Jo was having a good giggle watching Shortland Street last week. She called me to come and watch the 'tax man' making his debut on our nations' longest running soap, chasing down beloved Dr Drew McCaskill for probable (intentional) tax evasion.
While the one liners such as Drew referring to his tax audit as "….. jumping through pedantic Government hoops so drones like Gerry can justify their jobs" will never be as famous as Dr Ropata's "We're not in Guantemala now", as Chartered Accountants we have found the tax man episodes highly entertaining.
Drama aside though, there are some very useful lessons highlighted by the scriptwriters' take on tax matters, including the importance of record keeping and taking proper professional advice from a qualified Chartered Accountant.
Here is Jo's commentary on Dr Drew McCaskill's IRD audit woes:
1. Importance of good record keeping habits
When the IRD came knocking on Drew's door, he struggled to produce any proper records for the IRD to even look at. Referring to his pile of papers as "…. a bit of a mess", the tax man replied dryly "The IRD recommends keeping your documents in an orderly fashion".
Potential IRD investigations aside, proper record keeping is a good business habit. Maintaining records of receipts, invoices, statements and other documents is critical to accurately account for your income and expenses when filing GST, income tax and other returns, as well as for business planning and monitoring purposes.
2. "Who keeps tax records for seven years?"
As Mr Tax Man replied to Drew, "The law requires you to keep records that far back".
For any matter that is tax related, you must be able to produce records going back seven years. If you were subject to an IRD audit, this is how far back the IRD could choose to review your affairs. No invoice, no deduction.
3. Correctly claiming business expenses – and keeping personal expenses personal
Drew's wife Harper finds a receipt for a sally lun bun. Drew informs her it is a business expense as he is thinking of selling them at the bar he owns.
While it might be tempting to justify a personal expense this way, it will not pass the test if the IRD chooses to look closer. It is always best to keep separate business and personal bank accounts and credit cards and be vigilant about not mixing expenses up.
4. Importance of using a Chartered Accountant
Harper told Drew to give his box of papers to the accountant to sort out because "… they know what they are doing". Drew replied "I doubt he would do much – I fired him years ago. I know my books better than anyone." He later went on to say when he dumped his accountant, he got a little creative with the books and fudged tax returns to avoid haemorrhaging tax.
Not only has Drew got himself into trouble by thinking he can go it alone, now faced with an IRD audit, he has no professional guiding him and managing him through the process. To quote the dear doctor again "…. 20/20 hindsight, it was a mistake to save money by doing my own tax return."
Paul has personally managed many different IRD audits on behalf of clients and this experience has always helped our clients when negotiating a package to settle their tax liabilities and penalties. Working with a known and respected Chartered Accountant will assist you with the IRD if you unfortunately find yourself in an audit situation.
5. Consequences of tax evasion – even if unintentional
Drew called it tax minimisation, referring to it as "… a game everybody plays against the greedy government". Except he got caught.
Quoting Mr Tax Man again "You signed a tax return saying you understood what you were filing. You are looking at four to six years." Drew enquired if this meant four to six years repaying tax. Mr IRD replied "Incarceration. This is tax evasion! It is highly likely you are going to prison."
While at the extreme end of punishments (and Paul has personally never seen a tax audit result in jail time), it is most definitely one of the avenues the IRD could choose to pursue for blatant, repeated or significant offending.
More likely, there will be penalties and interest as well as the underpaid tax to repay, however the real punishment is the toll a major tax audit can take on your health, family and well-being. This shouldn't be underestimated.
6. Voluntary disclosure option
In this week's episodes, Drew has seen the light and decided to be honest, face his tax indiscretions and make a voluntary disclosure to the IRD.
This is the correct thing to do if you become aware of an error, oversight or other inaccuracy in your tax affairs – no matter how small and whether it was intentional or not. You may still face some penalties, but you are likely to get a more favourable response from the IRD and keep your reputation intact.
Jo tells me the storyline is still unfolding so I am sure I will hear the final outcome of Drew's tax woes at some stage in the future. However, to close I must dispel a few of the mistruths and stereotypes presented on Shortland Street in the interests of drama and entertainment:
The tax man isn't necessarily a grey-haired male in a dark suit with a black briefcase.
The IRD are unlikely to physically follow you around.
The timeframe and process for a tax investigation/audit is many months to many years, depending on the complexity of your affairs. It would never be compounded to a couple of days!
If you are concerned you may have made mistakes with your record keeping, you are aware you forgot to declare something, or you would like help improving the way your store and organise your financial affairs, please contact us to make an appointment. We can guide you through the best approach to take for your specific circumstances and, if necessary, negotiate with the IRD on your behalf.