Tax penalty regime changes tipped to end audit roulette

Plans to lighten up Inland Revenue's approach to penalties on erring taxpayers have been welcomed by tax accountants.

"On balance it's a document full of commonsense," said PricewaterhouseCoopers tax partner Scott Kerse of the discussion document released yesterday outlining changes to the regime set up in 1997, which imposed penalties ranging from 20 to 150 per cent when taxpayers failed to accurately calculate their tax liabilities.

KPMG tax partner John Cantin said the penalties had become a real irritant for taxpayers and produced some perverse outcomes where people thought twice about correcting errors.

Tax practitioners particularly liked the provision that "shortfall penalties for not taking reasonable care or for taking an unreasonable tax position would not be imposed if the taxpayer concerned made a voluntary disclosure of the shortfall before being notified of a pending tax audit or investigation."

At present voluntary disclosure can knock up to 75 per cent off the penalty. But the rest, combined with what are seen as punitive use-of-money interest rates, can provide an incentive not to disclose.

Institute of Chartered Accountants tax director Craig Macalister said that in some cases under the present rules people could be looking at a bill for more than $10,000 even if they made a voluntary disclosure.

"So they think they are probably better off playing audit roulette rather than coming forward and admitting it."

Kerse said it was disappointing that the proposal to drop the penalty in such cases had a use-by date of two years, and that there were no plans to lower interest rates to more commercially normal levels.

Another planned change is for the IRD to notify taxpayers the first time their payment was late instead of immediately imposing a late payment penalty.

On the other hand the penalty for late filing would be extended to GST returns not filed by the due date. Late filing penalties range from $50 to $500.

For shortfall penalties the lowest level of culpability is failure to exercise reasonable care.

In practice taxpayers who have relied on the advice of tax agents are considered to have exercised reasonable care, so long as they have provided the agent with adequate information and instruction and are not relying on the agent or his advice when they have reason to believe it is incorrect.

Those caveats will now be written into the legislation, with an additional one to cover cases where the taxpayer has had a previous tax shortfall penalty imposed for the same error or action.

Shortfall penalties for underpayments of PAYE would be graduated for employers who filed their monthly schedule but did not pay the associated PAYE on time.

Revenue Minister Peter Dunne said: "The idea behind the proposed changes is to encourage voluntary compliance by having tax penalties that reflect the seriousness of the offence. People comply more readily with the law when they see it as reasonable."