Business mentor: Be prepared for a surprise visit from the tax man

Q: I've been in business for two years now and have only just got myself a proper accountant. I haven't managed my finance records as well as I should have and worry about being audited by IRD. Can you explain what is involved in an audit and when audits are carried out?

* Small business sector specialist Sarah Trotman asked Inland Revenue service centre manager Richard Philp for some advice:

A: An Inland Revenue audit is an examination of your financial records to check you have reported your correct tax position and complied with the tax laws.

It may be as simple as checking a GST refund claim, or it could be a full examination, across all revenues (GST, payroll and income tax) of your business and private affairs.

You may be selected for an audit on the basis of the following:

* Computer or manual analysis of your business accounts and tax returns.

* Information received during another investigation, which suggests that your records should be checked.

* Your compliance and payment record.

* Selection of a particular industry.

* Examination of a particular issue or problem that affects a group of taxpayers.

* Where you live or run your business, as Inland Revenue may audit a particular area.

* Local intelligence, perhaps arising from media reports or unexplained wealth.

* Information we get from other people about you.

* Random selection.

If you think the tax position you have reported in the past may contain errors, there are advantages in making a voluntary disclosure rather than waiting for Inland Revenue to find them.

These include a reduction of 75 per cent in the penalty charged on any related shortfall of tax where a voluntary disclosure is made before an audit starts.

Often when people learn they are going to be audited they'll do an initial check of their records. If you do this and discover an error, Inland Revenue still allows you to make a voluntary disclosure. A voluntary disclosure made at the initial interview or at the inspection-of-records stage of an audit (whichever is the earlier) means that the amount of any related shortfall penalties charged will reduce by 40 per cent.

Inland Revenue usually advises that you'll be audited. On rare occasions an audit may start with an unannounced visit.

For example, there may be an unannounced registration check of both payroll and GST to ensure a business is in the tax system.

Obviously, checking records, such as ledgers, journals, invoices and bank accounts, is an important part of an audit.

Sometimes the investigator will need to take your records back to an Inland Revenue office to complete a full inspection. If records are removed, a receipt detailing every item taken will be issued. You can view these records and request copies if you need them.

A records check can also be done at your premises. Support from a qualified tax agent can be of great help during the audit process.

If you're considering making a voluntary disclosure, read Inland Revenue's booklet, IR 282 Putting Your Tax Affairs Right. You can order a copy through INFOexpress by phoning 0800-257-773, or view it on Inland Revenue's internet site.

* For answers to any of your cashflow and accounting questions or for a free copy of How To Control Your Business Cashflow And Keep Some For Yourself, call 379-1079.