This article explains how IRD charges unsuspecting taxpayers with interest rates that exceed all but lenders of last resort, and calls for a change in approach.

IRD continues to rip off its customers under the guise of use of money.

IRD claims it is lending at its published UOMI rate which is currently 8.4% (and if IRD owes you a tax refund at best IRD only pays out 1.75%)

The 8.4% rate on its own can be excessive when the taxpayer can instead borrow from the bank, current short terms rates around 5%.

However when the debt is only identified some time after the event the taxpayer doesn’t get that choice and is charged at historical IRD rates up to 14.24% (the IRD rate applying from March 2007 to March 2009).

IRD’s ‘market value’ argument

IRD claims to base these on market rates.

By way of example, we quote from some relatively generic text in a letter from IRD justifying charging backdated use of money interest on a debt that the taxpayer did not know about.

The overall purpose of UOMI is to encourage taxpayers to pay the correct amount of tax on time.

UOMI is charged to compensate the Government for underpaid tax. It is calculated on the formula set out in section 120E of the TAA.

Section 120A(2) provides that interest is not a penalty. It is not charged on the basis of any assessment of fault.

In the reverse situation, where taxpayers have overpaid their tax, Inland Revenue pays credit interest to the taxpayer.

Ever since the advent of the regime, IRD has always charged significantly more than it is prepared to pay.

Currently IRD pays 1.75% on “overpaid tax” but charges 8.4% on “underpaid” tax, even if the taxpayer was unaware of it.

Late payment penalties

Even the above market debt rates are not enough to satisfy Shylock at IRD.

IRD also routinely imposes “late payment penalties”, 5% up front plus another 1% per month. This compounds to around 17%, so in the first year of a backdated tax debt the taxpayer shells out around 25% for being late in paying.

A backdated tax debt can double in three years and triple in five.

Even worse, unlike interest, the late payment penalties are non deductible, so the effective pre tax rate is even higher.

Not only is this extraordinarily harsh, often the taxpayer simply can’t afford to pay the total that IRD demands, and government ends up counting an asset that may never be collected.

Distinction between interest and punishment

We say late payment penalties are an abomination:

  • If the taxpayer has committed a fault such as failing to take reasonable care, IRD adds yet more shortfall penalties
  • Interest is to compensate use of money, penalties are to punish
  • Late payment penalties pretend to be the former but are actually the latter, so that IRD punishes taxpayers who have done nothing wrong

Remission

The Tax Administration Act states that the Commissioner may (not must) remit penalties or interest if the Commissioner is satisfied that the remission is consistent with the Commissioner’s duty to collect over time the highest net revenue that is practicable within the law, having regard to the importance of penalty/interest in promoting compliance, especially voluntary compliance.

IRDs published view is that this is intended to cover cases like:

  • remission of a late filing or late payment penalty if the taxpayer did not file or pay because of an honest oversight which was promptly corrected once identified, and
  • remission of a penalty if the taxpayer’s liability arose as a result of the Commissioner issuing incorrect advice.

Unfortunately IRD staff can take a very narrow view of what falls under these criteria.

We say that if a taxpayer voluntarily discloses a shortfall, interest should be limited to what the taxpayer would have paid if they had funded the payment themselves (eg at normal borrowing rates)

In some circumstances IRD should give serious consideration to remitting interest altogether – for example if a taxpayer has made an understandable mistake which IRD wouldn’t have picked up, and brings it to IRD’s attention

We have drawn this article to IRD’s attention and will publish any comments.