Penalty reductions for voluntary disclosures

Sections 141G(3)(a) and 141J(2) of the Tax Administration Act 1994

The shortfall penalty for not taking reasonable care, taking an unacceptable tax position or having an unacceptable interpretation will not be imposed when a tax shortfall is voluntarily disclosed before notification of a pending tax audit or investigation.

Background

Shortfall penalties may be reduced if taxpayers voluntarily disclose tax shortfalls. Before these amendments, penalties were reduced by:

• 75 percent if the disclosure was made before the taxpayer was notified of a pending tax audit or investigation; or
• 40 percent if the disclosure was made after the taxpayer was notified of the pending tax audit or investigation but before the audit or investigation began.

The penalty reduction was intended to reflect the lower administrative cost of having the tax shortfall identified before resources are committed to an investigation. It also recognises the taxpayer's intention to comply and co-operate with Inland Revenue.

The discussion document, Tax penalties, tax agents and disclosures, notes, however, that the rules did not adequately encourage taxpayers to disclose a tax shortfall. Imposing shortfall penalties in cases when taxpayers wished to voluntarily disclose tax shortfalls, even though the penalties were reduced, diminished the incentive for taxpayers to make a disclosure.

The amendment is intended to encourage taxpayers to come forward and tell Inland Revenue when they discover they have a tax shortfall.

Key features

To increase the incentive for taxpayers to comply voluntarily, shortfall penalties payable for "not taking reasonable care", "unacceptable tax positions" and "unacceptable interpretations" will be reduced by 100 percent when the tax shortfalls are voluntarily disclosed before taxpayers are notified of pending tax audits or investigations.

The 75 percent reduction will still apply to the gross carelessness, abusive tax position and evasion shortfall penalties if the disclosure is made before notification of an audit. The 40 percent reduction also continues to apply if the disclosure is made after the taxpayer has been notified of an audit but before the audit begins.

Application date

The amendment applies to voluntary disclosures made on or after 17 May 2007 (the date the bill was introduced).