This article explains the risks associated with filing IR10 accounts information forms and recommends filing financial statements as well or instead. It also highlights the way IRD misleads the public in denying any disadvantage of using IR10 forms.

We have written before in respect of

  • IRD strongly encouraging taxpayers to file an IR 10 “accounts information” form in substitution for financial statements, and then
  • later claiming that the taxpayer is not protected by the four year time bar because they “failed” to file the financial statements

Overriding time-bar

In a recent dispute we won on behalf of our clients, IRD sought to impose income tax on the subdivision and sale of farmland

  • initially because the subdivision involved ‘work of more than a minor nature’ (a concept that was completely irrelevant as the land had been owned for several decades before the work commenced); and
  • Subsequently because the transaction involved “major development work”, a matter which we were able to overturn on technical arguments.

Underlying all this however was the fact that the sale of the land was disclosed to IRD in GST returns and in financial statements more than four years before IRD’s review commenced and were thus (in our view) protected by the four year statutory time bar:

108(1) [No increase in assessed amount after four years]

Except as specified in this section or in section 108B, if—
(a) A taxpayer furnishes an income tax return and an assessment has been made; and
(b) 4 years have passed from the end of the tax year in which the taxpayer provides the tax return,—

the Commissioner may not amend the assessment so as to increase the amount assessed.

….

108(2) [Fraudulent or wilfully misleading returns]

If the Commissioner is of the opinion that a tax return provided by a taxpayer—

(a) Is fraudulent or wilfully misleading; or
(b) Does not mention income which is of a particular nature or was derived from a particular source, and in respect of which a tax return is required to be provided,—

the Commissioner may amend the assessment at any time so as to increase its amount.

As noted previously, IRD repeatedly tells us that it doesn’t want to receive financial statements, and instead taxpayers should file an IR10 form.

See for example Agents Answers issue 133 March 2011 which states:

“We understand there are concerns about the lack of information able to be disclosed in an Accounts information (IR10) form…” Because of these
concerns some E-Filers and other agents choose to send paper returns so they can attach more disclosure information. We’d like to assure you that this isn’t necessary and you can continue to use the IR10 and E-File returns confidently.

It isn’t our policy to disadvantage taxpayers and their agents who use the IR10″

IRD has made a number of similar statements since 1994 when NZICA first raised the issue.

Comforting words, but regrettably not true.

If (contrary to IRD’s instructions) the financial statements were lodged with IRD, IRD could not have reopened the tax returns unless they were ‘wilfully or fraudulently’ misleading, a matter which IRD has never alleged.

In this case IRD did override the time bar because the accountant had not disclosed the sale in the IR10 filed instead of the financial statements. And yet IRD’s own policy statement states

Our policy in [the case of information in error omitted from an IR10] is that if an audit reveals such a situation this omission in itself would not be grounds to reopen a statute barred back year assessment under section 108(2) of the Tax Administration Act 1994 (section 25(2) of the Income Tax Act 1976) unless there is conclusive evidence that the omission from the IR 10 was part of a scheme to fraudulently or wilfully mislead the Commissioner.

As noted, we won the dispute, but all the costs incurred by the taxpayer and IRD would have been unnecessary if IRD followed its own guidance.

Ombudsmen

In July 2011 we raised this in a formal complaint to the Commissioner, and then in September 2011 to the Ombudsmen’s office.

IRD simply refuses to answer the question – instead burying the issue in a swamp of commentary that is either uncontested or otherwise irrelevant.

Regrettably over the course of six months the Ombudsmen’s office has contributed nothing to the issue – instead just acting as a postman passing submissions back and forth between the complainant and IRD. As at the date of this article, the Ombudsmen won’t even estimate when it will have finished its deliberations, let alone provide the answer.

Our recommendations:

  • Financial statements need to be filed with every tax return.
  • Do not rely on an IR10 form.
  • if something does slip up, be ready to challenge Inland Revenue.