Sometimes people cut corners with their taxes. Not everything is returned as it should be. Claims are over stated or income is suppressed. Often these defaults start small and simply get out of hand. The IRD allows voluntary disclosures which substantially reduce penalties and in many cases avoid the risk of prosecution. The trick is not to wait too long before making a disclosure and to be sure that it covers all the ground required by the IRD.
Voluntary disclosures may be prompted by a number of things. You may simply want to make a clean start on your tax affairs. You may have received a preliminary letter from the IRD – it is still not too late at this point to disclose matters. You may be involved in another dispute altogether with someone who knows about your tax affairs (say an ex-spouse or partner) and want to remove a pressure point in your dealings with them. Whatever the reason, a voluntary disclosure must be made carefully and fully to attract the full range of concessions that are available. It is also wise to use the occasion of a disclosure to deal with all your tax skeletons because it is invariably the case that a disclosure is verified by the IRD and it can be followed by a full investigation.
The IRD’s requirements are set out in a Standard Practice Statement. This covers the necessary content of the disclosure and the concessions that will follow. The disclosure should set out a clear and comprehensive statement of the errors that are being disclosed and of the reasons for them. If several taxpayers are potentially affected by the disclosure all of them need to be included so that concessions apply across the board. Enough information should be disclosed to enable the IRD to make an assessment. Ideally this means that an effort should be made to calculate the tax position as a result of the disclosure.
If a voluntary disclosure is made before the notification of an investigation the IRD will allow a 75% reduction of shortfall penalties that would otherwise apply and an indemnity from prosecution will normally be given. Since May 2007 shortfalls which are of lesser severity qualify for a 100% reduction of penalty if a prenotifcation disclosure is made.
If a disclosure is made after notification of an investigation but before it has commenced, a 40% penalty reduction will be available. It is still possible to negotiate for non prosecution at this stage.
Geoff Clews has assisted many clients, some very prominent business people, to make voluntary disclosures and to negotiate settlements with the IRD on the best terms possible.
For frequently asked questions about voluntary disclosure, click here.
To contact us about making a voluntary disclosure, click here.