Audits and Disputes:The Myths, The Realities and the Lessons to be Learnt

A paper presented to the NZLS Tax Conference 13 October 2016

Inland Revenue Content by Ele Duncan[1]
Advisor Observations by Geoff Clews[2]

Taxpayers and their advisers all have war stories about their dealings with Inland Revenue. IR investigators have their views of taxpayers, their agents and advisers.

Much of this on the taxpayer side has found its way into urban myth. Many may believe it colours IR attitudes towards taxpayers.

In this session some of the myths will be examined and debunked. Respective views will be tested and weighed and some of those myths may be found to be true.

The object of the session will not be to tell stories for the sake of it, but to provide insights into the factors that are likely to be at play for both sides in a tax investigation and dispute.

Introduction

It is fair to say, no taxpayer is filled with delight at the thought of an audit by, or dispute with, the Commissioner of Inland Revenue (Commissioner). The Commissioner understands this and tries to make the process as painless as practicable…yes, truly!

A wide range of powers can be at play when the Commissioner conducts an audit. Those powers assist the Commissioner in carrying out her duties as set out in sections 6 and 6A of the Tax Administration Act 1994 (TAA), being to protect the integrity of the tax system and to collect over time the highest net revenue practicable within the law, having regard to the Commissioner’s resources, the importance of promoting compliance and the compliance costs incurred by taxpayers. It is against this background any audit or dispute is conducted by the Commissioner.

The purpose of this paper and accompanying presentation is not to provide a detailed technical analysis of the various topics. It seeks to extract the salient points of each topic as background to the discussions of various issues that may arise when taxpayers are under audit by, or in dispute with, the Commissioner of Inland Revenue.

Compliance Focus

It is common for taxpayers to ask “why me”? How is it that they came to the Commissioner’s attention?
Inland Revenue has a range of data and advanced analytics that shape the work it undertakes. Prior to commencing a risk review or an audit, it is fair to assume the Commissioner has conducted some sophisticated analysis using such tools. This may include analysis of data as directed by portfolio leads (for example Property, Hidden Economy), risk assessments against industry trends, benchmarking and financial data. On occasion an audit may commence from direct observation, for example not ringing up cash in the till. An audit may also be the result of anonymous information.

The Commissioner uses sophisticated technology, information from other government agencies and data analysis to detect and monitor suspicious activity, ranging from basic scams to complex and organised criminal activities.
To support global efforts to combat tax evasion, the Commissioner contributes to information sharing that’s happening across government here in New Zealand and with organisations overseas, for example, the Australian Taxation Office.

There is no one answer as to why a taxpayer is selected for an audit.[3] There will be a legitimate reason for the audit, although Inland Revenue is unlikely to be able to disclose it. However, it could be, for example:

The Commissioner’s analysts have identified information in the tax return(s) that show an unusual pattern, or one that’s inconsistent with industry norms.
The Commissioner has received information (which could be from a number of sources, including anonymous information) that suggests the returns are not correct.
There’s a history of non-compliance with tax obligations.
The Commissioner has received local knowledge, perhaps arising from media reports or unexplained wealth.
The Commissioner’s current compliance focus includes the industry or activity the taxpayer is involved in.[4]

The Commissioner’s current Compliance Focus includes:

Trusts: including structures involving trusts that:

• don’t seem to make commercial sense
• deliver unusually favourable tax advantages.

Under-reporting income and operating outside the system: includes a focus on hospitality and construction sectors.

Property: including a focus on property trading and speculation.

High Wealth: including examining

• large one-off or unusual transactions
• unexplained losses
• unusual classifications of income and expenditure between capital and revenue
• mismatches between tax paid and net wealth
• complicated structures or intra-group dealings
• unusual financial instruments or financing arrangements
• mixed business/private use of assets—especially lifestyle assets.

Aggressive Tax Planning: including identifying those who try to avoid paying the tax they should or boost entitlements to social benefits by using inappropriate or unlawful tax structures. [5]

Not all contact from Inland Revenue will be an audit. For example, a risk review is not an audit, and Inland Revenue will make it clear when contacting taxpayers or their advisors whether they are carrying out a risk review or an audit. As part of Inland Revenue’s overall compliance plan, Inland Revenue undertake risk reviews of particular parts of the business or compliance systems of taxpayers to evaluate the risk of non-compliance.
An audit may result from these reviews. An audit may also be commenced without a risk review and without prior notice or contact, for example, where Inland Revenue has identified an area of clear non-compliance. On occasion Inland Revenue may also make an unannounced visit to a taxpayer’s place of business. When Inland Revenue contacts a taxpayer or their agent, notifying them of an audit or investigation, the words “audit” or “investigation” will be specifically used.[6]
Inland Revenue Observations:

Comply with requests in a timely manner. If you can’t comply with the timeframes set, seek an extension. Ignoring a request and going incommunicado will not make the investigator go away.
Don’t second guess what Inland Revenue are asking. If you or your client do not understand information request or an investigators question – seek clarification. Don’t be afraid to ask questions.
Maintain open lines of communication. Setting a collaborative and professional tone early on is a win-win for both parties. Each have a job to do and professionalism and courtesy on both sides makes for a better experience for all.
If problems arise during the audit (other than a technical difference), try to resolve them with the investigator. If this isn’t possible, in the first instance contact the investigators team leader and failing that, their manager. Their contact details will have been provided in the initial audit letter.
Inland Revenue aren’t experts in every business enterprise that exists. It’s genuinely beneficial if taxpayers can assist the Commissioner to understand the realities of their business which provides context to the audit. Inland Revenue does have a range of specialist and Principal Advisors in various areas such as finance, transfer pricing, international tax, debt, GST, insurance who bring with them both technical and commercial expertise.
Just as its preferable for an Investigations team to have one point of contact with a taxpayer, it can be helpful for a business to do the same and appoint a point of contact for an Investigator and someone within the business responsible for providing the required information. If one finds different Investigators are requesting information at the same time, perhaps even the same information, don’t be afraid to raise this as an issue with those concerned. This should not in fact occur. Further, if the timing of the information request and timeframes for delivery are untenable for the taxpayer or advisor (for example it falls over a taxpayer’s balance date), communicate this with the Investigator and seek to negotiate a mutually agreeable timeframe.
Use an audit as an opportunity to review the client’s tax position. This may enable a voluntary disclosure to be made, which can reduce penalties.

Advisor Observations:

Understanding the dynamic of a tax audit starts with an understanding of IR’s objectives but it also requires an understanding of the taxpayer’s motives and expectations. There are sophisticated taxpayers and those who are less so. The extent and nature of adviser support depends on the level of understanding the taxpayer has of their obligations, the powers and tactics of IR and what can and cannot be realistically achieved through managing an audit. For some taxpayers, audit engagement with IR will be commonplace and to some extent routine. Such taxpayers will usually have a fair sense of the risks that an audit may involve and be prepared to make decisions which reflect a considered response to those risks. For others an audit will be disruptive to life and business and potentially damaging personally and economically.

In all instances the taxpayer is driven by a common aim – to protect its interests through the audit process. That nature of the interests being protected may be different, depending on the circumstances and the taxpayer. A taxpayer may see that its interests lie in having the audit dealt with as quickly and economically as possible. That may be driven by economics, but it is just as often driven by the realisation that a prolonged audit will involve a degree of psychic or emotional disruption that will have adverse ripple effects in both business and personal terms.

