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01 Aug 1998

Finalising agreements in tax investigations (Aug 98) (WITHDRAWN)

Withdrawn INV-350-Finalising agreements in tax investigations (Aug 98). Statement provided for historical purposes only.


This statement has been withdrawn and is provided for historical purposes only.


This standard practice statement sets out the principles and parameters for finalising agreements in tax investigations.

Final agreements must be in accordance with the law. Agreements cannot be finalised based on "splitting the difference" on a global basis. All agreements must be on an issue by issue basis based on the law and the evidence available. Once signed, the agreement precludes the taxpayer from using the disputes process in relation to the issues finalised.

This standard practice statement does not cover relief in cases of serious hardship or financial hardship as provided for by sections 176 and 177 of the Tax Administration Act 1994.

This standard practice statement applies to all staff who complete tax investigations, e.g. Corporates, BusinessLink, BusinessDirect, Personal Customer Services, RADC, Duties.


For a number of years the Commissioner of Inland Revenue has had a practice of resolving disputes arising from tax investigations through the process of reaching resolution.

It is essential for Inland Revenue, its staff and taxpayers that a code of good practice in relation to final agreements be defined.  This standard practice statement ensures that taxpayers are uniformly treated when entering into discussions/negotiations with Inland Revenue.

These guidelines apply to finalising agreements for disputes in respect of all the Inland Revenue Acts.  The principal focus is on the Income Tax Act 1994 and the Goods and Services Tax Act 1985.  These comments, with the necessary modification, apply equally to the other Inland Revenue Acts.

Legal authority for finalising agreements in tax investigations

As already stated all agreements must be on a principled basis.  Therefore assessments arising from final agreements are no different from tax assessments issued in other circumstances.

On many occasions the New Zealand Courts have stated that the Commissioner merely acts in the quantification of tax due, and it is the taxing Acts which charge tax. The Commissioner has a duty to assess the tax properly payable within the terms of the statutory framework, and in carrying out that duty the Commissioner must be completely impartial.  All assessments arising from final agreements must conform to the relevant Inland Revenue Act.

Finalising an agreement

The final agreement with a taxpayer represents an agreement on the relevant facts and the application of the law to those facts.  The process of finalising an agreement is one that will occur on an issue by issue basis.  Finalising an agreement is not to be seen as a process of bargaining between the parties where issues are traded off against each other.  The Commissioner will consider representations from the taxpayer, or adviser, on the relevant issues in the dispute and these will be resolved on their individual merit.

It must be remembered that not all disputes will result in a final agreement being reached.  Where agreement is not reached the disputes resolution process will apply.

Fundamentals of the agreement

The process of reaching a final agreement through negotiation is one that should occur on an issue by issue basis.

It is important to recognise that the final agreement will need to be based on an assessment that conforms to the legislation.  As the Commissioner is under a statutory obligation to assess and collect the correct amount of tax, it is inappropriate that the risks of litigation be factored into the final agreement.  While litigation risk is an appropriate consideration in terms of commercial agreements, it is not appropriate in the context of finalising an agreement of taxation disputes.  If the law is uncertain and there is only a 50/50 chance of the Courts taking one view or the other, it is not possible to simply give a taxpayer one-half of the advantage or disadvantage in recognition of the uncertainty.  Agreements are based on the same statutory criteria as that for making other assessments.  The process of final agreements should not be regarded as an opportunity for issuing an assessment that does not conform to the legislation.

There are circumstances or situations where Inland Revenue will not enter into negotiations.  These are:

  • not assessing an amount which is clearly assessable, or allowing a deduction, rebate or credit that is clearly not allowable.

  • where Inland Revenue's view of the law on a particular issue is firm (e.g. as stated through the Courts, or Inland Revenue's legal opinion is in agreement with the treatment of the issue) and this view is supported by the evidence.

  • penalties and/or prosecution action.

  • where an adjustment can be made only on an "all or nothing basis", that is, either an adjustment would be made for the total amount in question (the quantum of which may or may not be capable of precise computation) or no adjustment is made at all.  For example, the assessability of a transaction may depend solely on such concepts as whether the taxpayer is carrying on a business or there was a profit making purpose.  Generally speaking, on the facts, the taxpayer either satisfies the criteria for assessability of income or the taxpayer is not liable for tax in respect of that transaction.

Circumstances or situations where Inland Revenue may enter into negotiations are:

  • where the quantum of a disputed amount depends on the facts.  For example, a claim at law may be subject to apportionment and there could be doubt as to the correct position to be allowed (e.g. how much is business (deductible) and how much is private (non-deductible)).

