The following article sets out a real life case example of a taxpayer who:

  • In good faith relied on an incorrect ruling from IRD in respect of his tax residence
  • Was then subjected to significant cost in overturning a second IRD ruling, also incorrect
  • Was then subjected to unsympathetic IRD debt collection procedures

We also remind taxpayers that they should not seek advice from Inland Revenue, and especially not in respect of tax residence.

It is common knowledge that Inland Revenue is now taking a much harder line on collection of tax debt than in the past.

In the following article we set out a case example of how such debt has arisen through IRD errors in determining tax residence, but IRD still show no mercy.

The message remains — don’t ask IRD for advice, and especially not on residence.

Secondment to USA

In early 2006 a New Zealand resident individual (we’ll call Jack) and his family left New Zealand on an 18 month secondment to the United States. They rented out the family home and a number of other rental properties, and had every intention and indeed did return to New Zealand after 18 months.

The previous November Jack had written to Inland Revenue asking what his status would be for tax residence purposes. Inland Revenue gave him a written determination that he would cease New Zealand residence, and should not return his US income in New Zealand. At this point we note that with professional knowledge and experience it is clear that this determination was wrong. However in good faith and without seeking any other advice, Jack relied on IRD’s determination.

In late 2007 Jack duly returned to New Zealand and went back to his old job. He completed his US tax filing requirements.

Long term move to USA

In the 2009, the US employer asked Jack to take up a permanent position. Jack and his family decided to move to the US and later that year bought a house there. Once again Jack first wrote to Inland Revenue regarding his tax residence. This is where the wheels came off.

IRD faulty residence determination

A couple of months after arriving in the United States, Jack received a letter from Inland Revenue saying that despite buying a house in US, he remained New Zealand resident, and must return his worldwide income in New Zealand. This determination was absolutely clearly incorrect, and in due course although at some cost we were able to overturn it.

However to add insult to injury, IRD also stated that they were reversing the previous determination, and Jack would need to reopen three years worth of tax returns, calculate and pay tax at New Zealand rates, with a credit for the United States tax already paid.

We considered this would be a significant administrative cost, and Jack was already under some financial pressure. Under the circumstances we asked IRD to withdraw that decision.

IRD lets the dogs out

Inland Revenue declined, and invited Jack instead to put forward an application for relief under the hardship provisions. Despite Inland Revenue already having the relevant information, we still had to go through the formal process, and given Jack’s financial position thought that this application would be successful. However Inland Revenue then turned down the application.

Our subsequent attempts to elevate this matter with Inland Revenue were also unsuccessful, and in early November 2010, IRD told Jack that he must propose a repayment arrangement within two weeks (imagine Inland Revenue replying to our correspondence within two weeks — it never happens).

In the meantime, despite the issue being under discussion, Inland Revenue started issuing statements imposing interest and late payment penalties.

Then another insult — four days after expiry of IRD’s two-week deadline, IRD wrote to Jack’s bank and instructed them to deduct the full amount of the “underpaid” tax. IRD was already in e-mail and telephone correspondence with Jack, but didn’t bother telling him or his agent, and Jack only found out about the letter to the bank when he received a copy in the mail in early January 2011.

Three weeks later, IRD cajoled the taxpayer into a debt repayment arrangement that from past experience a single late payment will re-impose interest and late payment penalties.

IRD acts swiftly to prevent similar errors – NOT

In May 2010 we had commenced discussions with IRD, identifying this and several other examples of IRD staff making incorrect residence determinations. Among other aspects we understood that IRD accepted that the existing IR886 residence form focussed unduly on NZ connections and gave misleading guidance to both IRD staff and taxpayers. We provided an amended design (which we use ourselves) and IRD indicated they were taking that into account in redesigning the form.

In July 2011 IRD issued a new version but it has barely changed from the previous version, and remains just as misleading. Another seven months later IRD has given no indication it is prepared to correct the form.

DON’T EVER LODGE AN IR886 — it is likely to end up with an incorrect IRD determination and a lot of unnecessary cost.

Our impression of Inland Revenue

This whole episode gives the strong impression that IRD:

  • does not stand by its own written determinations
  • will not take responsibility for its own errors
  • is happy to impose maximum administrative cost on taxpayers
  • then proceeds to vigorous debt collection processes.
  • is quite happy to keep issuing misleading instructions

Lessons for taxpayers:

  • Never go to Inland Revenue for advice — go to a professional instead
  • If Inland Revenue alleges that you owe tax — even if you disagree, give serious consideration to paying it, and hopefully recovering the tax later on
  • Don’t expect an ounce of fairness or sympathy from the Department even when the error is IRD’s own.