Tax Evasion NZ: 7 Serious Warning Signs, Penalties and What to Do

Tax evasion in New Zealand is a serious tax compliance matter. It generally involves deliberately taking action to evade the assessment or payment of tax, or obtaining a tax refund or payment when you know you are not entitled to it.

Examples can include deliberately hiding income, providing false or misleading information, failing to account for tax deducted or withheld, or using methods designed to suppress sales records.

If you have made a genuine mistake, that does not automatically mean you have committed tax evasion. The circumstances, knowledge and conduct involved matter.

What Is Tax Evasion in New Zealand?

Tax evasion NZ refers to conduct intended to evade the assessment or payment of tax, or to obtain a tax refund or payment that a person knows they are not legally entitled to.

Tax evasion is different from simply making an honest mistake on a tax return.

For example, there can be a significant difference between:

• Accidentally entering an incorrect figure.
• Misunderstanding a complicated tax rule.
• Deliberately leaving income out of a tax return.
• Deliberately creating false records.
• Knowingly claiming a refund that you are not entitled to.

The circumstances surrounding the conduct are important when determining whether an issue amounts to tax evasion or another type of tax compliance problem.

For more information, see Inland Revenue’s interpretation statement on the evasion shortfall penalty .

Is Tax Evasion Illegal in NZ?

Yes. Tax evasion can be both a civil tax matter and a criminal offence in New Zealand.

Inland Revenue distinguishes between shortfall penalties and criminal penalties.

A tax shortfall caused by evasion can attract a 150% shortfall penalty. In appropriate circumstances, Inland Revenue may also pursue criminal prosecution.

Certain criminal tax offences can result in a fine and, in serious cases, imprisonment.

Read the official Inland Revenue guidance on criminal tax penalties for further information.

7 Warning Signs That Could Indicate Tax Evasion

Not every tax error is tax evasion. However, certain types of deliberate conduct can create serious tax compliance problems.

1. Deliberately Hiding Income

One of the clearest examples of potential tax evasion is intentionally failing to declare taxable income.

For example, a business might deliberately leave cash sales out of its accounting records so that the income is not included in its tax calculations.

Deliberately taking steps to hide income can create significant tax and criminal consequences.

2. Providing False or Misleading Information

Providing information that is deliberately false, incomplete or misleading can create serious consequences.

This could include deliberately altering records, supplying false information to Inland Revenue or submitting a return containing information that the taxpayer knows is incorrect.

If you are uncertain about information included in a tax return, professional tax advice can help you determine the appropriate way to correct the issue.

3. Claiming Expenses You Know Are Not Deductible

Businesses can claim legitimate business expenses where the applicable tax rules allow them.

However, deliberately claiming private expenses as business expenses, inventing expenses or knowingly claiming deductions that are not available can result in a tax shortfall.

The important distinction is whether the taxpayer simply misunderstood a complicated rule or knowingly took an incorrect position.

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

Tax evasion can also involve obtaining, or attempting to obtain, a tax refund or payment when the person knows they are not legally entitled to it.

This can occur where someone deliberately supplies false information to create a refund entitlement.

If you believe a refund claim may be incorrect, it is important to address the issue rather than ignoring it.

5. Deliberately Suppressing Sales

Businesses that use systems or practices to hide sales can face serious consequences.

Electronic sales suppression tools can be used to manipulate point-of-sale records and hide income received from customers.

Businesses should maintain complete and accurate sales records and ensure that their accounting systems properly record transactions.

6. Failing to Account for Tax That Has Been Deducted or Withheld

Employers and other taxpayers can have obligations to deduct or withhold tax in certain circumstances.

Failing to account for tax that has been deducted or withheld can become a serious matter, particularly where the conduct is deliberate.

This can include situations involving PAYE and other withholding obligations.

7. Deliberately Destroying or Altering Records

Good record keeping is an important part of tax compliance.

Deliberately destroying, altering or withholding records to conceal taxable activity can make a tax investigation significantly more serious.

Taxpayers should retain relevant financial and tax records and avoid destroying or changing records that may be relevant to an Inland Revenue enquiry.

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

Tax evasion and tax avoidance are not the same thing.

Tax Evasion

Tax evasion involves unlawful conduct intended to evade tax or obtain a tax benefit that the person knows they are not entitled to.

Examples can include deliberately hiding income or providing false information.

Tax Avoidance

Tax avoidance is a separate area of tax law concerning arrangements or transactions that result in a tax advantage and fall within New Zealand’s tax avoidance rules.

The distinction can be legally complex. You should not assume that every tax planning strategy is automatically acceptable or automatically unlawful.

If Inland Revenue has raised concerns about an arrangement, professional advice should be obtained before responding.

What Are the Penalties for Tax Evasion in NZ?

The consequences of tax evasion depend on the circumstances and the relevant provisions of New Zealand tax law.

150% Shortfall Penalty

Inland Revenue states that the shortfall penalty for tax evasion is 150% of the resulting tax shortfall where the applicable evasion penalty is imposed.

