IRD Audit in NZ: What Triggers One and How to Prepare

Receiving a letter from Inland Revenue saying your tax affairs are under review is unsettling — even if you have done nothing wrong. The reality is that most IRD audits are resolved without drama when the right records are in place and the right people are handling the response.

This guide explains what triggers an IRD audit in New Zealand, what the process looks like, how to prepare your documentation, and the specific risks that apply to trades businesses and medical practices.

An IRD audit is a formal review of your tax returns and financial records to verify that you have correctly reported your income, claimed only legitimate deductions, and paid the right amount of tax.

Audits range in scope from a targeted review of a single return or deduction category through to a full investigation covering multiple years and multiple tax types — income tax, GST, PAYE, and FBT.

IRD has broad powers during an audit. They can require you to produce records, ask questions, interview you or your staff, and access third-party information such as bank records and supplier invoices. Refusing to cooperate or failing to provide records can result in penalties on top of any tax adjustment.

IRD uses a combination of automated risk-scoring, industry benchmarking, and targeted campaigns to select audit candidates. Common triggers include:

IRD maintains detailed benchmarks for hundreds of industries — gross profit margins, expense ratios, wage costs as a percentage of revenue. If your figures sit well outside the expected range for your industry, the discrepancy flags for review. A builder claiming unusually low materials costs, or a medical practice with a high ratio of vehicle expenses to revenue, will attract attention.

A large drop in declared income, a sudden spike in deductions, or a business that reports losses for multiple consecutive years can all trigger a review. IRD looks for patterns that are inconsistent with normal business activity.

Businesses that operate largely in cash — hospitality, trades, retail — are subject to closer scrutiny because cash income is harder to verify. IRD uses lifestyle audits and third-party data to cross-check declared income against spending patterns.

IRD cross-references GST returns against income tax returns. If your GST-exclusive turnover does not reconcile with your declared income, the discrepancy will be investigated. This is one of the most common triggers for small business audits.

Claiming significant home office expenses, high vehicle costs, or substantial entertainment deductions relative to your business size will attract scrutiny. The same applies to related-party transactions — loans to shareholders, payments to family members, or transactions between associated entities.

IRD periodically runs targeted campaigns across specific industries. Trades businesses, property investors, and the gig economy have all been subject to recent campaigns. Being in a targeted industry does not mean you have done anything wrong — but it does mean your returns are more likely to be reviewed.

IRD receives data from banks, employers, government agencies, and overseas tax authorities. If information from a third party does not match your declared income, it will be investigated.

IRD accepts anonymous reports about tax evasion. While tip-offs alone are not sufficient to trigger a formal audit, they can prompt a preliminary review.

IRD will contact you — usually in writing — to advise that your tax affairs are under review. The letter will specify the tax type and period under review and request that you provide certain records.

At this point, contact your accountant immediately. Do not respond to IRD directly until you have taken advice. The way you respond to the initial request sets the tone for the entire process.

IRD will request records relevant to the period under review. This typically includes:

• Bank statements (business and sometimes personal)
• Invoices and receipts for income and expenses
• GST workpapers
• Payroll records
• Asset registers
• Contracts and agreements
• Shareholder loan account records

You are legally required to retain business records for seven years. If records are missing, IRD may make an assessment based on the information available — which is rarely in your favour.

IRD will review the records provided and may ask follow-up questions. If they identify discrepancies, they will issue a Notice of Proposed Adjustment (NOPA) setting out the adjustments they propose to make and the reasons.

You have two months from the date of the NOPA to accept the adjustment or dispute it. If you dispute it, the matter enters a formal disputes process. This is where having experienced representation matters — the disputes process has strict procedural requirements and tight timeframes.

Most audits are resolved through agreement. IRD adjusts the assessment, you pay any additional tax plus interest and penalties, and the matter is closed. If agreement cannot be reached, the dispute can proceed to the Taxation Review Authority or the courts.

The best audit preparation is good record-keeping throughout the year — not a scramble when the letter arrives. Specifically:

Use a dedicated business bank account and business credit card. Personal expenses paid through the business account are a common audit finding and are difficult to explain after the fact.

Bank statements alone are not sufficient. IRD expects to see the underlying invoices and receipts that support your deductions. For cash expenses, keep receipts and note the business purpose at the time.

