Taxpayer amendments to tax returns (Oct 99) (WITHDRAWN)

Introduction

The Disputes Resolution regime requires taxpayers to follow a formal process when requesting an adjustment to a previously filed tax return. This Standard Practice Statement, in conjunction with SPS INV 490, states the Commissioner's operational practice when taxpayers wish to make adjustments to tax returns.

Application

This Standard Practice Statement applies to taxes and duties payable under a tax law from 1st December 1999, and to adjustments made on or after this date, regardless of the return period when the error occurred. These practices do not apply to assessments issued under the Child Support Act 1991 or to ACC assessments, except to the extent that the ACC adjustment occurs as a result of an income tax change.

Definitions

Credit adjustment: an adjustment that results in a reduced amount payable, increases a net loss, or increases a refund.

Debit adjustment: an adjustment that results in an increase in the amount payable, reduces the amount of a refund or reduces a net loss.

Response period: the response period referred to in this SPS is the two-month period starting on the date of issue of a notice of assessment or determination of loss. For GST purposes the response period is the two-month period commencing the day after the last day for filing the GST return.

Calculation of the tax effect of an adjustment

Income tax

The tax effect of an item in a return period is calculated using the taxpayer's marginal tax rates for the return period in which the error arose, not the period in which it is subsequently corrected.

If a taxpayer has no tax to pay in the period in which the error arose, the rate of tax that applies is the lowest marginal rate that would apply to the return period if the taxpayer did have tax to pay.

Other taxes

The tax effect of an item in a return period is calculated by multiplying the value of the item adjusted by the applicable rate of tax. For example the amount of an FBT adjustment is calculated by multiplying the value of the benefit by 49%.

The total tax effect of an adjustment is calculated by adding the tax effect of all return periods affected by the item adjusted.

Correcting small errors in Income tax and Fringe Benefit Tax (FBT) returns

In many instances the costs to the taxpayer and Inland Revenue in correcting small errors is significant in relation to the tax effect of the adjustment, and in some cases may prove a deterrent to taxpayers correcting errors. As a solution to this problem, Inland Revenue will now allow small errors in Income tax and FBT returns to be corrected in the following return period where the income tax or FBT effect of the adjustment or adjustments is $500 or less per return period.

In designing this practice, Inland Revenue considered the Care and Management provisions of the Tax Administration Act 1994. Section 6A of the Tax Administration Act 1994 charges the Commissioner with the care and management of the taxes covered by the Inland Revenue Acts. Subsection 3 of that section states:

"In collecting the taxes committed to the Commissioner's charge, and notwithstanding anything in the Inland Revenue Acts, it is the duty of the Commissioner to collect over time the highest net revenue that is practicable within the law having regard to -

1. The resources available to the Commissioner; and
2. The importance of promoting compliance, especially voluntary compliance, by all taxpayers with the Inland Revenue Acts; and
3. The compliance costs incurred by taxpayers."

 

The Commissioner also used the Care and Management provisions in SPS INV-490, to implement a practice whereby registered persons are able to self-correct GST errors in a subsequent GST return. (See TIB Volume Ten No.6 (June 1998), and TIB Volume Eleven No.2 (February 1999). The extension of self-correction of small errors to income tax and FBT returns is consistent with the principles of that practice.

Application of self-correction

Self-correction is only practicable for revenues where there is no impact on unrelated taxpayers, as errors in certain tax returns can result in the need for consequential adjustments to third party's returns (e.g. An error in PAYE deductions accounted for may lead to a consequential adjustment to a recipient's tax return). This has led Inland Revenue to limit the application of self- correction to income tax, FBT and GST. However, self-correction also caters to those situations where one adjustment affects related taxpayers. This means that self-correction can be made to an income tax return filed by a partnership (for example), with the resulting adjustments to the partners' tax returns.

Because the tax affairs of those taxpayers who receive only source deduction payments (i.e. salary or wages) are simple, self correction does not apply to IR 5 tax returns, or (from 1 April 1999), income statements.

Income tax and annual FBT returns are for a full year, and self-correction will result in a deferral of tax for 12 months or more. Therefore income tax and annual FBT errors can only be corrected in the immediately succeeding return if it has not already been filed when the error is detected. For example, errors in a 1998 tax return can only be self-corrected in the 1999 year. Quarterly FBT returns may be self corrected in a following return period if the correction is made when it is found, and within twelve months of the period in which the error arose.

Compliance and penalties provisions

The implementation of the Compliance and Penalties regime in 1997 included universal interest to provide compensation for tax that has been under or over-paid. This was intended, along with the other changes introduced, to encourage voluntary compliance, i.e. taxpayers had greater incentive to get things right first time. Allowing for self-correction in a following period will mean that interest is not charged in these circumstances, thus alleviating a potential barrier to compliance.

Inland Revenue reserves the right to impose shortfall penalties and assess the correct tax position in the year in which the error arose if:

• we believe the taxpayer's original tax position was not a genuine mistake; or
• the taxpayer repeatedly makes the same or similar mistake and self-corrects; or
• the practice is used to create an unwarranted advantage.