For example, if a taxpayer has a tax shortfall of $10,000 and a 150% evasion shortfall penalty applies, the penalty would be $15,000, before considering any other applicable amounts or adjustments.

The actual outcome depends on the facts and applicable legislation.

Learn more about Inland Revenue shortfall penalties .

Criminal Penalties

Tax evasion can also result in criminal prosecution.

Certain tax evasion offences can result in:

• Up to 5 years’ imprisonment
• A fine of up to $50,000
• Or both, depending on the offence and circumstances.

Not every tax error results in criminal prosecution. The circumstances and applicable legal requirements matter.

What Happens During an IRD Tax Investigation?

If Inland Revenue has concerns about your tax affairs, it may request information, records or explanations.

An investigation can involve reviewing:

• Tax returns
• Accounting records
• Bank information
• Invoices
• Business records
• GST information
• PAYE records
• Expense claims
• Sales records
• Other relevant information

The seriousness of an investigation depends on what Inland Revenue is examining and the information available.

If you receive an IRD letter requesting information or raising concerns about your tax position, do not ignore it.

Carefully review what Inland Revenue is asking for and consider getting professional advice before providing a detailed response if the matter is serious.

What If You Made a Genuine Tax Mistake?

This is an important distinction.

A mistake is not automatically tax evasion.

Tax law can be complicated, and taxpayers can make genuine errors in calculations, records or tax returns.

Inland Revenue has different categories of shortfall penalties, including penalties relating to reasonable care, unacceptable tax positions, gross carelessness, abusive tax positions and evasion.

The circumstances surrounding the error matter.

If you discover that your tax return contains incorrect information, do not simply ignore it.

Can You Correct a Tax Mistake?

Yes. Inland Revenue provides a voluntary disclosure process.

A voluntary disclosure is when you tell Inland Revenue what is wrong with your tax returns before it finds out through another process.

For example, you may discover that:

• Income was left out.
• An expense was incorrectly claimed.
• A return contained incorrect information.
• Another tax mistake needs to be corrected.

Individuals, businesses, trusts and employers can make a voluntary disclosure in appropriate circumstances.

Read the official Inland Revenue voluntary disclosure guidance for more information.

Can Voluntary Disclosure Reduce a Tax Penalty?

In some circumstances, yes.

A qualifying full voluntary disclosure may reduce an applicable shortfall penalty. The timing of the disclosure can affect the reduction available.

This is one reason why delaying action after discovering a tax problem can be risky.

If you believe there may be a significant tax error, get advice about the appropriate way to correct it rather than waiting for Inland Revenue to identify it first.

See Inland Revenue’s guidance on lowering shortfall penalties .

What Should You Do If IRD Suspects Tax Evasion?

If Inland Revenue has contacted you about suspected tax evasion, take the matter seriously.

1. Don’t Ignore the Letter

Check the deadline and understand exactly what Inland Revenue is asking you to provide.

2. Gather Your Records

Collect relevant:

• Tax returns
• Invoices
• Bank statements
• Accounting records
• Receipts
• Payroll information
• GST records
• Contracts
• Other supporting documents

3. Don’t Destroy or Alter Records

Keep relevant records intact.

Destroying or falsifying records can create additional problems and may make an investigation more serious.

4. Get Professional Advice

If the matter involves suspected evasion, an audit, significant tax penalties or potential prosecution, consider getting professional tax advice before responding.

5. Consider Whether Voluntary Disclosure Is Appropriate

If you have identified an error yourself, ask a qualified adviser whether voluntary disclosure is appropriate in your circumstances.

Can IRD Prosecute for Tax Evasion?

Yes.

Certain forms of tax evasion are criminal offences under the Tax Administration Act.

Criminal tax offences can involve conduct such as deliberately evading the assessment or payment of tax, providing false information, failing to make required deductions and other prohibited conduct.

The legal requirements for prosecution are different from those applying to civil tax penalties.

What Is the Difference Between Tax Evasion and an Incorrect Tax Return?

An incorrect tax return does not automatically mean tax evasion.

Consider two simplified examples.

Example A: Genuine Error

A taxpayer misunderstands a complicated deduction rule and claims an expense incorrectly.

They later discover the error and cooperate with Inland Revenue.

This does not automatically mean they have committed tax evasion.

Example B: Deliberate Concealment

A business owner knowingly keeps some sales outside their accounting system and deliberately excludes those sales from their tax return.

That conduct can raise serious tax evasion concerns.

The legal treatment depends on the facts, including the taxpayer’s knowledge and conduct.

Why Tax Compliance Matters for Businesses

For businesses, tax compliance is not just about filing a return.

Good systems should help you:

• Record all income.
• Track legitimate expenses.
• Keep supporting documentation.
• Reconcile accounts.
• Meet GST obligations.
• Manage PAYE obligations.
• File returns on time.
• Correct errors promptly.
• Respond appropriately to Inland Revenue enquiries.

Maintaining accurate records and providing complete information can help businesses manage their tax obligations and reduce the risk of avoidable compliance issues.