'The gloves are off': Inland Revenue gets back to business chasing tax debts

“The gloves are off” and Inland Revenue is ramping up audit activity and chasing tax debts after focusing on pandemic payments for the past two years, tax experts say.

Grant Thornton’s national director for business advisory services and tax, Greg Thompson, said the “nice amenable let’s help business” approach from the tax department has gone and “the gloves are off”.

Thompson said he had clients who were clearly Covid-affected who had been told to come back to Inland Revenue (IR) when they could pay the principal of their tax debts and penalties would be wiped. 

But he said now the business was in a position to have that conversation, they were being told Covid assistance was finished.

“And we’re starting to see audit activity starting to ramp up. They are clearly out of their old mode and into the new.”

One Auckland business owner told Interest.co.nz they were in the "fight of their lives" with IR to try and save their company.

PWC tax partner Sandy Lau said audits were starting again which the firm hadn’t seen for a while, and its team were being questioned on audits. 

Lau said Inland Revenue had more focus on compliance now rather than helping business through Covid.

She said there would be more tough times coming after the record storm which hit Auckland, Coromandel and Northland, and it would be interesting to see whether IR “pivots” in terms of how they approach taxpayers in need.

“I think there is still room in the rules to provide a bit of relief in terms of working out instalment arrangements and things like that, or working it through with a business owner to say how they might pay and how they might catch up on the various tax payments.”

The core job of the department is to collect tax, so it should be taking a bit of a “carrot and stick” approach to chasing tax debts which have mounted throughout the pandemic, Lau said.

IR said in an emailed statement that there was “flexibility currently in play for those affected by the flooding at the top of the North Island”.

The statement said IR was increasing its efforts to engage businesses that have outstanding tax debts and who have not taken any steps to set up a payment arrangement or made contact to discuss their situation.   

“Once we understand the circumstances that each business is facing, IR can better determine how to address their respective tax debts. IR willingly works with business-owners to find answers to their immediate cashflow problems on the basis that our primary responsibility is to maximise revenue over time.  However, if it is clear that a business is no longer viable, we will take all appropriate action to address current and future debt through the legal processes available to us.” 

IR’s 2022 annual report showed $2.38 billion in debt was put under instalment arrangements in the period covered.

It failed to meet most of its targets for investigations for the period due to the focus on Covid-19 payments and social payments.

Peter Mersi was appointed Commissioner of IR in July of 2022. In a speech to the chartered accountants body CAANZ, Mersi said compliance checks were increasingly happening at the time of a transaction.

He said this “right from the start approach” and “new tools” resulted in $166 million in wrong or potentially fraudulent refunds stopped in the last financial year.

On the edge

McDonald Vague senior associate Keaton Pronk said IR had been advertising more applications to wind up businesses and putting the pressure on.

He said Inland Revenue had been ratcheting up activity since July 2022, and company insolvency appointments had been tracking up since with a spike in November. Applications to wind up firms had started strong in 2023, exceeding the number of applications in both January 2022 and 2021.

Pronk said it was winding up applications from IR that had picked up and continued to rise in January. IR had a backlog of derelict debtors but how far recovery collections would continue into the 2023 election year was yet to be seen, he said.

The bulk of companies that Pronk was seeing go into liquidation or an insolvency process had received the government Covid-19 small business loan and had that as one of their debts, he said.

"Business owners that are starting to feel that kind of squeezed need to probably take a hard look at their bottom line and work out whether or not your businesses is viable without all the government subsidies ... A trading on a business is like all of us, we have a responsibility to pay tax. If you're not able to pay it, you're operating at a discount that other business competitors can't compete with, because you're not paying taxes."