The vast majority of taxpayers which are subject to audit are small or medium sized enterprises. This reflects the nature of the New Zealand economy and the scale of business in this country. Most such businesses are run by owner operators. They are heavily invested in those businesses, financially and emotionally. A tax audit can be seen as a personal affront, an attack on the owner’s honesty, and even with careful guidance and management an audit can lead to a degree of taxpayer paranoia. So the first difference between IR and taxpayers is that IR expects to engage with taxpayers on a dispassionate professional business-like level, but many taxpayers react to an audit, both at the start and as it progresses (or if they consider that it does not progress), in a far more personal way.

The interests of the taxpayer may in some cases lie in “investing” strategically in defending audit risk without necessarily seeing advantage in a quick resolution of an audit (unless that resolution has IRD retreating quickly). This taxpayer is less likely to be emotionally charged and more likely to deal with the audit dispassionately.

An advisor dealing with a taxpayer facing audit has first to understand where the interests of the taxpayer lie. Having achieved that, the advisor will deal with IR accordingly. In all cases the observations of IR (opposite) are valid. Courtesy will advance the taxpayer’s interests over aggression every day, but then it is possible to be firm courteously. Problems can be escalated, but there may be a difference between taxpayers as to what rates as a problem and what does not. Escalation for its own sake make be tactical but not productive, at least as far as IR is concerned. Explanations of business operations are important and can be adverse, neutral or positive to the taxpayer’s interests, depending how they are put forward.

In all audits the taxpayer will need to devote resources to the exercise. It is doubtful that any taxpayer regards the costs of an audit as a welcome opportunity to support the tax advisory community. Managing the process, such as by having central point of contact is wise, but it begs the question as to the outcome such management is designed to achieve.

All taxpayers are entitled to be represented with a view to advancing their interests lawfully but those interest may not always align with IR’s expectations.

Voluntary Disclosures
The New Zealand tax regime is underpinned by voluntary compliance. The voluntary disclosure rules aim to incentivise taxpayers to determine their correct tax liability. There may be a range of reasons why this doesn’t occur, from an accidental error to more deliberate omissions. The rules also acknowledge the savings to Inland Revenue from voluntary correction of errors and other benefits of co-operation by taxpayers.

The requirements for a voluntary disclosure are set out in Commissioner’s Standard Practice Statement SPS 09/02, Voluntary disclosures (SPS 09/02). This sets out the content, timing and concessions available in respect of voluntary disclosures.

A taxpayer may wish to consider making a voluntary disclosure when they identify an error. There are advantages to making a full voluntary disclosure prior to the Commissioner identifying discrepancies during an audit or at some later date.[7] A major advantage is shortfall penalties may be reduced by up to 100%, and in some cases may avoid prosecution action. [8]

A taxpayer may make a full voluntary disclosure for the purpose of shortfall penalty reduction either:

before the first notification that a tax audit or investigation is pending (“pre notification disclosure”); or
after being first notified of a pending audit but before the audit or investigation starts (“post notification disclosure”).

The notification requirements are set out in s141G(4) of the TAA and provide a taxpayer is deemed to have been notified of a pending tax audit or investigation, or that one has started if:

The taxpayer; or
An officer of the taxpayer; or
A shareholder of the taxpayer, if the taxpayer is a close company; or
A tax adviser acting for the taxpayer; or
A partner in partnership with the taxpayer; or
A person acting for or on behalf of or as a fiduciary of the taxpayer,

is notified of the pending tax audit or investigation, or that the tax audit or investigation has started.
Section 141G(5) of the TAA provides an audit or investigation starts at the earlier of

The end of the first interview an officer of the Department has with the taxpayer or the taxpayer's representative after the taxpayer receives the notice referred to in subsection (4); and
The time when -
1. An officer of the Department inspects information (including books or records) of the taxpayer after the taxpayer receives the notice referred to in subsection (4); and
2. The taxpayer is notified of the inspection.

Where a taxpayer makes a full voluntary disclosure the following reductions in shortfall penalties are available:

100% for a pre-notification disclosure where the applicable shortfall penalties are either for not taking reasonable care or taking an unacceptable tax position.[9]
75% for a pre-notification disclosure where the applicable shortfall penalties are gross carelessness, evasion or similar act or a promoter penalty.[10]
40% for post notification disclosures.

Reductions are also available for voluntary disclosures of temporary tax shortfalls.
Where a taxpayer makes a full pre-notification disclosure, it is the Commissioner’s practice not to consider subsequent prosecution action against them in respect of the tax shortfall that they have disclosed. However, Inland Revenue may consider prosecution action when a taxpayer makes a post-notification disclosure that involves evasion or similar offending.

What is meant by a full disclosure?

To qualify for the concessions in the voluntary disclosure regime, a disclosure must be full and complete. A detailed explanation of the voluntary disclosure requirements is outside the scope of this paper and these details can be found in SPS 09/02. It is however important to note the following points from the SPS 09/02:

A voluntary disclosure must contain sufficient information to enable the Commissioner to make a correct assessment. Although each case will be considered on its own merits, if a subsequent investigation reveals a further shortfall that should have been included in the disclosure, the taxpayer will not be entitled to the reduction in respect of the voluntary disclosure.
If a taxpayer has provided information pursuant to a legal requirement such as a s17 notice, they have not made a voluntary disclosure.
If Inland Revenue has already identified and verified that there has been a tax shortfall, the taxpayer cannot make a voluntary disclosure. Subsequent verification of the tax shortfall by the taxpayer would merely confirm the Commissioner’s prior knowledge of that tax shortfall.
If the disclosure is not fully detailed and the taxpayer cannot provide full details at their first point of contact with Inland Revenue, the Commissioner will allow a reasonable time to obtain more information. The time period for obtaining this information will be negotiated.
If the taxpayer provides the clarifying information within the agreed period, and provided the information then constitutes a full disclosure, the taxpayer will be treated as having made a full disclosure on that initial date.

If a taxpayer has been notified of an audit on one tax type and makes a full voluntary for another tax type, that will be treated as a pre notification disclosure. Similarly, if a taxpayer has been notified of an audit in respect of a specified period and makes a full voluntary disclosure in respect of another period outside of the periods under audit (although those periods may subsequently be extended), this too will qualify as a pre-notification disclosure.

Inland Revenue Observation:
Be mindful that a voluntary disclosure is effectively an admission, accepting there was a default of the nature disclosed.

Make sure any disclosure if full and complete, otherwise a taxpayer may not get the full benefits of making a disclosure. Simply stating there is an issue with, for example, a specified GST return is not sufficient.

Advisor Observations:

The voluntary disclosure regime is one of the best elements of tax administration in this country. It gives those taxpayers who have made mistakes (even those who have deliberately strayed from their tax obligations) a chance to put things right with substantially reduced exposure to criminal prosecution and civil penalties depending on the timing of the disclosure. IR has already commented on the need to be mindful that disclosure is an admission and that a disclosure must be full in order to attract the best outcome for the taxpayer. These are four aspects in relation to which the advisor plays an important role.

          Managing the inherent admission, absent assured non-prosecution

A feature of the disclosure regime is that different benefits accrue to a taxpayer, depending on when the disclosure is made. The differences drive off the relationship of the disclosure to the notification of an audit and whether in the case of a disclosure that follows notification, the disclosure is made before the audit is deemed to have commenced, applying various statutory tests. A key difference is that a post notification disclosure does not carry any practical assurance of non-prosecution. This means that when making such a disclosure the taxpayer’s admissions may lead to both civil and criminal liability and civil liability is likely to involve both recovery of disclosed shortfalls and the imposition of civil penalties.
Just how to make this type of disclosure has to involve care on the part of an advisor. The advisor should look to:

(a)      Engage IR informally over the risk of prosecution ahead of making a disclosure;
(b)      Seek to reduce the risk of prosecution through advocacy over the relative seriousness of the taxpayer’s default;
(c)      Emphasise in such submission the risk of damage to the efficacy of the disclosure regime as a whole, if a prosecution follows a post-notification disclosure;
(d)      Try to agree a position whereby a shortfall penalty is imposed first so as to pre-empt the risk of prosecution; and
(e)      Not make any concession of the taxpayer’s criminal liability without having explained the risks to the client and taking clear instructions to proceed.