  • when an adjustment may rely on a question of valuation for which there are competing bases.  For example, in the determination of an arm's length transaction for GST purposes.

  • when an item may not be subject to precise computation.  For example in the estimation of living expenses in an asset accretion assessment.

  • where an issue of quantum or valuation has been resolved for one period and is likely to apply to prior periods.

In these cases, where determination of the taxable income will depend on the facts, a factual position must be agreed between the taxpayer and Inland Revenue.

Penalties and tax in dispute

Penalties, if applicable, must be included in the final agreement.  This includes penal tax, shortfall penalties and late payment penalties.

In the case of shortfall penalties agreement can be negotiated only to the level of penalty imposed.  Shortfall penalties will not be used as leverage to achieve an agreement.

Failure to agree on penalties will not preclude an agreement on the substantive issues.  Where this occurs the penalties will continue under the disputes resolution process.

Ability to pay

The ability of the taxpayer to pay the tax is not relevant in determining a taxpayer's tax liability, but may give rise to other administrative arrangements tailored to the taxpayer's circumstances.  When the facts and law support issuing an assessment but the taxpayer will not be able to pay the tax, the assessment is still to be issued.  The taxpayer should apply under the relevant sections of the Tax Administration Act 1994, i.e. sections 176 and 177, for consideration to have the tax remitted or obtain an instalment payment arrangement.

Timing of final agreements

Agreements should be finalised at the completion of an investigation.

Where the attempt to finalise an agreement is unsuccessful the disputes resolution process is to be followed.

In most cases an agreement should be finalised before an assessment is issued.  The final assessment will take into account the issues agreed upon in the agreement.

When an investigation extends over several years or relates to a back year assessment, it may sometimes be possible for the investigator to progressively raise with the taxpayer matters which are the focus of potential adjustment.  Due to the limitation of time for amendment of assessments contained in section 108 of the Tax Administration Act 1994, it may not be possible to conclude a final agreement for all years under consideration.  In this situation Inland Revenue may negotiate on a year by year basis.  Where this situation arises, any agreement reached will not be a precedent for the treatment of future years.

There may be circumstances where an agreement is finalised post assessment. This will occur only in rare circumstances, i.e. where there was no agreement in writing, or the time bar prevented resolution prior to the issue of the assessment.

Form of agreement

Where the agreement is of a straightforward nature it is considered that the form IR210D, Agreed Adjustment, will be sufficient.  However, in more complex cases a final agreement must contain the following information: (Refer to appendix for an example)

  • name, address and IRD number of the taxpayer to whom the agreement relates

  • a statement recording the terms of agreement, including who proposed the agreement

  • a statement recording the adjustments covered by the agreement, including the tax type, section of the relevant act and period involved as well as any penal tax and shortfall penalties

  • a statement that the taxpayer acknowledges that by signing the agreement they forfeit any further right to challenge the adjustments covered by the agreement, and that this right has been explained to them

  • a statement acknowledging that the taxpayer has made a full and true disclosure of all known facts to the Commissioner

  • a statement outlining the ramifications of making any false statements

  • a statement as to the precedential effect of the agreement

  • a statement as to the due date for payment of any deficient tax

  • if applicable a statement as to any additional tax included in the agreement

  • the agreement must be signed and dated by both parties.

Although the above details must be included in every agreement, additional information may be included if relevant.  However, if including additional information it is best to seek legal advice to ensure that it does not detract from the main focus of the agreement.

Where there are a lot of issues in dispute it may not be possible to finalise an agreement in respect of them all.  Where this situation arises the disputes resolution process would be limited to the unresolved issues.

Inland Revenue can make an assessment only when all issues for the periods/years have been finalised.  Where issues remain unresolved, the assessment will not be made until such time as all the outstanding issues are finalised.  This is because the Commissioner cannot make a partial assessment. In this situation the disputes resolution process is to be used to resolve the remaining issues.  All issues are to be taken into account when the assessment is finally made.

Where a situation involves a number of taxpayers i.e. partners or shareholders, an agreement reached with one person may not necessarily form the basis of an agreement for all the other parties.  This is because it is important to consider the factual background to each person's involvement and the tax position taken by that person.

