Tax Evasion NZ: Penalties, Examples & IRD Rules

What Is Tax Evasion NZ?

Tax evasion NZ generally involves deliberately attempting to avoid paying tax that is legally owed or obtaining a tax refund or payment that a person knows they are not entitled to.

Examples can include deliberately hiding business income, submitting false information, claiming expenses that were not incurred, making improper GST claims or attempting to obtain an incorrect tax refund.

The consequences can be significant. Inland Revenue may impose a shortfall penalty, and serious cases can result in criminal prosecution.

What Is Tax Evasion in New Zealand?

Tax evasion NZ refers to deliberate conduct intended to evade the assessment or payment of tax or to obtain a tax refund or payment that the taxpayer is not legally entitled to receive.

The key issue is that tax evasion involves more than simply making an accidental error. The circumstances, knowledge and intention behind the conduct are important when determining whether behaviour amounts to evasion.

Tax evasion can involve individuals, companies, employers, contractors, sole traders and other taxpayers.

In simple terms:

Tax evasion means deliberately breaking tax rules to avoid tax or obtain a tax benefit you are not legally entitled to.

What Are Common Examples of Tax Evasion NZ?

Tax evasion NZ can take different forms depending on the taxpayer and the type of tax involved.

1. Deliberately Hiding Business Income

A business receives income but deliberately leaves some of that income out of its accounting records or tax return.

This could include intentionally failing to record cash sales or deliberately excluding taxable business income from a return.

2. Claiming Fake Business Expenses

A taxpayer deliberately claims expenses that were never incurred or treats personal spending as a business expense.

Creating false invoices, altering records or knowingly making illegitimate expense claims can create serious tax compliance consequences.

3. Providing False or Misleading Information

Knowingly providing false or misleading information to Inland Revenue can potentially constitute a serious tax offence when the relevant legal requirements are met.

This could involve information provided through tax returns, GST returns or other tax documents.

4. Failing to Account for PAYE

Employers have responsibilities for deducting and paying PAYE and other employment-related amounts to Inland Revenue.

Deliberately failing to pass on amounts that have been deducted can result in significant consequences.

5. Claiming a Refund You Know You Are Not Entitled To

Attempting to obtain an income tax refund, GST refund or other tax payment that you know you are not entitled to can potentially fall within the rules relating to tax evasion.

Is Tax Evasion a Crime in New Zealand?

Yes. Tax evasion can be a criminal offence in New Zealand.

New Zealand tax law contains criminal provisions covering tax evasion and related offences.

Depending on the offence and circumstances, a conviction can result in:

• imprisonment of up to five years
• a fine of up to $50,000
• or both imprisonment and a fine

Criminal prosecution is generally associated with serious or deliberate non-compliance. The actual outcome depends on the facts of each case.

What Is the Tax Evasion Penalty in NZ?

One of the significant financial consequences of tax evasion NZ is the evasion shortfall penalty.

The current Inland Revenue shortfall penalty for evasion is 150% of the resulting tax shortfall.

Example of a Tax Evasion Penalty

Imagine a business deliberately underreports income and this creates a tax shortfall of $20,000.

A 150% shortfall penalty would be:

$20,000 × 150% = $30,000

The taxpayer could therefore face:

• the original $20,000 tax shortfall
• a $30,000 shortfall penalty
• potential interest and other consequences
• possible criminal prosecution depending on the circumstances

This demonstrates why deliberate tax non-compliance can become substantially more expensive than the original tax liability.

Can You Go to Prison for Tax Evasion NZ?

Yes. Serious tax evasion NZ cases can result in criminal prosecution and imprisonment.

The maximum penalty for an applicable evasion offence can include up to five years’ imprisonment, a fine of up to $50,000, or both.

Actual sentencing depends on the specific offence, the amount involved, the conduct of the taxpayer and other circumstances considered by the court.

Tax Evasion vs Tax Avoidance NZ: What’s the Difference?

Tax evasion and tax avoidance are not the same thing.

Legitimate tax planning is not automatically tax evasion or tax avoidance. Businesses can structure their affairs and claim legitimate deductions while remaining compliant with New Zealand tax law.

Is Making a Mistake on Your Tax Return Tax Evasion?

No, an incorrect tax return is not automatically tax evasion.

The circumstances surrounding the error are important.

For example, accidentally entering an incorrect figure and correcting the mistake is different from deliberately creating false information to reduce tax.

Inland Revenue’s penalty framework recognises different levels of taxpayer behaviour, including:

• lack of reasonable care
• unacceptable tax position
• gross carelessness
• abusive tax position
• evasion

Different penalties can apply depending on the nature and seriousness of the behaviour.

What Happens If IRD Finds an Incorrect Tax Return?

If Inland Revenue identifies an incorrect return or tax shortfall, the consequences depend on what happened and why.

A taxpayer may potentially face:

• additional tax to pay
• shortfall penalties
• use-of-money interest
• late-payment penalties
• an IRD audit or investigation
• criminal prosecution in serious cases

The applicable consequences depend on the circumstances and the type of tax error involved.

What Is a Voluntary Disclosure to IRD?

If you discover that something is incorrect in a previous tax return, you may be able to make a voluntary disclosure to Inland Revenue.

A voluntary disclosure involves telling IRD about a tax issue rather than waiting for Inland Revenue to discover it independently.

Potential situations can include:

• income being left out of a return
• expenses being incorrectly claimed
• incorrect GST information
• other tax return errors

Individuals, businesses, trusts and employers may be able to make voluntary disclosures.

Can a Voluntary Disclosure Reduce Tax Penalties?

Potentially, yes.

The timing and completeness of a voluntary disclosure can be important when determining whether a shortfall penalty reduction is available.

