seen mistakes ranging from simple to severe. Frequent issues include:
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Property investors incorrectly claiming principal repayments as deductible interest.
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Missteps with GST on property transactions, particularly misunderstanding zero-rating rules.
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Errors in accounting software coding – where expenses and assets are mixed up.
While some mistakes stem from confusion, repeated errors over several years can result in significant tax bills once an IRD audit uncovers them.
Penalties and Voluntary Disclosure
If errors are discovered, the IRD may issue penalties depending on severity:
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Not taking reasonable care – 20% penalty.
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Unacceptable tax position – 20% penalty (for larger sums).
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Gross negligence or evasion – penalties up to 150%.
However, taxpayers who make a voluntary disclosure before or during an IRD audit can often receive a 100% reduction in penalties. The key is to be proactive rather than reactive
Protecting Yourself From IRD Scrutiny
The best way to avoid problems is simple:
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File returns on time.
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Pay taxes on time.
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Be reasonable in your claims – minimise tax within the rules, not outside them.
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Seek professional advice before entering into complex property or GST arrangements.
As Matt explained, paying tax isn’t necessarily a bad thing – it often means you’re succeeding in business or investment
Key Takeaways
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An IRD audit applies pressure on high-risk taxpayers to keep the voluntary compliance system working.
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Triggers include late returns, unusual GST changes, and property transactions.
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Common mistakes involve claiming principal repayments as interest or mishandling GST rules.
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Penalties range from 20% for careless errors up to 150% for evasion.
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Voluntary disclosure can dramatically reduce penalties if mistakes are found.
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Filing and paying on time is the simplest way to avoid IRD scrutiny
Next Steps
At Lighthouse Financial, we help you stay compliant while ensuring you claim every deduction available. Book a chat with the Lighthouse Accounting team today.
If you’d like to learn more, check out these other episodes below.
For a no obligation discussion to see how we can help you on the path to wealth, please contact us.
Disclaimer:
The information in this article is general information only, is provided free of charge and does not constitute professional advice. We try to keep the information up to date. However, to the fullest extent permitted by law, we disclaim all warranties, express or implied, in relation to this article – including (without limitation) warranties as to accuracy, completeness and fitness for any particular purpose. Please seek independent advice before acting on any information in this article.
