Audit Traps for Clients
Audit Traps for Business Clients
This article talks about the audits we have had this year and the audit traps some of our clients have faced.
We feel that its been a good learning experience to share the outcomes of IRD audits so far this year as we have entered a period where IRD have gone from a politically driven “Be Kind” mentality of assisting business clients though Covid back in March 2020 to a change of position where small business clients have become somewhat of an audit target.
We don’t want to scare our business clients but but we do want to make you aware that some expense items which we could previously negotiate with IRD have definitely become non-negotiable.
The following are non-negotiable areas as we have found for recent audits:
Motor vehicle logbooks
No logbook means no claim.
We have always advised clients to keep them but now if you cannot show a clearly kept logbook for vehicle mileage then your vehicle claims will either be disallowed or a massive adjustment made at best.
Another point to note is that IRD have been ruthless in regards to travel being from home to a place of work (and back again) is deemed private. Once you are at work and travelling to clients then you are fine to claim.
Also if you operate from home then travel to clients is essentially all “on work” and in theory is claimable. One thing that can make things easier is having both a work vehicle and private vehicle. This is not always practical but will help your cause in event of an audit.
Also be realistic about making a private use adjustment. Trying to sell the story that your vehicle is 100% business use is a hard sell. Making say a 10% adjustment for private use will go a long way towards helping your case.
Clothing & Laundry
Unless you have a clearly marked uniform for work then IRD have been quite definitive about not allowing a claim for clothing.
Work boots etc. must also be specific and for purpose.
We have been around in circles with auditors on this and overall they will not budge.
Entertainment, Client Gifts and the 50% Adjustment
Most entertainment will need to have a 50% adjustment made.
In one case we tried to argue that items donated for charity auctions should be 100% claimable and IRD told us they would allow this but only on the basis that every one of those charities quantified this by a letter of proof etc.
The client could not be bothered with both the level of proof required and IRD got their way.
https://www.ird.govt.nz/income-tax/income-tax-for-businesses-and-organisations/types-of-business-expenses/entertainment-expenses is a good link to define what can be claimed 50% and what can be claimed 100%.
Audit Insurance
Audit Insurance is paying off.
On average the costs to deal with these audits have been around the $3000 mark.
For $180 of Insurance policy the clients have been happy that this has covered our fees.
It is also important to note that none of these have actually been full audits and only what IRD refer to as education reviews.
A full audit which luckily we have not yet, had involves a more in-depth process of investigation of multiple years.
If you have any questions about these findings or are worried that you have been over claiming or just have questions about some of the content of this article, get in touch. All of our team can assist in these areas.
We feel it is important for clients to know that the IRD are now more proactive within the audit area plus they have access to far more information due to everyone’s digital footprint and their new and more powerful data collection resources.
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