Inland Revenue will adhere to the terms of the final agreement for the periods/years covered by the investigation. Re-examination of the taxpayer's affairs for the periods/years covered by the final agreement would be undertaken only where, for example, new evidence suggests that tax avoidance, evasion, fraud, manipulation or transfer pricing has occurred.  Any re-examination will also be subject to the time bar rules of section 108 and 108A of the TAA.

Inland Revenue will not be bound by any final agreement where there has been either a failure to disclose relevant facts and/or the making of a false statement.

Where a period/year has been adjusted without a full investigation of the taxpayer's affairs being carried out (e.g. an adjustment in respect of a single issue following a policy ruling) nothing in this standard practice statement prevents Inland Revenue later undertaking a full review of that period/year (other than in respect of the particular issue or issues that have been the subject of a final agreement).

Once a taxpayer has signed the final agreement or the IR210D that taxpayer is precluded from using the disputes process relating to the negotiated issues.

Failure to negotiate a final agreement

Not all taxation disputes that are capable of negotiation will necessarily lead to a final agreement being reached. During the negotiation process, Inland Revenue will enter into correspondence and discussions on a totally "without prejudice" basis.  Where a final agreement is not reached, Inland Revenue will not be bound by any factual or legal matters which may have been "agreed" on a without prejudice basis to facilitate the final agreement.

Authority to approve final agreements

The officer who has undertaken the investigation is not authorised to approve the final agreement.  There must be objectivity in the approval of final agreements.  It is therefore necessary for an independent officer to review the case.

All final agreements must be approved by the person who has authority to decide disputes for that investigator.  Generally, this will be the team leader.

In cases where approval of an assessment is required at a certain level, such as sections BG1 (tax avoidance) and GB1 (general anti-avoidance) of the Income Tax Act 1994, approval of any final agreement is to be given at that level.

Tony Bouzaid
National Manager
Operations Policy

Appendix to Standard Practice Statement INV-350

Documentary form of the final agreement

(Note that the statements in the following ‘[ ]' are for the preparer's information only and are not to be included in the agreement issued)

ABC Company Limited
Sesame Street
Games Town

Attention: XXXXX [Company officer]

Dear Sir/Madam

IRD No. XX-XXX-XX [Enter IRD number of taxpayer to whom the agreement relates]

This document records the terms of agreement between xxxxx [enter taxpayer's name] and the Commissioner of Inland Revenue, in relation to an adjustment requested by xxxxx [enter taxpayer's name] / proposed by the Commissioner [whichever is appropriate] on xxxxx. [enter date].

The following adjustments are covered by this agreement: [Enter the specific tax types and tax periods concerned along with details of the adjustments agreed upon including penal tax and shortfall penalties.  Additional details of each adjustment may be added as necessary].

  1. An adjustment of $XXX.XX pursuant to section [enter relevant section] of the Goods and Services Tax Act 1985 for the period ending xx/xx/xx.

  2. An adjustment of $XXX.XX pursuant to section [enter relevant section] of the Income Tax Act 1994 for the period ending xx/xx/xx.

  3. A shortfall penalty for [enter type of shortfall penalty being imposed] of $XXX.XX pursuant to [enter relevant section] of the Tax Administration Act 1994 for the period ending xx/xx/xx.

XXXXX [enter the name of the person signing this agreement on behalf of the taxpayer] acknowledges that by signing this agreement all rights to further challenge this adjustment are forfeited in accordance with section 89I of the Tax Administration Act 1994, and has had this explained to them.

XXXXX [enter the name of the person signing the agreement] acknowledges that xxx [enter he or she] has made to the Commissioner, full and true disclosure of all known facts or facts of which xxx [enter he or she] is aware, which are subject to this agreement.

The Commissioner gives notice that in reaching this agreement reliance has been placed on xxxxx [enter taxpayer's name] disclosing all known facts.

The Commissioner also gives notice that the making of false statements to officers of the Inland Revenue Department (and various acts and omissions) can be subject to prosecution.

This agreement is confined to the adjustment(s) identified above and does not in any way negate your right to apply in writing for consideration of the remission of penalties imposed.

This agreement is not to be used as a precedent for the resolution of the same or any similar issues in respect of any other years, issues or taxpayers.

Payment of the deficient tax is due xx/xx/xx. [enter either the original due date, the new due date or details of any instalment arrangement].

This agreement also includes additional tax of: [Enter the amount of additional tax for each period and revenue.  If no additional tax is being imposed delete this paragraph].

on behalf of (Taxpayers Name)

[More detail may be added.  However, legal advice should be sort to ensure that it does not detract from the main focus of the agreement].