Consequences of mistake under the new IRD online systems
The Inland Revenue Department (IRD) has advised that, over the next six years, it intends to implement a range of online services to better serve the public and reduce compliance costs. While these changes should be applauded, several issues arise due to the current legislated form.
In the next 12 months, the IRD proposes to upgrade the MyIR system (the online portal for clients and tax agents) to enable filing of GST online, as well as making some additions to the system to allow for greater communication and amendment of mistakes. This article will focus only on the GST issues, which are set for immediate release.
The GST system is designed to allow for accounting software filing and improved online filing of returns. It went live in April 2016 and was trialled through a small number of firms. The online form version of this process has been live for the past two years, and the IRD reports that both have met with great success (http://www.ird.govt.nz/transformation/whatshappening/file-returns/file-tax-return-from-accounting- software.html).
It is expected that this process will save participants significant sums in compliance costs. However, I hold concerns with the possibility of mistakes and the current inflexibility to correct these under the Tax Administration Act 1994 (TAA).
Simple mistakes in data entry are likely to remain undetected for several days, or possibly until the return has been processed. This can cause problems when these mistakes impact on legal responsibilities such as filing tax returns. There are also significant implications in terms of possible penalties and limits on the ability to correct errors under section 113A of the TAA.
Section 113A deals with the correction of minor errors in subsequent returns and provides:
“(1) This section applies for the purposes of this Act and the Goods and Services Tax Act 1985 when—
(a) a person has provided a return in which the assessment of their liability for income tax, fringe benefit tax, or goods and services tax contains 1 or more minor errors; and
(b) the error was caused by a clear mistake, simple oversight, or mistaken understanding on the person’s part; and
(c) for a single return, the total discrepancy in the assessment that is caused by the error is $500 or less.
(2) The Commissioner may allow the person to correct the error in the next return that is due after the discovery of the error.
(3) For the purposes of subsection (1)(c), the liability the person has for income tax, fringe benefit tax, or goods and services tax is treated separately.”
The error correction problem is evident in section 113A(1)(c), which limits any genuine mistake to $500 or less. When dealing with GST returns, the sums for input and output tax very seldom amount to $500 dollars, which would result in section 113A(2) almost never being invoked, except in cases of minor correction.
This is confirmed by the IRD’s website, which says that any mistake in GST must be minor to be subject to any correction, otherwise the disputes process is the only option available to taxpayers seeking a correction. This is both time-consuming and costly due to the expert assistance needed to file the Notice of Proposed Adjustment (NOPA) under part 4A of the TAA (http://www.ird.govt.nz/gst/changes-corrections/changes-correction/changes-corrections.html).
In Westpac Securities NZ Ltd v Commissioner of Inland Revenue  NZHC 3377, this position was confirmed in relation to income tax. Westpac Securities (WS) applied to the High Court for determination of the discretionary power held by the Commissioner of Inland Revenue (CIR) under section 113A, and applied for judicial review of a decision made by the CIR to amend an assessment to ensure its correctness. WS had offset losses from related companies against WS’s income and, as a result, was unable to use foreign tax credits which subsequently became available to the related companies. WS asked the CIR under section 113 to correct its mistake. The CIR responded that under section IC5(4) of the Income Tax Act 2007, the decision was irrevocable and that it could not interfere.
The Court held that the CIR’s power to amend an assessment under section 113 is to do what the CIR considers necessary to ensure the correctness of the assessment. An initial incorrect tax position is not a necessary prerequisite, and section 113 can also be used to amend “correct” assessments. The Court held that the power of amendment is discretionary, so the merits of a taxpayer’s reasons for requesting reassessment may need to be considered. Further, the CIR can amend a decision which is irrevocable by the taxpayer.
However, the Court went on to say that the CIR still has the discretion to decide whether or not the power should be exercised. In this case, the prevailing factor is the discretionary power given to the CIR, and if correction of the mistake does not suit it, then the application can be denied.
Over the years, I have had clients entangled in disputes with the IRD where auditors/reviewers have taken an entrenched approach when their position is challenged, even when they are shown to be wrong by court citation. This has resulted in taxpayers having to employ the disputes procedures in Part 4A of the TAA, which in one instance has taken the better part of six months to resolve for a simple mistake. This example has left me with concern over the fair treatment in the new online system where a genuine mistake, such as a typo, is to blame.
In my opinion, section 113A needs review if the online systems are to be truly effective. “Minor errors” should not be defined merely on dollar amounts – a typo is a typo regardless of the decimal point.
The penalties for error are significant (see Part 9 of the TAA), with responsibility falling upon the taxpayer, even if he or she uses a tax agent or an accountant. Therefore, extra care is needed to double-check that information being provided to the IRD is correct before pressing the submit button and potentially facing a drawn-out and costly resolution procedure to correct a genuine data entry error.