          Avoiding the possibility of assured non-prosecution coming “unstruck”

These risks are not as likely to arise when a pre-notification disclosure is made, because it comes with a stated assurance of non-prosecution. However even with that, there have been instances where IR officers have suggested that the disclosure does not qualify as being full, so that the risk of prosecution is revived.
It is important to be conscious of what makes for a full disclosure, canvassed above. The requirements go to the Commissioner’s ability to make a correct assessment of liability. When a pre-notification disclosure is in issue the fullness of the disclosure does not really extend to the circumstances of the default, unless they bear upon the Commissioner being able to make a correct assessment. It ought not to be a matter of any significance how the disclosure describes the circumstances of the default because the SPS assurance of non-prosecution makes those irrelevant to the calculation of liability on the disclosed default. There will be instances where the disclosure of circumstances may have a bearing on the rate at which a shortfall penalty will be applied. That is a matter which the Commissioner must assess as a consequence of the disclosure but it is not an assessment of the tax shortfall, which is the focus of the disclosure regime.

          Avoiding the limited disclosure which comes back to bite

The disclosure regime is focused on specific tax shortfalls. If a shortfall is not included in a disclosure, the fact that others may be will not attract disclosure relief for the omitted shortfall. Advisors must be sure that taxpayers understand this and that the disclosure covers all matters than are likely to be discovered by the inevitable verification review which will follow disclosure.

The specificity of the regime offers opportunities also. A notified audit for income tax will not necessarily encompass GST. Though a pre-notification disclosure may not be possible for the income tax periods that have been covered, it may still be possible to make a disclosure for periods that fall outside the notified audit or for taxes that are likely to be brought into the loop eventually, before an audit has formally been notified for those taxes.

          Taking full advantage of the risk review letter

IR routinely issues what are called risk review letters. These raise with taxpayers or their advisers the fact that there could be something amiss with the taxpayer’s affairs. The risk review letter includes an invitation to voluntarily disclose a default. Because the letter does not notify an audit (and will typically expressly say it is not notifying that), a disclosure can be made which could achieve the full benefit of a pre-notification voluntary disclosure.

How long does an audit take?
Too long may be the answer from a taxpayer’s point of view. It is appreciated an audit can create a significant impact on a taxpayer and the Commissioner does try to minimise this impact.
The time taken for an audit depends on a number of factors, including:

The size and complexity of the business
The standard of the records, and
The taxpayer and advisers co-operation.

Although there is no set timeframe for an audit, the Commissioner does meet the following externally reported performance targets for audits, namely, on average, the Commissioner will complete audits within the following agreed timeframes:

4 months for general audits
12 months for risk based audits
16 months for evasion and fraud audits
28 months for aggressive tax planning audits.[11]

Further, 75% of disputed cases must be completed within 15 months.
An investigator will provide an estimate of the timeframe for the audit at the outset and if this changes, the parties will be updated.

Advisor Observation:

The length of an audit is not in itself what really annoys taxpayers. For most taxpayers the most frustrating aspect of an audit which takes a long time is that IR is very unlikely to communicate well over the issues it sees emerging and how they bear upon possible material tax defaults or shortfalls. Particularly when an audit may pick up the possibility of criminal activity, IR plays its cards close to the chest. Openness is expected from the taxpayer in all cases but it is not all that often exhibited from IR, toward taxpayers and their advisers, especially when IR has suspicions (not always justified) of serious taxpayer misconduct. What the taxpayer usually sees is a series of requests for information, then more information and sometimes the same information as was supplied some time before. The frustration of an apparently unmanaged audit is often more the matter of concern than the time being taken.

It is not unusual for IR officers to duck or delay requests for conferences to focus an audit on outcomes rather than points of interest to the investigator. Sometimes matters of “issue” or “concern” are trotted out by IR repeatedly, even though the taxpayer has provided its explanation. Rather than confront the question whether there is a basis for discounting the taxpayers’ response, some IR officers consider that restating the concern means the explanation has been rebutted – it has not; it has simply been ignored.

Regrettably it seems to be lost on some investigators that every letter and every request for information that is issued involves the taxpayer in cost. The author has had one IR investigator recently state (it seemed with some pride in his technique) that he sometimes asks for information just to see what he gets and not because there is any basis to think the request relates to a matter that is relevant in terms of his audit.
The time frames that have been referred to above are helpful tools to be able to guide clients in their expectations of a tax audit. But they seem a step away from the reality that many advisors see each day.

The Commissioner of Inland Revenue’s search powers[12]
With the Hidden Economy being a key focus for Inland Revenue, the use of the Commissioner’s powers, in particular s16, has garnered attention.

Pursuant to s16 of the TAA and Part Four of the Search and Surveillance Act 2012 (SSA), the Commissioner has powers to fully and freely access places and documents for the purpose of inspection any documents, property, process or matter which are considered necessary and relevant for the purpose of collecting any tax or carrying out any function lawfully conferred on the Commissioner.

Sections 16B and 16C of the TAA enable the Commissioner to remove documents for copying and/or full and complete inspection.[13] Section 16(1) is a warrantless power of entry, such that other than in the case of private dwellings, the Commissioner does not need to obtain a warrant to access any land, buildings, other places or documents.

In exercising these powers, Inland Revenue officers apply best practice following the guidelines set out in the Commissioner’s Operational Statement, OS 13/01 The Commissioner of Inland Revenue’s search powers (OS 13/01) to ensure compliance with sections 4,5,6,21 and 22 of the New Zealand Bill of Rights Act 1990. The Operational Statement OS 13/01, amongst other things, also sets out the protocols the Commissioner will follow in relation to legal privilege and the non-disclosure right under sections 20 and 20B to 20G of the TAA.

Use of the Commissioner’s search powers are subject to internal checks and balances. As noted in OS 13/01, the Commissioner’s search powers will generally be exercised where, in the Commissioner’s opinion, other means of obtaining information are inappropriate or inadequate. The Commissioner need not use her other information gathering powers prior to the exercise of s16 search powers.

The Commissioner will use s16 where it is considered appropriate in the circumstances of the particular case and where it is reasonable. This may include cases where, in the Commissioner’s opinion, there is a risk or history of non-compliance and/or lack of co-operation, where it is considered likely documents may be at risk, or likely that the case involve revenue offending (tax crimes, including fraud and evasion). Section 16 can also be used in cases of aggressive tax planning and tax avoidance.

The Commissioner acknowledges the intrusive nature of the exercise of s16, and the need to use it in a way that recognises the importance of the rights and entitlements affirmed in other enactments, including the Bill of Rights Act, while ensuring the effectiveness of the Commissioner’s investigative tools. The Inland Revenue officer in charge will explain clearly to occupiers what their rights and obligations are. These are further detailed in OS 13/01.

The power of access in s16 includes the power to search for items covered by that section.

