In the past, an IRD audit could be commenced for no other reason than the business had not been audited in recent years. Audits would start with the stereotypical interview comprising a series of broad questions that may or may not apply to the business, before the investigator would commence trawling through invoices looking to see if everything is in order.
More recently, the IRD have started using a variety of techniques to identify who to audit (such as data analysis). Once identified, a detailed background analysis (industry and the business itself) is usually completed before the audit commences. In some cases, contentious transactions or industry specific risks are identified before the IRD makes contact.
A noticeable increase in the sophistication and technical ability of the IRD Investigations staff has also been seen. This has its benefits and disadvantages. Time won’t be wasted on small issues as a result of technical inexperience. However, when an issue is identified it is more likely that the IRD Investigator will be able to establish non-compliance, or will have good reason to investigate further.
If you do receive a risk review or audit letter from the IRD it is important to take it seriously and adequately prepare for the process. An internal review could be completed first, as a form of risk assessment, but note a standard request from the IRD is to provide a copy of any internal or external review results – so care needs to be taken regarding how results are documented.
A professional and collaborative relationship with the IRD should be built from the first point of contact. During the initial meeting with the IRD a short overview of the organisation including its business and financial operations should be presented. Be prepared to discuss areas of risk within the organisation and the processes already in place to address those risks – such as the review process for GST returns. It should be clearly established how further information requests are made, e.g. in writing to a nominated point of contact who will be responsible for managing the audit on behalf of the business.
Tax advice previously provided by your advisors, which may include your accountant, is subject to “Privilege”. In some cases requests for information may be received, but the information does not need to be provided, or only extracts of it need to be provided.
It is important to make evident that your organisation meets its tax obligations with the appropriate level of rigour and management oversight. It is also important not to stress and let the process consume you. Utilise the skills of your professional advisors throughout. It won’t be their first time. It is a process, it just needs to run its course.