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  • % Chance of IRD Audits

    Hi Guys,

    I was recently approached by my accountant to get IRD Audit insurance, apparently he was asked to resell insurance at a cost of $189($89 mark up) but instead is offering his own form of insurance. The cost he's charging for my portfolio would be $69 or $92 annually.

    For an audit, he would normally charge are:
    IRD Risk Review $240 - $480 plus gst
    IRD Audit $480 - $960 plus gst

    My question is what are the chances of being audited? My formula for value on this is:

    (480+960)*1.15*.7=1159.2(very roughly adding GST and less tax deductions)
    69/1159.2=0.0595 or 5.95%.

    if the chances were higher than 5.95% then that would make this a good decision and make savings over the general period of 16.8 years. But if I'm not likely to be audited in any greater frequency than that, it may not be the best decision. This is either prudent on my part, or a cunning business strategy on his...or both.

    Any thoughts?

  • #2
    Unless you are trading and making substantial GST claims forget it.

    Comment


    • #3
      If you're looking at it mathematically, no insurance is financially sensible.

      Insurance is set at a level where overall across the entire population the fees will cover any claims, and all the costs of the insurance company, and still make a profit. By definition, overall people are paying a lot more for insurance than they would on average if they didn't insure and just paid for things when they happened.


      But insurance isn't purely mathematical. It is a risk reduction strategy. In my opinion you should insure against anything you can't afford to lose. As an example, I insure my house for full value, but I have the most minimal level of contents insurance the company will allow. I don't have full car insurance, because if I crash my car I'll buy a cheap new one - I can afford that loss. I do have third party car insurance, because if I crash my car into someone's house or luxury supercar, I can't afford that loss.

      So the question is, would you be financially devastated if you were to be audited by the IRD, and your accountant charged you $500, $1000, or even $2000? I would hope not. But I don't know your personal situation, so maybe you would be.

      But if not, I certainly wouldn't insure against it. But it's all about your risk tolerance.

      If I recall, Mr Money Mustache wrote an article on insurance a few years back which said what I did above in a much more entertaining way. I'll go find it now and link it. His whole blog is totally worth reading.

      EDIT: http://www.mrmoneymustache.com/2011/...e-bad-at-math/
      Last edited by Anthonyacat; 18-08-2015, 11:54 PM.
      AAT Accounting Services - Property Specialist - Anth[email protected]
      Fixed price fees and quick knowledgeable service for property investors & traders!

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      • #4
        Good read, pretty much in line with my thinking. Was just putting it out there mathematically to see what people thought. Besides that I think I could get a greater return/savings by investing that money and accessing it if and when I get audited. Thanks for the link.

        Comment


        • #5
          Absolutely. And your invested funds will earn significantly more than you would have paid in insurance. Statistically.

          The problem of course occurs when you're audited next year, and then again the year after... If you imagine that situation, and think you'll be kicking yourself for not buying the insurance, you should probably go ahead and statistically waste your money, in exchange for the peace of mind.
          AAT Accounting Services - Property Specialist - [email protected]
          Fixed price fees and quick knowledgeable service for property investors & traders!

          Comment


          • #6
            IRD do publish some compliance info. How they select taxpayers to audit is I believe a closely guarded secret. But some sectors are mentioned as targets from time to time , such as high net worth folk and property developers.

            IRD have also stated that they have determined expected ranges for quite a few occupations and are more likely to take a closer look at those which are outside that range.

            Not an accountant but I do several returns for the family. I take a conservative approach to expenses, make sure returns and tax due are done on time. My aim is no red flags!

            Comment


            • #7
              Are you just a long term hold investor of rental properties? If so your likelihood of audit is very low. So I personally don't suggest rental owners get audit insurance.

              Audit insurance also doesn't cover anything illegal. So say you are a property trader and you push the boundaries too far, or you are just useless and do something majorily wrong, then there is a chance this isn't covered under the insurance anyway.

              Audit insurance only covers the accountants time and not the extra tax, penalties, interest etc.

              For a rental owner, the first step by IRD is normally to ask for your full financial statements. This takes a few minutes to send to IRD and often stops the audit before it even starts (I would say 95% of the time for rentals).

              A full audit for a rental owner is still going to be pretty straight forward and quick. They will look at 2-3 key areas, that might be very big amounts but easy to explain. So the time taken should still be small.

              Business or trading, audits can be very time consuming. IRD target cash businesses, property traders and other risk industries that they identify. So audit insurance could be worthwhile for these, but still the chances of getting audited if you are doing things reasonable and using a chartered accountant are quite slim.