Noting the restrictions set out in the SSA, the Commissioner's view is that officers are not empowered to directly search persons. However, occupiers are required to provide Inland Revenue staff with reasonable facilities and assistance in carrying out the search. This includes emptying their pockets if asked to do so, handing over documents and devices such as cell phones or USB drives, and allowing the Inland Revenue officer to search inside items such as handbags, briefcases and backpacks.

Where Inland Revenue officers have reasonable grounds to believe that documents, including electronically stored information, are on an occupier's person, Inland Revenue officers may request the assistance of Police to search that person where the Police powers to do so apply. Where Police are called on to assist IR officers, any constable is able to exercise any power ordinarily exercisable by them (s113(3) of the SSA).

Any such search of a person will be conducted with decency and sensitivity and in a manner that affords to the person being searched, the degree of privacy and dignity that is consistent with achieving the purpose of the search (as set out in the SSA).

The search may extend to any item the person is carrying or that is in the person's physical possession or immediate control (including briefcases, handbags and backpacks).

When the search power in s16 is being exercised Inland Revenue staff are statutorily empowered under s16(2)(b) to ask questions which occupiers must answer.

The SSA also imposes additional obligations on occupiers to provide access or other information that is reasonable and necessary to allow Inland Revenue to access data in computer systems or other data storage devices or internet sites (s130 of the SSA).

The answers to questions asked under s16(2)(b) can be required in writing or under statutory declaration. Generally, it is the Commissioner's practice to require oral answers to these questions during the search, although the occupier can be asked to provide answers in writing or under a statutory declaration.
Any questions asked under s16(2)(b) must be "proper" questions. Proper questions are those relating to the effective exercise of powers under s16, for example asking a person’s name, address and occupation. It does not include investigative questions, which are questions directed at obtaining evidence of offending or of the taking of the underlying tax position. Questions of this kind will be put to the occupier separately under a voluntary interview or an inquiry under sections 18 or 19.

If an occupier refuses to answer a proper question, or leaves without answering it, this could give rise to a prosecution for obstruction.[14]

The Inland Revenue officer in charge of a s16 has authority under s116 of the SSA to secure the place or item being searched. Where that officer has reasonable grounds to believe any person will obstruct or hinder the search (or any other power being exercised during the search), can exclude any person from the place, vehicle or item being searched.

In practice, this means that occupiers may be asked to remain outside a specified area, to keep away from other occupiers or Inland Revenue officers, or to leave the premises. Failing to do any of these things could result in the occupier being liable to prosecution for obstruction.

Inland Revenue Observations:

There’s no denying the Commissioner does exercise her powers, including those under s16 as and when appropriate to do so. However the use of those powers is not as liberal as some commentators may suggest. It is a considered decision that involves a number of factors and is not made lightly:
- A s16 access request must be approved by an Investigations Team Leader, Legal and Technical Services Manager and Investigations Manager.
- A warrant must be obtained for accessing a private dwelling.
- A s16 visit requires significant Inland Revenue resources which includes a number of investigators, legal advisors, ancillary staff and support services, transport and storage capacity and potentially other recourses including Digital Forensics expertise.
- Those resources are often amplified as more than one site may be accessed at the same time.
- If it is considered there is a safety issue, for example firearms present, the New Zealand Police may accompany Inland Revenue.
- The Commissioner is also conscious of the disruption a s16 can cause for the other parties.

Advisor Observations:

The exercise of the power of access to premises and the accompanying power to inspect, remove and copy material is probably the most invasive of IR’s dealings with taxpayers. It is difficult for anyone who has not experienced such action by IR to understand the incredible feelings of invasion and affront that will often be engendered.

The author is no apologist for tax evasion and there will be instances where an unannounced access action will be justified, but there are cases where the adrenaline rush that no doubt accompanies IR officers flashing warrant cards, requiring cooperation and generally exercising powers that have the excitement of a TV drama, gets the better of people.

Our superior courts have allowed the warrantless search and seizure power to be exercised with comparatively little judicial intervention and with a light handed requirement for the Commissioner to have satisfied herself as to the necessity and relevance of the information being sought. That seems to have been on the basis that if Parliament had allowed the power to be undertaken without warrant, it was not intended to be subject to another level of judicial inquiry into necessity and relevance.
The result for advisors is really that the scope for dramatic intervention is virtually non- existent. Instead advisors should concentrate on keeping IR honest in the exercise of the power. That often lies in monitoring the extent to which IR seeks to question people on site, or to require “reasonable assistance”. As an example the requirement for reasonable assistance is imposed on “the occupier” of land or a building or place that is entered by IR. It is not at all clear that the occupier includes all and every person who happens to be on the premises at the time of the action by IR. The context of section 16 suggests that the occupier has to be someone who has authority to consent to another being present on premises. Neither is it clear that IR can require every person they find on premises to remain in place during a section 16 action.

Finally, there is the issue of questioning. The requirement to answer all proper questions is again imposed on the occupier and, despite IR’s routine questioning of employees on business premises which are visited using sectioin16, it is doubtful that such questioning is compulsory. It falls more within the voluntary inquiries that might be made under section 17 of the TAA and advisors are able to suggest that questions to employees who do not meet the standard of being an occupier can be declined. As to the extent to which answers are compellable otherwise, it is important to note that the obligation relates to “proper questions.” This certainly permits questions which would elicit privileged material to be declined but there is a broader range of “propriety” which permits intervention by an advisor to ensure that questioning is within acceptable bounds.

Legal privilege and the non-disclosure right
For the purposes of the Commissioner's search powers, the only privileges or confidentialities that apply to Inland Revenue's ability to access and seize documents are those provided for in sections 20 to 20G. The privileges and rights to confidentiality in s102 and in subpart 5 of Part 4 do not apply to the Commissioner's search powers because they have been specifically excluded by the Schedule to the SSA and by sections 20 and 20B. In practice, however, Inland Revenue regards the s20 privilege as extending to litigation privilege where New Zealand lawyers (as defined by the Lawyers and Conveyancers Act 2006) are involved. For this purpose, litigation privilege is regarded as covering documents created for the dominant purpose of advising or assisting on reasonably apprehended litigation.

Confidential communications between legal practitioners and their clients that meet the criteria under s20 are privileged from disclosure under s16. This does not apply to documents made or brought into existence for the purpose of committing or furthering the commission of some illegal or wrongful act (s20(1)(c)).

Sections 20B to 20G set out the criteria for claiming a non-disclosure right over tax advice documents subject to the information gathering power in s16. A document is not a tax advice document if it was created for purposes that include committing, or promoting or assisting the committing of, an illegal or wrongful act (s20B(2)(c)).
Often a taxpayer of their adviser will make a blanket claim of legal privilege or the non-disclosure right. A blanket claim of legal privilege or of the non-disclosure right across all documents is not a valid claim. As set out in OS 13/01, the Commissioner will provide an adequate opportunity for the owner of hard copy documents to review the documents to enable particularised claims to be made within a reasonable timeframe.
Where particularised claims are not made, and disputed claims are not resolved, within the agreed timeframe, the Commissioner will then continue to use the documents for investigative purposes.

While the Commissioner might agree to documents potentially subject to claims of legal privilege or the non-disclosure right remaining sealed for a reasonable period until the owner has the opportunity to review them, make particularised claims, and resolve any disputed claims, where the owner has neglected or chosen not to do so, the Commissioner can take any steps necessary to enable the investigation to continue.

In addition, s180(2)(b) of the SSA specifically authorises the Commissioner to continue with the investigation when proceedings have been commenced in relation to the exercise of s16 or the use of any evidential material obtained from the search. Taxpayers can apply to the High Court under s180(3) of the SSA for interim orders overriding s180(2).