A qualifying voluntary disclosure made before a taxpayer receives the first notice of a pending tax audit or investigation may receive a significant reduction in the applicable shortfall penalty.

For serious tax issues, professional advice can help you understand whether voluntary disclosure is appropriate and how the process may affect your tax position.

What Should You Do If You Discover a Tax Mistake?

Step 1: Identify the Problem

Determine which tax return, tax period, income source or expense is affected.

Step 2: Gather Your Records

Collect relevant:

• invoices
• receipts
• bank statements
• accounting records
• GST records
• payroll records
• tax returns
• supporting documentation

Step 3: Preserve Your Records

Do not destroy, alter or conceal records relating to the tax issue.

Step 4: Get Professional Advice

If the issue could involve a significant tax shortfall or potential tax evasion NZ concerns, consider speaking with a qualified tax professional before taking further action.

Step 5: Consider Voluntary Disclosure

Depending on the circumstances, a voluntary disclosure may be available and could reduce an applicable shortfall penalty.

How Can Businesses Avoid Tax Evasion Problems?

Strong internal accounting and tax compliance processes can help businesses reduce the risk of serious tax errors.

Keep Complete Financial Records

Record business income and legitimate expenses accurately and consistently.

Separate Business and Personal Spending

Separate bank accounts and clear accounting records can make it easier to identify legitimate business transactions.

Account for Cash Income

Cash income is still taxable business income when it relates to taxable activity.

Review GST Returns

Ensure sales, purchases and GST claims are supported by appropriate records.

Reconcile Your Accounts

Regular bank and accounting reconciliations can help identify missing transactions and unusual entries.

Keep Payroll Tax Records

Employers should ensure PAYE and other employment-related deductions are accurately recorded and paid to Inland Revenue on time.

Ask Before Making an Unusual Tax Claim

If you are unsure whether an expense, transaction or arrangement is tax deductible, obtain professional advice before filing the return.

What Is the Difference Between Tax Evasion and Tax Fraud?

The terms tax evasion and tax fraud are sometimes used interchangeably in everyday language. The precise legal treatment depends on the conduct and the relevant legislation.

Deliberate dishonest behaviour intended to obtain an improper tax benefit can create serious tax consequences.

Examples can include:

• false tax returns
• fake invoices
• bogus expense claims
• hidden income
• false GST claims
• unlawful refund claims
• manipulation of business records

Can Businesses Be Investigated for Tax Evasion NZ?

Yes. Inland Revenue can investigate suspected tax non-compliance, including conduct involving incorrect returns, hidden income, false information or improper refund claims.

Businesses should maintain accurate accounting records and ensure that tax returns are supported by appropriate documentation.

Good accounting processes can also make it easier to identify and correct errors before they become more serious compliance problems.

People Also Ask About Tax Evasion NZ

What is tax evasion NZ?

Tax evasion NZ involves deliberately attempting to avoid paying tax or obtaining a tax refund or payment that a person knows they are not legally entitled to receive.

What is the penalty for tax evasion in NZ?

The evasion shortfall penalty can be 150% of the resulting tax shortfall. Serious cases can also result in criminal prosecution.

Can you go to jail for tax evasion in New Zealand?

Yes. Certain tax evasion offences can result in up to five years’ imprisonment, a fine of up to $50,000, or both.

Is tax evasion a criminal offence in NZ?

Yes. Certain deliberate conduct intended to evade the assessment or payment of tax is a criminal offence under New Zealand tax law.

Is accidentally making a mistake tax evasion?

Not automatically. An accidental mistake does not necessarily constitute tax evasion. The taxpayer’s conduct, knowledge and intention are important factors.

What happens if I accidentally underpay tax?

Depending on the circumstances, Inland Revenue may assess additional tax, interest or a shortfall penalty. The consequences depend on the nature and seriousness of the error.

Can I correct an old tax return?

In many situations, taxpayers can take steps to correct tax errors. A voluntary disclosure may also be available depending on the circumstances.

What is tax avoidance vs tax evasion?

Tax evasion generally involves deliberate conduct to evade tax or obtain an unlawful tax benefit. Tax avoidance is a separate concept involving arrangements that may be counteracted under New Zealand’s anti-avoidance rules.

Can IRD investigate a business for tax evasion?

Yes. Inland Revenue can investigate suspected tax non-compliance and take enforcement action where appropriate.

Tax Evasion NZ: Key Takeaways

Tax evasion NZ is serious and can result in significant financial and legal consequences.

• Deliberately hiding taxable income can create serious tax consequences.
• Knowingly claiming false expenses can result in significant penalties.
• False or misleading tax information can result in penalties or prosecution.
• The evasion shortfall penalty can be 150% of the resulting tax shortfall.
• Serious criminal offences can result in imprisonment and fines.
• An honest mistake is not automatically tax evasion.
• Voluntary disclosure may reduce applicable penalties in qualifying circumstances.
• Accurate accounting records can help businesses maintain tax compliance.

Get Professional Tax Advice From DFK Orb360 O’Halloran

Whether you operate a small business, manage a company, work as a contractor or are responsible for business tax compliance, professional advice can help you understand your obligations.

DFK Orb360 O’Halloran provides accounting, tax and business advisory services to help New Zealand businesses manage their financial and tax responsibilities.

Learn more about DFK Orb360 O’Halloran

Official Tax Resources

• IRD – Criminal Penalties
• IRD – Shortfall Penalties
• IRD – Voluntary Disclosure
• IRD – Getting Your Tax Right
• New Zealand Legislation

Tax Information Disclaimer

This article provides general information about tax evasion NZ, tax penalties and New Zealand tax compliance. It is not personalised tax, accounting or legal advice.

Tax legislation, Inland Revenue guidance and enforcement practices can change. If you are dealing with a potential tax error, investigation or compliance issue, seek professional advice based on your individual circumstances.