Diana Clement: Best not to bury head in the sand over tax

Getting your tax wrong is never a good idea. Photo / Thinkstock

The IRD has teeth and isn't afraid to bare them at 'non-compliant' taxpayers.The spectre of tax returns makes some people bury their heads in the sand. Thousands of them every year, in fact.

With the end of the financial year having just passed and IR3 returns looming for many people, it's that time of the year. Self-employed people and small business owners are also due to do GST and IR4 returns. All in all, the start of a new financial year adds up to a lot of paperwork.

One date that comes up awfully fast is July 7, the date for IR3 and IR4 returns for people who don't have tax agents. Those who do have agents have until March 31, 2012.

That's not to say these people can breathe easy. They have five days to pay the 2010 end-of-year income tax from last year, due on Thursday.

Another date certain to give some readers palpitations is May 9, the next date for GST returns and payments.

Depending on a person's individual circumstances the due dates that apply to them may be different. The Inland Revenue Department has a useful calendar at www.ird.govt.nz/calendars-dates if you don't know the dates relevant to your tax affairs.

Not everyone needs to file an IR3, points out Scott Kerse, a partner at PricewaterhouseCoopers. If you receive only income and interest with tax already deducted you probably fall out of the net. It is, however, up to you to find out.

Getting it wrong is never a good idea. The IRD has teeth and isn't afraid to bare them at "non-compliant" taxpayers.

Penalties and interest are fairly easy to rack up if you're not paying attention to due dates. The purpose of penalties is to encourage taxpayers to register when they are supposed to, file returns on time, provide complete and accurate information, claim and receive only what they're entitled to and pay on time. They're one of the IRD's bigger sticks.

The first you are hit with is a $50 late filing penalty if your tax return is late. If you then fail to pay tax on time you face late-payment penalties of 1 per cent the day after the due date and then 4 per cent after the seventh day. Every month 1 per cent is added.

There are also shortfall penalties if you are found to have underpaid tax - usually as a result of an audit. These penalties range from 20 per cent of the deficient tax if you simply haven't taken enough care, to 150 per cent for evasion. They are charged for:

* Unacceptable interpretation of tax laws.

* Abusive tax positions.

* Evasion.

* Gross carelessness.

The first three cases involve a deliberate action by the taxpayer to avoid paying tax. But the IRD can penalise anyone who doesn't fill their returns in carefully enough if they're deemed to be grossly careless.

As well as these penalties you also pay interest on unpaid or late taxes.

Being human, and tax being complex, people make mistakes.

According to the IRD some of the common mistakes people make when filing their tax return include:

* Providing an incorrect IRD number.

* Filing duplicate returns instead of sending a letter with necessary changes when the original return needs to be amended.

* Figures do not add up.

* Interest and resident withholding tax are entered in the wrong boxes - one transposed for the other.

Salary and wages are either entered in the wrong place or PAYE left out.

Other common mistakes accountancy partnership PwC sees include:

1. Kiwis not realising they need to pay tax on foreign investments.

"People may have income from a foreign currency bank account and have a foreign exchange gain that they may not realise they need to pay tax on," says Kerse. A classic mistake is assuming the IRD won't find out about your Channel Islands bank account. The IRD has access to a lot of information from foreign financial services companies and can track New Zealand taxpayers who are evading tax this way.

"The penalties for getting this stuff wrong are pretty severe."

2. Pies (portfolio investment entities) also catch taxpayers out, says Kerse. Most Pie income doesn't need to be accounted for in a tax return, but some does. "The information from Pie providers is pretty good, but you have to wade your way through it," says Kerse. If you're a head-in-the-sand type taxpayer, then you may miss the salient details.

3. Claiming tax credits on "donations" that are actually charges. A classic case of this is private school fees. This mistake has suddenly jumped up the scale of importance thanks to new, very generous limits for tax credits on donations - up to the equivalent of a taxpayer's entire annual salary.

4. Forgetting to split joint accounts down the middle. You can't put the income from joint accounts against the lower earner's tax.

The IRD likes to point out that the majority of customers file returns and pay their due amounts on time. More than 15 per cent don't. That adds up to more than one million individuals, businesses, partnerships, trusts and other entities that don't comply on time.

You can sometimes get some of your IRD debt written off. The IRD is prepared to write off an amount of debt if it determines "that full payment would cause you serious hardship". It will also consider an instalment arrangement. The IRD's debt options booklet IR582, which is available online, outlines options for those who can't afford to pay.

Time is of the essence. If you contact the IRD before a payment is due and make an instalment arrangement proposal you won't be charged penalties. If you front up after that date and the penalties have been charged they will stand. Having said that, it's sometimes worth asking nicely if the penalties can be removed as this can be successful. A plausible excuse helps. The IRD has the power to legally waive penalties in certain circumstances, so it's worth trying your luck.

The total overdue debt for the 2009-10 year is $5.2 billion, although collectable debt, which excludes things such as insolvency debt, is $3.49 billion.

The IRD tends to focus its collections enforcement and legal action on audit-assessed debt cases, the top 1000 debt cases and complex ones. The single biggest type of overdue tax is plain old income tax.

There are those individuals and businesses who fail to get returns in on time or pay on time who do not deliberately set out to evade tax. Most are honest, but inefficient or short of money.

The other category, which the IRD actively chases, are those who deliberately under-report tax. Ignorance of the law is no excuse.

The old saying is that you can get away with anything until you're audited. It then comes back to roost.

No doubt some of the property traders caught by the IRD in recent years thought they could get away with buying just one or a handful of properties, doing them up and flicking them on - or just flicking them on.

The reality was that the IRD's computer systems and investigative nous were several notches better than the investors. It was a gamble with very high stakes for some of them.

The IRD's campaign against property speculators brought in an $83.1 million tax bonanza from 2007-10, nearly $20 million more than its target.

Investigators also continue to target the hidden economy, as well as tax agents and intermediaries that promote aggressive tax planning schemes that rely on dodges that go beyond the limits of the law.

•Individuals not required to file an IR3 can still do a personal tax summary calculation online to determine if they are owed a refund.