If the claim of legal privilege or the non-disclosure right cannot be resolved between the Commissioner and the person making the claim, either party can apply to a District Court Judge for orders under s20(5) as to whether the claim for legal privilege is valid, or under s20G as to whether the document is a tax advice document (or for related orders regarding tax contextual information).

Inland Revenue Observations:

It is a lawyer’s responsibility to protect their client’s legal rights. The tax context is no different. However, there’s little to be gained from asserting rights which do not in fact exist (in the tax context), for example:
- Privilege does not apply to trust account records of payments, receipts, income, expenditure or financial transactions.
- Investment receipts that are trust account records are also specifically excluded from being privileged.
- Claiming blanket privilege over every document prolongs an audit and inevitably adds to the cost of the audit. The majority of documents requested under information requests or subject to the Commissioner’s search powers are generally not privileged or subject to non-disclosure rights. There are prescribed processes for addressing documents which are rightly privileged or subject to non-disclosure rights and the sooner the relevant documents are identified and a process agreed for dealing with these, the more efficiently the audit can be progressed.

In a similar vein it’s worth noting:
- Ignoring s17 requests to furnish information will not deter the Commissioner. Treat information requests and notices issued by the Commissioner seriously.
- Releasing your original file to the client subsequent to a request so you are “not able to provide the requested documents” may end in a discussion regarding obstruction.
- Although lawyers deal in precise terms and are in the details business, if a request is made and it’s clear what it pertains too, denying the request based on semantics only adds delay and further correspondence and cost to the audit.

Advisor Observations on privilege and non-disclosure:

This could be paper in itself. There are several high level points for advisors to remember when considering privilege and non-disclosure in the context of the Commissioner’s search and seizure powers:

Section 20 of the TAA only deals with legal advice privilege. All other common law privileges, including litigation privilege and common interest privilege are preserved except to the extent they have been codified under the Evidence Act. Recognition of litigation privilege is not a matter of practice concession by IR must a matter of law which IR must recognise.

Privilege and non-disclosure are rights exercisable document-by-document. The practical problem is that a section 16 action involves often incredible time pressures. There will seldom be time for the taxpayer to make a document by document review for privilege when IR officers are on the premises requiring that documents be removed for copying. IR’s primary concern is to preserve the record and if taxpayers are left to a make a review, there is an obvious risk that the record may be tampered with. The position is all the more difficult when IR wants to clone every computer hard drive within the taxpayer’s premises. These are the practical pressure which have led in the past to blanket claims of privilege being asserted even when it is clear that such a claim cannot properly be made if it is known that both privileged and non-privileged documents are within the compass of the claim.

IR has now developed procedures for protection of privilege and non-disclosure rights which strike a balance between preserving the record and allowing a taxpayer to review documents which have been removed in order to raise particular privilege claims. There are practical problems nevertheless because the ease with which a taxpayer may find privileged material in boxes that have been removed to IR’s premises will be much less than it its own filing system.

The procedures as they relate to electronic documents are complicated and usually require a taxpayer to submit a list of advisor names as key words with which IR’s computer forensic team can identify potentially privileged material. That material can then be excerpted and provided to the taxpayer for review and for confirmation of a privilege or non-disclosure claim. Remember that the claim process for tax advice non-disclosure is much more prescriptive than for legal privilege and claims need to be made in accordance with those rules to be upheld.

The limits of privilege are not well understood and as noted above it is important that financial records retained by a lawyer for a client do not attract privilege – that has been negated by section 20 of the TAA. There are however aspects of privilege that have been expanded by virtue of the statutory regime, eg the extent to which agency communications can be protected.

The section 20(5) process for testing privilege claims has some wrinkles to it. It is seldom a Judge who sits, poring over the contested documents, to decide whether there is a valid claim or not. In the author’s experience most District Court Judges simply do not have the time or inclination to undertake this role. Accordingly, it is not unusual for the Court to appoint an amicus to undertake the review and report to it. This approach involves cost and the Court seems inclined to require the party asserting the privilege to bear the costs of the amicus review. This is an incentive to deal with privilege issues sensibly.

Concluding an audit
At the conclusion of the audit the findings will be discussed and the Commissioner will send confirmation of any tax adjustments, and if required, any shortfall penalties in an Agreement to Amend Assessments form. A taxpayer has the opportunity to review this form and seek advice as to whether they wish to sign the form and agree to the proposed adjustments.

The Commissioner’s SPS 15/01, Finalising agreements in tax investigations (SPS 15/01) sets out the principles and parameters for finalising agreements and resolving disputes in tax investigations.[15]

Where possible disputes will be resolved by agreement. However, as outlined in SPS 15/01 issues should not be resolved or agreements finalised for the “sake of expediency or involve coercion to complete the investigation. All cases must be resolved issue by issue, based on the law and evidence available.” The following salient points from SPS 15/01 include:

Agreements, whether reached by resolution or settlement, must be made on a principled basis.
Resolution of disputes must be based on a genuine agreement as to the relevant facts and the application of the law to those facts. Issues should not be resolved and agreements finalised for the sake of expediency or involve coercion to complete the investigation.
Inland Revenue will not agree to resolve issues in some circumstances, for example:
- where such an agreement would mean not assessing an amount which is clearly assessable, or allowing a deduction which is clearly not deductible
- where the only consideration is the taxpayer’s ability to pay
- where the matter relates to use or money interest and/or prosecution action
- where the agreement would require Inland Revenue to act contrary to a settled view of the law.
Inland Revenue may agree to resolve issues where:
- the quantum of a disputed amount depends on facts, for example where there is doubt as to the correct apportionment to be made
- where an item may not be subject to precise computation.
Late payment and shortfall penalties, where applicable, should be discussed along with the substantive tax dispute. Shortfall penalties will not be used as leverage or as a bargaining tool to achieve agreement (i.e. let’s agree the core tax if Inland Revenue waives the shortfall penalty).
The potential application of shortfall penalties should be discussed, even in situations where prosecution action is being considered.
Failure to agree on shortfall penalties will not preclude agreement being reached on the substantive tax issue, however it should be made clear shortfall penalties are still on the table and that issue is yet to be resolved. This may involve entering a dispute in respect of shortfall penalties.
The ability of a taxpayer to pay is not relevant to determining their tax liability. This falls to be considered separately, although it may be discussed in tandem with resolution of the substantive dispute.[16]

Where an investigation covers a number of years, it may be possible to make an assessment on a year by year basis so that any dispute may be limited to particular years. Where this occurs, any agreement reached will not be a precedent for the treatment of future years (except where the matter concerns an adjustment arising from an agreed adjustment in a previous year or where an issue subject to an agreed adjustment spans more than one year).

As with settlements once the disputes process has commenced, there must be objectivity in the approval of final agreements. Consequently, an independent review of the case must be carried out by a person with the authority to approve the agreement. Generally this will be a team leader or higher level delegation holder.
There is a perception that the use of agreed adjustments is effectively trying to coax a taxpayer into agreement. An Agreement to Amend Assessments form, typically referred to as an “agreed adjustment” form is simply the final exposition of the Commissioner’s position, inviting the taxpayer to consider whether or not they agree with the position.

Where an agreement is being contemplated, an estimate of Use of Money Interest, if applicable, should also be ascertained.

Where no agreement is reached, the next step is for a Notice of Proposed Adjustment (NOPA) to be issued and the disputes process commences.