Where errors are detected during an audit or investigation the taxpayer will only be allowed to self-correct errors in the following return if the total tax effect of the error or errors is $500 or less per return period, and the immediately following return has not already been filed. However, taxpayers will be allowed to self-correct errors that are disclosed at the time an audit is commenced (subject to the conditions above).

In view of the considerations above, a requirement of self-correction is that sufficient records must be kept to show:

• The return period the error occurred
• The amount of tax involved
• The nature of the error
• The return period correction was made

These records must be readily available for review by Inland Revenue staff.

General Rule for adjustments to tax returns over the telephone

1. Changes to PAYE returns (IR 66N, IR 66W, IR 68P, IR 345, IR 346, IR 348, IR 349),
2. Changes to Non-Resident Withholding tax and Approved Issuer Levy returns (IR 67P, IR 67S),
3. Changes to Resident Withholding (IR 15P, IR 15S),
4. Changes to Non-resident individual income tax returns (IR 3NR),
5. Transposition of numbers and arithmetical errors in all returns,
6. Changes to the rebates for an IR 3 or IR 5 returns, (excluding the donations rebate),
7. Changes to Family Assistance,
8. Adjustments where the tax effect falls within the criteria allowed for under self-correction.

Other credit adjustments

Small errors in FBT, income tax and GST returns may be self-corrected in a following period, subject to the conditions specified above and in SPS INV 490.

Employer Monthly schedules may be amended by telephoning or by sending an Employer monthly schedule amendments form (IR 344) to correct the error in the period in which it arose.

All other types of credit adjustment must be made in writing. Where the total tax effect of the adjustment is $2,000 or more, a Notice of Proposed Adjustment (NOPA) on the prescribed form must be issued. The tax effect of an adjustment is calculated by adding the tax effect of all tax return periods affected by the item adjusted. For example, an omitted item of expenditure has an income tax effect of $1650 and a GST effect of $555. As the total tax effect of the adjustment is greater than $2,000, a Notice of Proposed Adjustment is required. The only exception to this requirement is if the error has arisen because of a simple arithmetical or transposition error.

The Commissioner's practice applying to the content standards for Notices of Proposed Adjustment can be found in Standard Practice Statement INV 150, published in TIB Volume 11, No.6 (July 1999).

A NOPA must be issued where the issue involves a contestable interpretation of tax law, regardless of the tax effect of the adjustment, even if the tax effect is $500 or less.

If the adjustment is being requested after the expiry of the applicable response period, an explanation must be included as to why the request should be accepted late, unless it relates to a simple arithmetical or transposition error.

If the amount of the adjustment is less than $2,000, use of the NOPA form is optional, however all NOPAs are given priority by Inland Revenue. If an informal request for an adjustment has been made, and the issue has not been resolved within the applicable initial response period, a NOPA should be issued to protect the taxpayers right to further challenge the item in contention.

Inland Revenue will no longer accept amended tax returns for any credit adjustments.

Other debit adjustments

Small errors in FBT, income tax and GST tax returns may be self-corrected in a following period, subject to the conditions specified above and in SPS INV 490.

Employer Monthly schedules may be amended by telephoning or by sending an Employer monthly schedule amendment form (IR 344).

In addition to those specified in the General rule above, debit adjustments may be made to IR3, IR 3NR, GST and FBT returns by telephone or in writing.

Adjustments to other tax returns must be requested in writing. Use of the NOPA form for these adjustments is optional, however all NOPAs are given priority. If an informal request for an adjustment has been made, and the issue has not been resolved within the applicable initial response period, a NOPA should be issued to protect the taxpayers right to further challenge the item in contention.

Any debit adjustments requested by way of Notice of Proposed Adjustment will be treated as voluntary disclosure for the purposes of consideration of penalties.

Inland Revenue will not accept amended tax returns for any debit adjustment.

Summary

1. Taxpayers may self-correct minor errors in income tax, FBT and GST returns, subject to the conditions outlined above and in Inland Revenue Standard Practice Statement INV 490.
2. Requests for correction of errors such as the transposition of numbers, or arithmetical mistakes may be made by telephone or in writing.
3. Adjustments that result in an increase in tax to pay, reduction of a refund or a decrease in the amount of net loss may be requested by telephone or in writing. Those that are requested on the prescribed Notice of Proposed Adjustment form will be given priority consideration.
4. In general requests for adjustment where the tax effect is a decrease in tax to pay must be made in writing. Where the proposed adjustment has a tax effect of $2,000 or more, or where the issue involves contestable interpretation of tax law, the request must be made on the prescribed Notice of Proposed Adjustment form unless it is correcting a simple arithmetical or transposition error.
5. Amended or ‘second' tax returns will no longer be accepted.

This Standard Practice Statement was signed by me on 8th October, 1999

Michael Rapson
Manager, Technical Standards