A Case Study: Tax Arrears With IRD

11 August 2023 by Ross Barnett in Property Accounting

A Case Study: Tax Arrears With IRD

Unfortunately, it happens sometimes. Your business goes through a rough patch and before you know it, the business is behind on PAYE, GST and/or Income Tax. IRD then aggressively add penalties and interest, and the debt soars.

One of our clients was recently in this position, and this is how we resolved it.

Background

Our client had a real hard luck story. They had a major mental illness within the family, which cost them thousands in cash to support the family member, plus damages and loss through theft of property. This caused our client significant financial distress, which caused them to fall behind with their tax payments.

Our client owed approximately $100,000, with around $35,000 being interest and penalties.

Steps We Took

1st step

We communicated with IRD. It’s great to keep IRD updated and let them know that the tax arrears are currently being looked at by professionals to work on repayment options.

2nd step

Complete IRD statement of financial position forms, including income and expenses. Normally for IRD to consider any kind of payment plan, they want to see the full picture and understand your financial situation.

3rd step

Is there a way we can make a lump sum payment?

In this case, our client managed to go to other family members and borrow $50,000. With the possibility of another $15,000 if really needed. 

4th Step

Decide how to approach IRD. In this case, we were aggressive, and paid the $50,000 lump sum to IRD, with no commitment from IRD that they would accept our payment arrangement. Unfortunately, this means that you are giving away some of your power or control and risking that IRD will not just take the money and then be unreasonable.

Overall IRD are wanting to get a solution too, and wants to get some money in, rather than having a big arrears.

Based on the client's income and expenditure, things were tight. We could offer a further $250 per fortnight, but only wanted to do this for 2 years as cash flow as the business environment was tough, and we didn’t want to make a long-term commitment that might change over time. Plus, our clients were nearing retirement. So, this was another $13,000 over 2 years.

Total offer $50,000 lump sum, plus fortnightly repayments of $13,000 = $63,000 total. In this case, if cash flow turned out to be extremely tight, the extra $15,000 could be borrowed from the family.

Leave a little bit in reserve, as IRD will often come back with a slightly different offer or require slightly more.

5th Step

IRD takes a while to process a payment arrangement, but as soon as you make the offer, start honouring it and prove you can make the payments. Our client started making the fortnightly payments of $250 straight away, and before the tax arrears was fully settled, 3 payments were made.

6th Step

Wait for IRD to respond and don’t be afraid to meet with them face-to-face to discuss your full situation.

7th Step

Result – IRD was very understanding and reasonable in this case. They decided that the $250 per fortnight was actually too tight and didn’t give our client enough buffer or leeway. So, they accepted the $50,000 as a full and final settlement.

By offering and paying the $50,000 lump sum, we managed to get our client a write-off of $50,000, and have left them in a much better financial position than having to pay the full $100,000.

Does Every Payment Plan Work?

No. If the client doesn’t give IRD the information such as the financial position, it often goes back and forward, and ultimately gets nowhere.

Or if the client doesn’t have a legitimate reason, then it is unlikely to get a major tax write-off.

IRD will quite often write off penalties. Getting interest and the actual core tax written off is a lot harder, and often unsuccessful unless there is a legitimate financial hardship.

Overall IRD are wanting to get a solution too, and wants to get some money in, rather than having a big arrears.

If you do have large tax arrears, we suggest working with Ross to develop a plan on how to approach IRD. If you are not a client, a free chat with Ross would be a great starting point, to see if we can help.

 

Schedule Appointment with Coombe Smith Lifetime Property Accountants

 

Article by Ross Barnett

 

Disclaimer: This article has been prepared for the purpose of providing general information, without taking into consideration any particular person's objectives, financial situation or needs. Any opinions contained in it are held by the author as at the report date and are subject to change without notice.

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