Advisor Observations:

The agreed adjustment form will not always refer to all of the back ground to a resolution or agreement. There may be factual assumptions that form the basis of the agreed position and there may also be implications of effects of the agreed position which need to be recorded. Do not treat the agreed adjustment form as automatically including these matters. If the full substance of the agreement is expressed in a series of letters between the taxpayer’s advisor and IR, culminating in the agreed adjustment form then care should be taken to record that exchange as having led to the agreed result. This can be done by attaching correspondence or by preparing a schedule of supporting material that is treated as forming part of the agreed adjustment record.

Disputes
Where the taxpayer and Commissioner disagree on a tax position, a dispute may be commenced by either party. [17] The specifics of conducting a tax dispute can be found in the Commissioner’s Standard Practice Statements, SPS 11/05, Disputes resolution process commenced by the Commissioner of Inland Revenue (SPS 11/05) and SPS 11/06, Disputes resolution process commenced by a taxpayer (SPS 11/06).

As with general audit activity, there can be a perception that investigators are personally invested in cases and seemingly on their own mission in respect of a particular audit. Against those perceptions, it’s helpful to understand some of the checks and balances an investigation or dispute is subject too. It’s also important to keep in mind if an audit has been concluded and a dispute commenced, significant work has gone into determining the Commissioner’s position. In the context of investigations some of the checks and balances include:

Each item of outbound correspondence is peer reviewed.
Team Leader approval is required at key steps in every case.
Managerial approval is required for certain decisions, for example default assessments over certain levels and prosecution action.
Shortfall penalties over certain levels are reviewed by a nationally moderated consistency committee.
Key disputes documents, shortfall penalty submissions of significant value and prosecution submissions are reviewed by Legal and Technical Services staff and undergo a process of “CTA” or “Critical Task Assurance”. For decisions, such as those involving the general anti avoidance provision, the oversight and sign off required is amplified and involves senior managers.
Both active and closed cases are quality reviewed each month.

Inland Revenue Observations:
There are a few things that can help expedite a dispute. Where a taxpayer notice (such as a NOPA or Notice of Response (NOR) seeks to rely on contracts or documentation, it is helpful if this can be provided with the dispute documents so all parties have clarity from an early stage. It’s not uncommon for information to be withheld, only to be provided at conference and the matter resolved.

The facts are not foreign to the taxpayer. Both parties should seek to clarify the facts and where possible, reach agreement on the facts or as many as can be agreed. Similarly, as soon as practicable, if the parties can agree on the issues or points of law in question, the discussions can be more focused and efficient.

An open dialogue and informed discussions throughout the process are genuinely welcomed by the Commissioner. However, there have been occasions where after many months, and in some cases far longer, of such discussions, and it is clear the parties cannot resolve the legal issues, advisors have been “surprised” and aghast” that the Commissioner is going to progress the case into dispute. Although the Commissioner supports Alternative Dispute Resolution (ADR) and resolution wherever possible, there will be some issues where the parties simply cannot agree. If the issues genuinely cannot be resolved between the parties, it’s in everyone’s best interests to progress the case.

Advisor Observations:

If a tax audit can be opaque to a taxpayer, the dispute process that follows a failure to agree the outcome of an audit is a ritual dance. The most common complaint about the process is that it is one that is technical and difficult, and requires a great deal of time and attention to be devoted to the preparation and exchange of notices. That complaint is still valid but the disputes process has improved somewhat as a result of refinements that enable a taxpayer to opt out and take matters to litigation more directly than was previously the case, but there is no doubt more could be done to lessen the burden the process places on taxpayers. It is simply bad administration to have a system which involves such a degree of cost and complexity as leads to taxpayers being financially and emotionally burnt off and so unable to pursue genuine disputes.

That said, there is more likelihood of resolving a dispute if care is taken to express the basis for the taxpayer’s position carefully. Some of the most important advocacy of a taxpayer’s position occurs during the disputes process and care should be taken not to leave out key facts and arguments but also to explain what IR should take form these. It is never effective advocacy to assume that the audience to which dispute notices will be directed will understand the implications or significance of what is being advanced. That is why the most important part of the disputes notice exchange is the section dealing with how the law applies to the facts. Too often this is dealt with by saying The law applies to the facts to negate the proposed adjustment but much more is needed to express the rationale for the position being advanced on the taxpayer’s behalf. If this is done effectively it can focus attention on the key issues and suggest a basis for resolving maters. When it does not achieve the later it will at least make for greater efficiency in the conduct of any later litigation.

Prosecutions and Disputes Running Contemporaneously
Although it is not common, there are occasions where prosecution action and the disputes process may be run contemporaneously. This typically occurs where the Commissioner has issued an assessment to which the taxpayer has then issued a NOPA. In the context of dual action, the Commissioner has likely issued an assessment pursuant to s89C(eb) of the TAA where the Commissioner has assessed in the absence of a NOPA as the Commissioner has reasonable grounds to believe that the taxpayer has been involved in fraudulent activity. If the taxpayer wishes to dispute this, it necessitates a taxpayer initiated NOPA and commencement of the disputes process.

This can cause a tension between the prosecution and the “all cards on the table” civil disputes process where the onus of proof is on the taxpayer, except for proceedings relating to evasion or similar act (s 141E), or obstruction. The standard of proof in civil proceedings being on the balance of probabilities.[18] In criminal proceedings the standard of proof is beyond reasonable doubt and rests with the Commissioner.[19] In the civil dispute the taxpayer needs to make their position clear and evidence that position, whereas in the criminal context it’s for the Commissioner to make out the case, hence there can be some tension between the civil and criminal requirements and the provision of relevant information and evidence.

In Skinner and Rowley v R [2016] NZSC 101, the Supreme Court examined whether s109 of the TAA precluded conviction for knowingly supplying false information to the Commissioner, in breach of s143B(1)(C) of the TAA.[20]

The Supreme Court made some observations on the practical considerations involving both civil and criminal proceedings against a taxpayer:

[65] Hearing the civil proceedings before the criminal trial would carry the risk of interfering with the fair trial rights of the defendant. As he or she would have the burden of proof in the civil proceeding, he or she would be required to disclose information supporting his or her position and, in effect, disclose his or her defence to the criminal charge in advance of the trial. In a different context, these risks led the Court of Appeal to uphold the adjournment of civil proceedings until after criminal proceedings were completed in Commissioner of Police v Wei. In that case, the civil proceedings were applications by the Commissioner of Police for asset forfeiture orders under the Criminal Proceeds (Recovery) Act 2009.

[66] Kós J recorded that the IRD’s preferred practice is to amend an assessment (triggering the civil process for disputes in the TAA) after the outcome of the criminal process is known [R v Rowley (2012) NZTC 20,127]. This accords with the appropriate order as outlined in the Wei case. The Commissioner is allowed to do this because the time limits in ss 107 and 108 of the TAA do not apply by virtue of ss 108(2) and 108A(3). The express exceptions to these time bar provisions appears to be designed to facilitate the conduct of criminal proceedings before civil proceedings.

Although it is not common to have dual proceedings, when it is unavoidable, there are ways to mitigate this tension. Typically, the Commissioner would agree to parking the civil tax dispute at the conference stage - after the NOPA and NOR have been exchanged, until the prosecution case had been determined. Assuming both parties have co-operated efficiently and the case progressed through the courts, this should be manageable. However, where delays ensue, one needs to be mindful of s89P of the TAA which provides that where a taxpayer has initiated the dispute, the Commissioner must issue a challenge notice within four years of the taxpayer issuing its NOPA.

It is acknowledged there are other practical tensions that occur in such cases, including a taxpayer having to practically and financially address both the dispute and prosecution action.