Vehicle expenses are one of the most scrutinised deduction categories. If you are claiming a portion of vehicle costs as a business expense, you need a logbook that records business versus private use. IRD requires a logbook to be kept for a minimum of 90 consecutive days every three years to establish the business use percentage.

For entertainment, travel, and gifts, note the business purpose at the time. A receipt alone is not enough — IRD wants to understand why the expense was incurred for business purposes.

Ensure your GST returns reconcile to your accounting records and your income tax return. Unexplained differences are a red flag.

The seven-year retention requirement runs from the end of the income year to which the records relate. For a business with a 31 March balance date, records from the 2019 tax year must be retained until at least 31 March 2026.

Trades businesses — builders, electricians, plumbers, painters — face specific audit risks:

Cash income. Trades work often involves cash payments, particularly for smaller jobs. IRD uses lifestyle analysis and third-party data to identify trades operators whose declared income appears inconsistent with their spending. Every cash job should be invoiced and banked.

Subcontractor payments. If you use subbies, IRD will check that you have correctly withheld schedular payments (if applicable) and that the payments are supported by invoices. Payments to subbies without proper documentation are a common audit finding.

Vehicle and equipment expenses. Trades businesses typically have high vehicle and equipment costs. These are legitimate deductions — but they need to be supported by logbooks and records that demonstrate business use.

Materials and supplies. IRD benchmarks materials costs as a percentage of revenue for most trades. If your materials ratio is unusually low, it may suggest income is being understated.

Home office. Many trades operators work from home for administration purposes. Home office claims are legitimate but need to be calculated correctly — based on the proportion of the home used exclusively for business, not a rough estimate.

Medical professionals — GPs, specialists, dentists, and locums — face a different set of risks:

Company structure and income attribution. IRD has been active in reviewing the use of company structures by medical professionals. The key question is whether income earned through personal services is being correctly attributed to the individual rather than sheltered in a company or trust. The personal services attribution rules are complex and the consequences of getting them wrong are significant. See our guide on company structures for doctors in NZ for more detail.

ACC levy classification. Medical professionals are often classified in the wrong ACC levy category, resulting in either overpayment or underpayment. IRD and ACC share information, and discrepancies can trigger a review.

Locum income. Locum doctors working across multiple practices may receive income from several sources. Ensuring all income is correctly declared and that the right entity is receiving it is important.

Trust distributions. If you operate through a family trust, IRD will scrutinise distributions to beneficiaries — particularly where distributions are made to family members who have not provided services to the business. The trustee income rules that took effect from the 2024–25 tax year have increased the tax cost of trust structures and increased IRD's focus on this area.

Expense claims. Medical professionals often have legitimate expenses for professional development, subscriptions, and equipment. These need to be clearly documented and directly related to the earning of income.

If IRD makes an adjustment to your tax, you will generally be liable for:

Use-of-money interest (UOMI). Interest accrues on unpaid tax from the date it was due. The current UOMI rate is set by IRD and can be significant over a multi-year audit period.

Shortfall penalties. These apply where you have taken an incorrect tax position. The penalty rate depends on the nature of the shortfall:

Penalties can be reduced by 50% if you make a voluntary disclosure before IRD notifies you of an audit, and by a lesser amount if you disclose after notification but before the audit is completed. This is one of the strongest arguments for coming forward proactively if you know your records are not in order.

1. Do not panic. Most audits are resolved without significant adjustment when records are in order.
2. Contact your accountant immediately. Do not respond to IRD directly until you have taken advice.
3. Do not destroy or alter records. This is a serious offence and will significantly worsen your position.
4. Gather your records. Start pulling together the documents IRD has requested so your accountant can review them before responding.
5. Consider voluntary disclosure. If you know there are errors in your returns, a voluntary disclosure before the audit begins can significantly reduce penalties.

We act for clients through IRD audits regularly. Our role is to:

• Review your records before responding to IRD
• Prepare and submit the information IRD has requested
• Identify any issues and advise on the best way to address them
• Negotiate with IRD on your behalf
• Manage the disputes process if an adjustment is proposed that we believe is incorrect

We also work with clients proactively to ensure their records and structures are audit-ready — so that if IRD does come knocking, there is nothing to hide and everything is in order.

If you have received an audit letter, or if you are concerned about your current record-keeping, get in touch with us. The sooner we are involved, the more options you have.

Related reading: What is a tax agent in NZ? | How provisional tax works | Small business tax checklist NZ