A letter from Inland Revenue asking for information can be unsettling, even when you've done nothing wrong. It's also becoming more common. In the 2024–25 year IRD closed 6,147 audits, 42% more than the year before, and assessed $1.45 billion in discrepancies.
Knowing how IRD decides who to look at, and what happens next, makes the whole thing a lot less stressful.
How IRD chooses who to look at
For small and medium businesses, Inland Revenue says it selects people for a review or audit based on:
- unusual patterns in your tax returns
- the areas it's currently focusing on
- information from other sources suggesting a return may be wrong
- your compliance history
- local knowledge
- random selection
It won't always tell you exactly why you were picked, but it will tell you what the audit is focusing on.
What tends to get noticed
Numbers that don't fit your industry
IRD compares businesses with others in the same line of work. A margin that's much lower than similar businesses, or expenses that look high for your size, can stand out.
Income that doesn't match your lifestyle
If the income you declare wouldn't pay for the house, cars or travel you have, IRD may ask how. Audit interviews can include questions about your personal spending for exactly this reason.
Large or repeated GST refunds
Refunds get a closer look, especially in property development. IRD has been checking developers who claim GST refunds but haven't filed the matching returns.
Information IRD already has
IRD receives data from banks, employers, other government agencies, overseas tax authorities and crypto exchanges. It has identified around 188,000 New Zealanders who hold or trade crypto. When that data doesn't match your return, questions follow.
Cash businesses and focus industries
IRD's hidden economy work currently focuses on construction, horticulture, personal services and crypto-assets, as well as employers who don't file or pay PAYE.
Risk review or audit?
They're not the same thing, and IRD will tell you which one it is when it first gets in touch.
Risk review
- IRD asks for some information
- It checks whether there's a risk of errors
- Many end there, with no changes
Audit
- A detailed look at your records
- Can include interviews and site visits
- Ends with an assessment, or no change
In an audit, IRD usually gives reasonable notice and contacts your tax agent first if you have one. There's normally a first meeting, then requests for records, and sometimes a formal interview. Most questions are about the business, but some will be about your personal finances. You can have your accountant with you at any stage.
What it can cost
If an audit finds tax was underpaid, you'll owe the tax plus interest, and possibly a shortfall penalty. The penalty depends on how the mistake happened.
| Reason for the shortfall | Penalty |
|---|
| Not taking reasonable care | 20% of the shortfall |
| Unacceptable tax position | 20% |
| Gross carelessness | 40% |
| Abusive tax position | 100% |
| Evasion | 150%, and possible prosecution |
Penalties can be reduced by 50% if you have a good compliance history, and increased by 25% if you obstruct the audit.
Found a mistake yourself? Tell IRD first
Owning up before IRD finds it makes a big difference. This is called a voluntary disclosure.
How much a disclosure savesBefore IRD tells you about an audit, the penalty for not taking reasonable care or an unacceptable tax position is reduced by 100%, and for more serious categories by 75%. After you've been told about an audit but before it starts, the reduction is 40%.
How to be ready
- Keep your records for 7 years. Invoices, receipts, bank statements and anything that backs up your returns.
- Keep business and personal separate. A separate bank account makes everything easier to explain.
- Make your GST returns match your accounts. Differences between the two are one of the easiest things for IRD to spot.
- Note anything unusual. A one-off sale or big purchase is easier to explain with a note made at the time.
- File and pay on time. A clean history counts in your favour, and late filing draws attention.
- Call us early. If IRD gets in touch, talk to your accountant before you reply.
This article is general information based on Inland Revenue guidance (IR297 Inland Revenue audits, April 2026) and IRD's 2025 annual report. It isn't advice for your situation. Talk to us before you respond to IRD.