Advisor Observations:

The observations in Skinner and Rowley provide some assistance in managing the tensions that arise when both civil and criminal aspects of a dispute have to be dealt with side by side. But they do not resolve the matter entirely. They do not deal with the fact that an audit may have a dual focus, civil and criminal and that action following that may involve prosecution while a civil dispute has been commenced.

The problem is that there is no functional distinction under the TAA between protecting the integrity of the tax system by tax recovery and by prosecution. Resolving civil liability is about technical argument, verifying calculations and payment – it is “all about the money”. By contrast criminal investigations carry risk to reputation and liberty. Disclosure made to resolve the civil side may strip defences from the criminal side.

NZ is a nation of legal pragmatists not constitutionalists and so our practice differs from, say, that in the US. There a split is required between civil and criminal investigations and the authorities are required to nominate which path they are following because of the potential impact on the rights of the taxpayer. The UK also has a procedure under which a civil investigation will shift to a criminal one, with disclosure protections. In NZ both aspects are investigated at the same time and by the same investigators and very often warnings as to the risk of prosecution are not given until too late.

All stages of IR action from risk review, through requests for information to notified audit can expose the taxpayer client to the risk of criminal prosecution or of escalating matters to that point. The risk of criminal action does not always present itself immediately but can emerge over time. Often the taxpayer’s advisor is so keen to cooperate with IR in the face of criminal issues that the taxpayer’s rights are compromised without knowing. Yet there are risks in not cooperating, such as obstruction and penalty loadings. The arts is in getting the right balance.

The tensions arise in the way interview requests should be dealt with. “Voluntary interview” means just that – you need not answer questions but the content of answers can be used against you. To many advisors blithely allow their clients to be interviewed without care over what is being said and its implications for possible criminal liability. This can be contrasted with the compulsory interview under section 19 of the TAA where there is some greater protection for the taxpayer over admissions.

An advisor should keep in mind the prosecution/SFP choice. The imposition of a SFP will lock out the possibility of a prosecution and this possibility should be actively pursued if an audit develops so that criminal exposure is apparent.

IR’s preference for undertaking prosecution action before a civil dispute comes with some risks. IR will often assess without NOPA because of fraud. Even if it takes no other steps it is able to institute recovery action such as by interception of bank accounts or by obtaining freezing orders. This can choke off a taxpayer’s criminal defence resources.
Managing the implications of dual civil and criminal investigations is one of the most challenging aspects of a tax audit or dispute. It requires an advisor to be alert to emerging risk, be ready to use voluntary disclosures to greatest effect, control the interview process, and assess the value proposition for the client in various outcomes (some of which may involve prosecution)

Facilitated Conferences
Facilitation of tax dispute conferences was introduced six years ago. Facilitation is a form of ADR and occurs after the parties have exchanged the NOPA and NOR. Once these documents are exchanged the taxpayer is offered a conference where the parties can discuss the issues with a view to resolving, or at least refining the issues. Taxpayers have the option whether to have the conference facilitated.

Inland Revenue has some 70 senior, experienced staff trained and accredited to carry out facilitations. As part of Inland Revenue’s commitment to ADR and the facilitation process, the facilitators all underwent training provided by the Arbitrators and Mediators Institute of New Zealand Inc (AMINZ). Once facilitators were sufficiently trained and experienced, they were then accredited as Associate members of AMINZ.

The facilitator appointed will be independent of the case and the Inland Revenue teams involved in the dispute. Generally facilitators are from a different regional office and/or business unit. Although the facilitator does not hold any formal decision making powers, the facilitator can assist the parties in seeking to resolve differences in the understanding of the facts, the law and the arguments being put forward by both parties. Where appropriate, the facilitator can work with the parties to explore resolution.

Six years on, over 600 facilitated conferences have been held, with over half that number occurring in the last two years. Around 55% of all facilitated conferences achieved resolution of the dispute. Having a facilitator brings a fresh set of eyes and a new perspective to the case, along with someone independent of the Inland Revenue team involved.

Inland Revenue Observations:

Where key documentation is to be provided, for example a specialist report, it is preferable (for either the Commissioner or the taxpayer) to provide this to the other party with sufficient time to consider it. To get value out of a meeting or conference, it is important the parties have had time to meaningfully consider such developments. Providing comprehensive specialist reports the day, or shortly before the conference often means the discussions are not as valuable as one would hope.

Advisor Observations:
The success of a facilitated conference is largely dependent on the facilitator and their preparedness to engage with the parties over the strength of their respective positions. There are some facilitators who are passive and some who are more active. In the author’s experience the conference exercise is regarded by taxpayers much more positively if the facilitator is actively engaged, prepared to question the positions being taken by the parties, express tentative views about those positions and suggest where there could be reconsideration by either party of the other’s position. Without such intervention there is a real risk that a conference deteriorates into an exercise where IR and the taxpayer simply rehearse their already traversed argument across the table to no real result.

It is clear that a facilitator is not empowered to make a decision resolving the matter that is in dispute. That makes it important that the parties in the room include persons who, on both sides, are able to make a decision which will resolve maters. In the author’s experience the hierarchy of decision making within IR makes it difficult to have the required decision maker within IR at the table. The IR policy seems to be that where major settlements are in issue the delegation to deal with them will be at a relatively high level (see further commentary below) and so conferences can be a frustrating exercise in development of without prejudice recommendations, assurances of them being passed up the chain and then waiting for the outcome. Regrettably this leads more often than it should to expectations from conferences not being delivered as a result of the conference outcome being deliberated on within IR at a higher level.

Opt Out
Section 89N(1)(c)(viii) of the TAA provides the Commissioner and a taxpayer may agree, to opt out of the disputes resolution process if they are satisfied that it would be more efficient to have the dispute heard by a court or the Taxation Review Authority. The Commissioner will not agree without a conference having been held and the taxpayer must have participated meaningfully during this administrative phase. This ensures the issues have been thoroughly discussed. For more detail on the requirements and formalities of the opt out process refer to SPS 11/05 and SPS 11/06.

Although there has been a degree of displeasure expressed with the requirement for the Commissioner to agree to an opt out request, at the date of writing, I can find no occasions on which a request has been declined.

Advisor Observations:

The opt out form the disputes process is a useful means of bringing the disputes process to an end and getting a matter to Court or before the TRA. It suits taxpayers who have a clear view of their case and it does not preclude those taxpayers who want to roll the dispute resolution dice more than once (through notices, SOPs and dispute review) form doing so.

Settling Disputes[21]
The courts have held that, under s6A(2) and (3), the Commissioner can enter into:

Settlements where taxpayers dispute the interpretation of law or facts on which their liability has been assessed (Accent Management Ltd v CIR (2006) 22 NZTC 19,758 (HC); Accent Management Ltd (No 2) v CIR (2007) 23 NZTC 21,366 (CA).; Auckland Gas Co Ltd v CIR (1999) 19 NZTC 15,027 (CA); AG v Steelfort Engineering (1999) 1 NZCC 61,030; and Fairbrother v CIR (2000) 19 NZTC 15,548 (HC)).
Agreements as to the payment of outstanding tax, penalties and interest (Raynel v CIR (2004) 21 NZTC 18,583).

