Key Facts About the Latest IRD Warning

• Nearly 3,000 fraudulent amended tax returns have been identified and stopped.
• 542 fraudulent returns were submitted in a single night.
• $4.015 million in bogus claims was stopped.
• $151,787 had already been paid before additional controls were introduced.
• The activity initially appeared concentrated in the transport industry.
• IRD says the activity has spread to other sectors.
• Deliberate tax evasion may result in a 150% evasion shortfall penalty.
• Prosecution may also be possible in serious cases.
• IRD is working to identify people promoting or operating the scheme.

What Are Bogus Expense Claims in New Zealand?

Bogus expense claims are false, fabricated, inflated or otherwise illegitimate expenses included in a tax return to reduce taxable income or increase a tax refund.

According to IRD, the current investigation involves people amending tax returns and claiming expenses that were not legitimate.

The investigation began after Inland Revenue identified unusual patterns in tax returns.

Some taxpayers were reportedly told that certain individuals knew how to obtain “extra money” through expense claims.

The investigation has since expanded beyond the sector where the activity was first identified.

What Makes an Expense Claim Bogus?

An expense claim can become problematic when a taxpayer deliberately includes information that is false, misleading or does not meet the relevant tax deduction requirements.

Examples can include:

• Claiming an expense that never occurred.
• Inflating the value of a genuine expense.
• Claiming private expenditure as a business expense.
• Claiming an expense that does not qualify as a deduction.
• Using false or altered supporting documentation.
• Adding expenses simply to receive a larger tax refund.

A business expense is not automatically deductible simply because it was paid from a business bank account.

Likewise, receiving a tax refund does not mean that every deduction included in a return was valid.

Understanding Tax Deductions, Expense Claims and IRD Compliance

New Zealand’s tax system allows certain expenses to be claimed when they meet the relevant requirements. However, taxpayers cannot simply include an expense because it reduces taxable income or produces a larger refund.

Tax deductions, business expenses, income tax returns, amended tax returns, record keeping and IRD compliance are closely connected.

The eligibility of an expense can depend on factors including the nature of the expense, its connection with taxable income and the taxpayer’s individual circumstances.

The latest IRD investigation highlights the importance of maintaining accurate financial records and ensuring that information submitted in a tax return is complete and correct.

Are All Incorrect Tax Claims Fraud?

No. An honest tax mistake is not necessarily the same as deliberate tax fraud.

Taxpayers can make genuine mistakes when preparing tax returns. For example, someone may enter an incorrect amount, misunderstand a deduction rule or accidentally include an expense that should not have been claimed.

The circumstances and intention behind an error can be important when determining how the issue should be addressed.

However, deliberately submitting false information to obtain a financial benefit is significantly more serious.

If you believe you have made an error in a previous tax return, do not panic and do not ignore it. Review the situation and consider obtaining professional tax advice about the appropriate way to correct it.

What Are the Penalties for Bogus Expense Claims?

The consequences depend on the circumstances. However, IRD has warned that people involved in deliberate tax evasion can face significant financial and legal consequences.

Repaying an Incorrect Tax Refund

If an incorrect expense claim results in a taxpayer receiving money from Inland Revenue, the amount may need to be repaid.

A refund being paid does not make an invalid deduction legitimate.

150% Evasion Shortfall Penalty

IRD has warned that deliberate tax evasion can result in a 150% evasion shortfall penalty.

This means the financial consequences can be significantly higher than the original tax amount involved.

Potential Prosecution

In serious circumstances, deliberate tax fraud can potentially lead to prosecution.

Taxpayers should therefore be extremely cautious about anyone offering to increase their refund through questionable or guaranteed deductions.

How Does IRD Detect Suspicious Tax Returns?

Inland Revenue uses tax information and compliance processes to identify unusual activity.

The latest investigation demonstrates how unusual patterns involving amended returns and expense deductions can lead to further investigation.

This does not mean that taxpayers should avoid legitimate deductions. It means that tax returns should be accurate and supported by appropriate records.

Keeping receipts, invoices, bank records and other relevant documentation can help demonstrate how an expense was calculated and why it was claimed.

Which NZ Taxpayers Should Be Concerned?

The current investigation initially appeared concentrated in the transport industry, but IRD says the activity has spread to other sectors.

The warning is therefore relevant to:

• Employees
• Contractors
• Sole traders
• Self-employed people
• Companies
• Property investors
• Businesses
• Individuals filing tax returns

The important issue is not the taxpayer’s industry. The key issue is whether the information submitted to IRD is accurate, legitimate and properly supported.

How Can NZ Taxpayers Avoid Incorrect Expense Claims?

The best way to avoid tax compliance problems is to make sure every deduction is based on a genuine expense and meets the applicable requirements.

Keep Evidence for Your Expenses

Keep receipts, invoices, bank records and other supporting documents for expenses included in your tax return.

Separate Private and Business Expenditure

If you operate a business, maintain clear records showing which expenses relate to earning business income and which are private.

Check the Tax Treatment Before Claiming

An expense that appears business-related may not necessarily be fully deductible. Check the applicable tax requirements before claiming it.

Avoid Guaranteed Tax Refund Schemes

Be cautious of anyone promising to increase your tax refund by adding expenses or deductions that you would not normally claim.

Ask for Professional Tax Advice

If you are unsure whether an expense qualifies, getting advice before filing can help reduce the risk of an incorrect tax return.

What Should You Do If You Already Claimed an Incorrect Expense?

If you think you have included an incorrect expense in a previous tax return, do not ignore the issue.

The appropriate response depends on the circumstances and may involve reviewing the original return, supporting documentation and the nature of the expense.

You may need to review:

• The original tax return.
• The expense that was claimed.
• Receipts and invoices.
• Whether the expense was genuinely incurred.
• Whether the expense was deductible.
• Whether a correction or amendment is required.

If you are unsure what to do, getting advice early can help you understand your options.

What If IRD Has Contacted You About Your Expenses?

If Inland Revenue has contacted you about expenses, deductions or an amended tax return, do not ignore the communication.

Read the request carefully and identify what information or documentation IRD is asking for.

You may need to provide receipts, invoices, financial records or an explanation of how an expense was calculated.

If you are uncertain about the request or believe there may be errors in previous tax returns, consider obtaining professional assistance before responding.

What Does the Latest IRD Warning Mean for NZ Taxpayers?

The latest IRD investigation is a strong reminder that tax returns should contain accurate information and that deductions should be based on genuine, eligible expenses.

With nearly 3,000 fraudulent amended returns identified and $4.015 million in bogus claims stopped, Inland Revenue is clearly taking fraudulent tax activity seriously.

For taxpayers, the safest approach is simple: keep accurate records, claim genuine expenses, check before you claim and get professional advice if you are unsure.

There is no safe shortcut to a larger tax refund through false or illegitimate expense deductions.