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
Advisor Observations by Geoff Clews
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.
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.
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. 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 current Compliance Focus includes:
• don’t seem to make commercial sense
• deliver unusually favourable tax advantages.
• 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.
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.
Inland Revenue Observations:
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. A major advantage is shortfall penalties may be reduced by up to 100%, and in some cases may avoid prosecution action. 
A taxpayer may make a full voluntary disclosure for the purpose of shortfall penalty reduction either:
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:
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
Where a taxpayer makes a full voluntary disclosure the following reductions in shortfall penalties are available:
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:
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.
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:
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:
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.
The Commissioner of Inland Revenue’s search powers
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. 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.
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:
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:
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.
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:
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.
Where the taxpayer and Commissioner disagree on a tax position, a dispute may be commenced by either party.  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:
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.
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. In criminal proceedings the standard of proof is beyond reasonable doubt and rests with the Commissioner. 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  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.
The Supreme Court made some observations on the practical considerations involving both civil and criminal proceedings against a taxpayer:
 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.
 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.
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.
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.
The courts have held that, under s6A(2) and (3), the Commissioner can enter into:
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.
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.
 Senior Solicitor and Assistant Case Director, Inland Revenue.
 Tax Barrister, Old South British Chambers, Auckland.
 The terms “audit” and “investigation” are used interchangeably in this paper.
 IR 297 Inland Revenue Audits – Information for taxpayers.
 Inland Revenue Compliance Focus 2014-2015.
 For further details refer to the Commissioner’s Standard Practice Statement SPS 16/03, Notification of a pending audit or investigation.
 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.
 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.
 Section 141G(3)(a)(i) of the TAA.
 Section 141G(3)(a)(ii) of the TAA.
 Inland Revenue Annual Report, 2015.
 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.
 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.
 Section 143H of the TAA.
 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.
 Refer sections 177,177A-177D of the TAA. The remission and relief regimes of the TAA are outside the scope of this paper.
 Subject to certain statutory requirements. Refer for example s89D of the TAA.
 Section 149A(1) and (2) of the TAA.
 Section 149A(3) and (4) of TAA.
 Section 109 provides that except in objection or challenge proceedings, a disputable decision, including an assessment, is deemed to be correct.
 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.