So, you think you can outsmart the Inland Revenue Department (IRD)? Or bluff your way through if an investigator comes calling? If so, you're playing a dangerous game.
Accountants and tax consultants see clients week in week out who face penalties for failing to declare income. Some, says Dan Lowe, associate at Grant Thornton, may end up paying tens of thousands of dollars to fight or clear up very complex investigations.
The IRD can start investigations for all sorts of reasons. It may receive a tip-off. There's even a form, the IR873, for those who want to report tax evasion or fraud anonymously.
Increasingly, however, the IRD has got its hands on data that, once analysed, highlights potential cheats. It can, says Lowe, get access to bank accounts and credit card data held by Kiwis in 51 different countries.
It can also identify New Zealand bank accounts that have been credited with foreign income or are paying off overseas balances.
Simply holding an overseas credit card or bank account is enough to put taxpayers on the IRD's radar and trigger an audit, says Terry Baucher, tax consultant at Baucher Consulting. Often such accounts are used to bring overseas income into the country.
Last year the IRD asked pension transfer companies for the details of up to 30,000 clients, says Baucher. It waited until the deadline to declare the transfers had passed. Anyone who hadn't made appropriate declarations was sent an audit letter.
The pension firms would have advised clients they had to pay tax. But some clients thought they could evade it or didn't read the paperwork.
Tradespeople, shop owners and others who do cash jobs sometimes get a nasty shock. Baucher was approached by a bakery owner who was caught taking cash from customers and not ringing it up in the till. The man, a migrant, didn't understand how the tax system worked and thought he could get away with fooling the IRD. Not so.
By coincidence, another baker, Long Soun of Taupo, was prosecuted and given an eight-month sentence of home detention in January for a similar offence. Details of this and other cases can be found at tinyurl.com/IRDprosecutions.
It's likely the IRD officers checked out the establishment. They might buy a coffee and sit there for a while watching to see if cash transactions are rung up. Baucher says he has heard of cases where tax inspectors have bought a takeaway meal and deconstructed it to determine a restaurant's gross margins.
When it comes to tax, Kiwis are guilty until they prove their innocence, says Baucher.
Generally the IRD's questioning starts from an innocuous foreign credit card that may have been used recently, and then upon further questioning it is discovered that the clients have had significant foreign earnings, which have previously not been declared.
One of Baucher's clients received such a letter asking about her German credit card and as a result the IRD discovered a source of income that hadn't been declared. Although she was paying tax on those earnings in Germany, she wasn't declaring them in New Zealand, which she had to do.
It was a costly exercise even though she didn't in the end owe the IRD much money. Baucher says even relatively low-key investigations such as this one can cost the taxpayer $2000 to $3000 in accountancy fees.
Sometimes the extra undeclared income the IRD finds may only be small amounts of interest in overseas bank accounts or even earnings from investments that would have been tax-free in the country of origin, but are taxable for people living here. An example is Isa (individual savings account) investments in Britain.
What's more, many don't realise that foreign pensions are in effect investments, which means they fall under the Foreign Investment Fund rules and in many cases tax must be paid here annually on unrealised capital gains.
Anyone caught out has to pay the tax owed plus interest and sometimes a range of penalties. Where it gets really expensive is if the IRD decides to charge shortfall penalties as well as the unpaid tax and steep use-of-money interest on the backdated tax. Shortfall penalties are one-and-a-half times the amount of unpaid tax.
Simply holding an overseas credit card or bank account is enough to put taxpayers on the IRD's radar.
Lowe recommends clients "'fess up" as soon as possible. Tax evasion is a criminal offence and the last thing his clients will want is five years' free board and lodging in Rangipo Prison.
Confessing results in wiping shortfall penalties, says Aaron Quintal, tax partner at EY, or a 40 per cent reduction for an admission after an investigation has started. "We will sit down with a client beforehand and say, 'These are the risks'," he says.
Taxpayers sometimes avoid tax innocently or pocket money they earn through websites such as Trade Me, Bookabach or Airbnb thinking the IRD won't bother to chase up, says Lowe. The reality is it's very easy for the IRD to get a download of information from internet-based companies such as these in the way that it collected data on more than 40,000 customers from Trade Me.
What's more, the IRD is investing in new software and systems to ramp up its data mining. That means more investigations for the tax-paying public and businesses, says Quintal.
In the future the IRD will be able to match data from business suppliers and customers to highlight those that are taking cash without declaring it.
In the bakery example, the IRD would, law permitting, be able to take data from suppliers such as Southern Hospitality, Bakels NZ and Gilmours, for example, and extrapolate how much the annual takings should be.
In the case of restaurants, says Quintal, the IRD knows 70 per cent of receipts will be for Eftpos/credit card transactions. If a restaurant claims 95 per cent of customers pay by a card and it gets few cash payments, the IRD systems will flag it for investigation.
For every $1 spent by the IRD on investigations, about $5 is recovered. Its recent hospitality industry campaign netted $146 million in "hidden economy" discrepancies in the 2014-15 year to June 30.
The IRD also has a 52-member property compliance team that focuses on landlords and speculators who avoid or evade tax.
One of Baucher's clients had claimed that a house she sold was the family home. When the IRD checked her immigration records, it found she couldn't have possibly been living in the home. Because it had been bought with the intention of making a profit, she had to pay income tax on the capital gain.
Some audits, however, are just random and don't relate to specific projects. It's just because "your number is up", says Quintal.
However you're caught, ignorance of the tax laws is no excuse. Lowe had one Hong Kong-based client who innocently assumed he was non-resident for tax purposes in New Zealand. He came home to his wife and children for only three weeks of the year and was out of the country much more than the required 183 days annually.
But having the family here meant New Zealand was his permanent place of abode under IRD rules, which cost him $500,000 in in back tax.
Another of Lowe's clients in a similar situation was assessed as owing $1.5 million to the IRD. This was negotiated down to $650,000. The accountancy bill came to $45,000.
If, however, the man had been convicted of tax evasion he would have been subject to the Criminal Proceeds (Recovery) Act and his property could have been seized. Or like Waihi farmer Ewan Malcolm Campbell, who owed the same amount, he could have been imprisoned.