The courts have emphasised that settlements are made where the taxpayer’s obligations and entitlements are legitimately disputed and, therefore, the Commissioner will need to undertake litigation to collect the full amount of tax she considers owing. The courts have recognised that the Commissioner may consider, in light of the litigation risk, that the resources required could be better used elsewhere to maximise the net revenue collected.[22]

In holding that the Commissioner is authorised to enter settlements, the courts have given effect to a key outcome intended to be achieved by enacting s6A(2) and (3). The Organisational Review of the Inland Revenue Department, Report to the Minister of Revenue (and on tax policy, also to the Minister of Finance), April 1994, Wellington (“the ORC report”) shows that it was specifically contemplated that s6A(2) and (3) would authorise the Commissioner to enter settlements (ORC report, section 8.2):

One significant implication from the objective [that the Commissioner will collect over time the highest net revenue that is practicable within the law] is that IRD will be entitled to enter into compromised settlements with taxpayers, rather than pursue the full amount of assessed tax, in cases where there are legitimate differences of view about the facts in dispute and the costs of litigation are high.

Although the courts have not specifically considered whether the Commissioner can settle tax disputes before litigation or the formal disputes process has started, the Commissioner considers that, in principle, there is no impediment to doing so. The Commissioner may consider that settling will enable her resources to be better used to maximise the net revenue collected. The Commissioner’s position and responsibilities before litigation or the formal disputes process has started are not inherently different to her position and responsibilities during litigation. However, the litigation processes often results in the Commissioner possessing more information than she did before. Accordingly, the Commissioner will consider settling before litigation or resolving cases before the commencement of the disputes process only if satisfied that she has sufficient information on which to make an informed decision.

The case law is clear that the Commissioner can enter settlements with taxpayers if she considers doing so is consistent with s6A(3) and s6. It is not possible to list all the factors the Commissioner may consider in deciding whether to settle. Ultimately the decision must be determined by consideration of all factors relevant to the particular case. However, the following, non-exhaustive list identifies some of the factors the Commissioner could consider relevant (depending on the circumstances of the particular case):

        • the resources required to undertake litigation;
        • the alternative uses of those resources;
        • the amount of the tax liability at stake;
        • an assessment of the litigation risk (eg, the likelihood of the Commissioner succeeding);
        • the implications of the Commissioner succeeding (in whole or part) if litigation is undertaken;
        • whether settling or litigating would better promote compliance, especially voluntary compliance, by all taxpayers;
        • the amount the taxpayer would pay if the Commissioner were to settle;
        • whether the subject matter of the dispute might be determinative of, or have broader application to, other situations;
        • whether the Commissioner would be prepared to settle on an equivalent basis with other taxpayers in a similar position;
        • the uncertainty in the tax system that might be created should the subject matter not be authoritatively determined by the courts; and
        • the likely effects on taxpayer perceptions of the integrity of the tax system of settling or litigating.

As already stated, the factors identified above are not exhaustive. Some of these factors may not be relevant and additional factors may be relevant given the circumstances of any particular case. It is for the Commissioner to decide on the appropriate weighting given to the relevant factors in a particular case, however it is helpful for practitioners to turn their mind to such factors when making a settlement proposal.

Inland Revenue Observations:
As with other powers the Commissioner holds, the Commissioner will prescribe which officers have the delegated authority to decide whether to settle. This can be a source of frustration for taxpayers and advisors who desire the decision maker to be in the room when discussions are held so that a decision can be made there and then. Whilst cognisant of this desire, it is not the Commissioner’s practice for a number of reasons. In particular, the care and management delegation for settlements is held by a select number of highly experienced senior managers. Given this delegation is not widely held, it would not be practical or possible to have the delegation holders present, for example, at dispute conferences. Further, settlement proposals are subject to a number of checks and balances prior to being submitted to the delegation holder to ensure the proposed settlement accords with the Commissioner’s care and management obligations and statutory framework. Having time to properly undertake this consideration outside of the meeting or conference leads to better and consistent decisions than might otherwise occur if hastily made.

Although the Commissioner appreciates some taxpayers may view settlement of a tax dispute as they would any general commercial dispute, the Commissioner does not settle on a “commercial” basis. Any settlement is on a principled basis and takes into account the factors such as those outlined above. For a more detailed discussion on the Commissioner’s care and management obligations and ability to settle tax disputes, please refer to the Commissioner’s Interpretation Statement IS 10/07, Care and Management of the Taxes Covered by the Inland Revenue Acts, Section 64(2) and (3) of the Tax Administration Act 1994 (IS 10/07).

The Commissioner will always consider a settlement proposal made by a taxpayer in line with the statutory framework and IS 10/07.

Although it is recognised that each step in a process adds to time taken, the various processes implemented by the Commissioner are implemented with a view to creating more consistent and accurate decisions. It can be difficult to strike the right balance between consistency and flexibility.

Advisor Observations:

It is true that settlement negotiations with IR are not a commercial exercise yet there is undeniably a commercial element in that IR always has parameters within which a settlement is likely to be possible and outside of which a settlement will probably be rejected. Understanding those is the first step towards being able to guide a taxpayer to a positive result.

Having said that, there is one aspects of the way IR deal with settlement negotiations which taxpayers find infuriating. It is that IR will very seldom counter-offer and will simply reject a proposal for settlement and leave the taxpayer to try again. In those instances, where a counter offer has been made, the approach adopted by IR has been to remain firm on the counter offer, something that commercial taxpayers find difficult to understand.

[1] Senior Solicitor and Assistant Case Director, Inland Revenue.

[2] Tax Barrister, Old South British Chambers, Auckland.

[3] The terms “audit” and “investigation” are used interchangeably in this paper.

[4] IR 297 Inland Revenue Audits – Information for taxpayers.

[5] Inland Revenue Compliance Focus 2014-2015.

[6] For further details refer to the Commissioner’s Standard Practice Statement SPS 16/03, Notification of a pending audit or investigation.

[7] Any discussion in this paper pertaining to reductions for a voluntary disclosure assumes a full voluntary disclosure has been made in accordance with the relevant statutory requirements.

[8] For the detailed requirements of making a voluntary disclosure refer to s141G of the Tax Administration Act 1994 and the Commissioner’s Standard Practice Statement SPS 09/02, Voluntary disclosures.

[9] Section 141G(3)(a)(i) of the TAA.

[10] Section 141G(3)(a)(ii) of the TAA.

[11] Inland Revenue Annual Report, 2015.

[12] For a comprehensive discussion of this topic refer to the Commissioner’s Operational Statement, OS 13/01 The Commissioner of Inland Revenue’s search powers which forms the basis of this section.

[13] In order to remove documents under s16C, the Commissioner requires either a warrant or the consent of the occupier. Neither a warrant nor consent is required in order to remove the documents for copying under s16B.

[14] Section 143H of the TAA.

[15] As in the SPS, the term “disputes” in this discussion refers to both a difference in opinion on the application of the law that may occur during an investigation as well as disputes within the formal disputes resolution process contained in Part 4A of the TAA.

[16] Refer sections 177,177A-177D of the TAA. The remission and relief regimes of the TAA are outside the scope of this paper.

[17] Subject to certain statutory requirements. Refer for example s89D of the TAA.

[18] Section 149A(1) and (2) of the TAA.

[19] Section 149A(3) and (4) of TAA.

[20] Section 109 provides that except in objection or challenge proceedings, a disputable decision, including an assessment, is deemed to be correct.

[21] The following discussion is from paras 151-161 of the Commissioner’s Interpretation Statement IS 10/07, Care and Management of the Taxes Covered by the Inland Revenue Acts, Section 64(2) and (3) of the Tax Administration Act 1994.

[22]

OLD SOUTH BRITISH CHAMBERS, LEVEL 3, 3-13 SHORTLAND STREET, AUCKLAND, NEW ZEALAND