              Ross
              Book a free chat here
              Ross Barnett - Property Accountant

              Comment


              • #8
                Who does your tax returns - of all sorts? If some or all are done by a chartered
                accountant, your IRD risk profile is then lower than someone doing DIY returns.
                Want a great looking concrete swimming pool in Hawke's Bay? Designer Pools will do the job for you!

                Comment


                • #9
                  Originally posted by Perry View Post
                  Who does your tax returns - of all sorts? If some or all are done by a chartered
                  accountant, your IRD risk profile is then lower than someone doing DIY returns.
                  Unless that CA hits the IRD targets for some reason then all clients are audited.
                  Happened to a friend of mine.

                  Comment


                  • #10
                    Originally posted by Wayne View Post
                    Unless that CA hits the IRD targets for some reason then all clients are audited.
                    Happened to a friend of mine.
                    Recently? I used the hear the partners at my old firm discussing that like it was the sort of thing that happened in the 80s but not anymore.

                    That would cause absolute hell for a practice. They'd get so behind, and miss all the next years filing deadlines.
                    AAT Accounting Services - Property Specialist - [email protected]
                    Fixed price fees and quick knowledgeable service for property investors & traders!

                    Comment


                    • #11
                      Originally posted by Anthonyacat View Post
                      Recently? I used the hear the partners at my old firm discussing that like it was the sort of thing that happened in the 80s but not anymore.

                      That would cause absolute hell for a practice. They'd get so behind, and miss all the next years filing deadlines.
                      Quite a while ago - probably 15 years.
                      It was hell on the clients, especially as some of the things the accountant did were dodgy

                      Comment


                      • #12
                        Hardly anybody ever gets audited anymore unless you create a transaction that gets flagged like GST refund above 50K etc.

                        Well it was 50K 5 years ago might be higher now.
                        Last edited by Damap; 21-08-2015, 11:05 AM.

                        Comment


                        • #13
                          Originally posted by Perry View Post
                          Who does your tax returns - of all sorts? If some or all are done by a chartered
                          accountant, your IRD risk profile is then lower than someone doing DIY returns.
                          Originally posted by Wayne View Post
                          Unless that CA hits the IRD targets for some reason then all clients are audited.
                          Yes - agreed. There have been a few accountants under the
                          magnifying glass of the IRD. I suppose all that tells us is that
                          the risk profile is lower, rather than completely negated.

                          And yes - it's hell for the clients because they carry the cost
                          of any errors or fraud perpetrated by the accountant. It does
                          seem as if tax is the only thing that the law enforces the very
                          unjust system of vicarious atonement.
                          Want a great looking concrete swimming pool in Hawke's Bay? Designer Pools will do the job for you!

                          Comment


                          • #14
                            A couple of titbits of information I have picked up over the years:

                            1. Most IRD audits the taxpayer never hears about. Apparently all trading companies are audited on average every 4 years, but this could be just someone at the IRD looking through their returns etc.

                            2. The IRD will only do a full audit if they believe there is a good chance of at least $3k in it for them.

                            Comment


                            • #15
                              Originally posted by Perry View Post
                              Who does your tax returns - of all sorts? If some or all are done by a chartered
                              accountant, your IRD risk profile is then lower than someone doing DIY returns.
                              I think that is a bit simplistic. I have done DIY most years and have never had any experience which leads me to believe they are targeting DIYers for it's own sake. It could quite likely be there is a higher instance of DIY in industries they are especially interested in - tradies for example.

                              Originally posted by Damap View Post
                              Hardly anybody ever gets audited anymore unless you create a transaction that gets flagged like GST refund above 50K etc.

                              Well it was 50K 5 years ago might be higher now.
                              I have heard of this. But it won't necessarily result in a full audit. From what I heard the IRD usually just ask for more information or supporting documentation in respect of that transaction or period.

                              Originally posted by Perry View Post
                              And yes - it's hell for the clients because they carry the cost
                              of any errors or fraud perpetrated by the accountant. It does
                              seem as if tax is the only thing that the law enforces the very
                              unjust system of vicarious atonement.
                              Not in any way disagreeing with you, but I heard from an old landlord of mine (who also ran an accountancy business) he had a client who wanted him to sign the forms. He of course (rightfully) refused. He wasn't going to fall for that.
                              -----------------------------

                              It's good to see this discussion here. I've heard enough "property sorts" push the "tax free" angle over the years.

                              Always remember to pay your tributes to Caesar.
                              Last edited by PTWhatAGreatForum; 22-08-2015, 12:40 AM.

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