Application where returns are amended before due date (Feb 99) (WITHDRAWN)

Introduction

This Standard Practice Statement (SPS) outlines the Commissioner's practice when a taxpayer files a return taking an incorrect tax position and then seeks to amend the return before the due date for filing the return.

Application

This SPS applies for the period from 1 March 1999 to 31 March 2001.  It applies to all amendments made to a return before due date, including amendments requested by phone call, letter, NOPA or by filing an amended return.  It does not apply to income tax returns.

Background

The Tax Administration Act 1994 imposes shortfall penalties in all cases when a taxpayer breaches the standards defined in sections 141A to E and takes an incorrect tax position creating a tax shortfall.  This applies even if the return is amended before the due date for filing the return.

If the incorrect tax position was not caused by a breach of the taxpayers' statutory obligations, shortfall penalties cannot be imposed.

Except for income tax, taxpayers take their tax position at the date when they file the return.  This is the assessment date regardless of whether it is before the due date for filing the return.  Therefore when taxpayers file an incorrect return they have taken an incorrect tax position at that date.

The definition of taxpayer's tax position is different for income tax.  If a taxpayer alters the tax position taken in an income tax return before the earlier of the due date or when the assessment is issued, the amended return will be accepted as the taxpayer's tax position.

To date, in accordance with the legislation, Inland Revenue has been proposing shortfall penalties in some cases when the taxpayer has amended a return before the due date, with a 75% reduction for voluntary disclosure before notification of a pending tax audit or investigation.  However, we are concerned that imposing shortfall penalties in these situations may discourage taxpayers from voluntarily disclosing an incorrect tax position.  This would not be in keeping with the purpose of the penalty regime, which is to encourage taxpayers to voluntarily co-operate with Inland Revenue.

To encourage voluntary disclosure Inland Revenue will take a liberal approach.  We will not impose shortfall penalties if a taxpayer independently and voluntarily files an amended return before due date.  However, we reserve the right to impose shortfall penalties in all situations if we believe that the taxpayer's original tax position was not a genuine mistake or if the taxpayer repeatedly makes the same or similar mistake and files amendments to the returns before due date.

Practice

Inland Revenue will adopt the following approach:

If taxpayer amends return before due date and before IRD advises taxpayer of acceptance or non-acceptance of original tax position

In this situation the taxpayer has realised the mistake and has voluntarily notified IRD of the incorrect tax position.  To impose shortfall penalties would discourage taxpayers from making such voluntarily disclosures in the future.  The taxpayer has independently found and corrected the mistake before due date so Inland Revenue will not impose shortfall penalties.

Notification that the tax position has or has not been processed or accepted for processing will be the date the taxpayer or agent receives written advice or a statement of account, or the time of a telephone call advising of a pending tax audit or investigation.

If the exact time of the written advice/statement of account becomes crucial, it will be ascertained from the expected time for the mail to reach its destination as prescribed by section 14(2) of the Tax Administration Act 1994.  This is in accordance with the Standard Practice Statement INV-250 on Voluntary Disclosure.

If taxpayer amends return before due date but after IRD advises taxpayer of acceptance of original tax position

In this situation the taxpayer has independently realised the mistake and chooses to file an amended return before the due date.  Again to impose shortfall penalties in this situation would discourage this type of voluntary disclosure.  Generally Inland Revenue would not impose shortfall penalties because the taxpayer has independently found and corrected the mistake before due date.

If a refund is issued or the tax becomes due before the taxpayer files an amended return interest will be charged in accordance with Section 120.

Inland Revenue reserves the right to impose penalties if the amended return filed before due date is not correcting a genuine mistake.  That is, the shortfall may be considered for penalties if we believe that the taxpayer intentionally attempted to overstate a benefit or understate tax by filing an incorrect first return.  If we believe this may be the case we will need to request details as to why the shortfall occurred.

An example of the above would be if a vendor who has entered into a property transaction (for which an early return has been filed) omits to return the sale and then finds out that Inland Revenue is auditing the purchaser of the property.  In this situation the vendor might quickly put in an amended return because they consider that IRD would check up on whether the vendor has returned the sale.

If taxpayer amends return before due date but after IRD advises taxpayer of pending audit/investigation

In this case the taxpayer did not amend the return until after Inland Revenue gave notice that the tax position was to be examined.  Inland Revenue will consider shortfall penalties in this situation.  To establish whether the shortfall was the result of a breach of sections 141A to E we will need to request details of how the shortfall occurred.  If a penalty is warranted it will be reduced by 40% as a post-notification voluntary disclosure or 75% as a temporary shortfall.

If penalties were not imposed in these situations taxpayers would have an incentive to file early returns, overstating their benefit or understating their tax.  If IRD does not accept the tax position taken the taxpayer could send in an amendment before the due date to avoid penalties.  This does not encourage voluntary compliance first time.  Consideration of a penalty in this instance prevents taxpayers abusing the opportunity to take a tax position beneficial to themselves before the due date.

If taxpayer repeatedly makes same/similar mistake then amends return before due date

Inland Revenue wants to continue to encourage taxpayers to take the correct tax position when filing their returns.  Therefore in situations like this we may consider imposing a shortfall penalty.

This Standard Practice Statement was signed by me on 2 February 1999.

Tony Bouzaid
National Manager
Operations policy