IRD’s compliance focus has remained largely the same over the last few years with the likes of aggressive tax planning, high-wealth and high-income individuals and land transactions being key areas of focus. The “hidden economy” is another area where there has been a lot of IRD activity over the last year and we expect to see even more in the coming year. It is currently a headline item on IRD’s website.

The hidden economy refers to the part of the economy that people hide by not disclosing transactions and income to IRD. The hidden economy includes “cashies” and “under-the-counter” sales that are not put through the books or till. It also includes barter arrangements where the value of what a person receives for the goods or services provided is not included as income. Undertaking such transactions is tax evasion. If detected, not only will the person have to pay the tax evaded but also a penalty of 150% of that tax. For the worst (habitual) offenders, there could be a fine of up to $50,000 and/or a term of imprisonment not exceeding five years.

IRD is having increasing success at detecting transactions in the hidden economy. Detection could result from something as simple as someone “dobbing in” the offender (a link on IRD’s website provides a confidential means of doing this), disclosure of the transaction to IRD by one of the parties, an audit of one person suggesting another’s tax affairs should be audited, or a focus on participants in an “at risk” industry (e.g. the building industry or second-hand goods). IRD has also been using computer-based benchmarking tools to compare the performance of a business with industry norms for evidence a taxpayer is not disclosing income. These tools are becoming increasingly sophisticated and we understand IRD is set to roll out new benchmarking tools in the coming year.

A person with concerns about the tax liabilities that may arise from transactions they have hidden from IRD has the option of making a voluntary disclosure. By making a voluntary disclosure before IRD identifies an issue, a person can obtain a reduction in the penalties they face of between 100% and 40%.

For more information please contact your Findex Tax Adviser.