Taxpayers are obligated to pay tax. Even a single breach of tax payment obligations may result in civil penalties, criminal penalties, or both.
Civil penalties are imposed by Inland Revenue. Examples of common civil penalties include late filing penalties, non-electronic filing penalties, late payment penalties, and shortfall penalties.
On the other hand, criminal penalties are imposed by court upon conviction of an offence. Examples include evasion, obstruction, and aiding or abetting another person to commit an offence.
Late filing penalties refers to when a taxpayer files the tax returns required late. Note that Fringe Benefit Tax (FBT) does not apply. Inland revenue will contact if penalty is going to be enforced. Penalties can be avoided if return is filed promptly or the taxpayer has a valid reason. Valid reasons include circumstances that were beyond the taxpayer’s control such as illness or an accident, or not being able to obtain information that was needed to file. The amount of penalty imposed depends on the net income. There are three penalty bands – below $100,000 is $50 of penalty, between $100,000 to $1M is $250 of penalty, and more than $1M is $500 of penalty. Late filing penalties for the reconciliation statement, employer monthly schedule, and the annual ICA return is $250.
Penalty must be paid within the time frame stated, which for an annual tax return the penalty must be paid within 30 days from the penalty notice or terminal tax date, whichever is later. For a reconciliation statement and annual ICA return late filing penalty, it must be paid within 30 days from penalty notice or date by which the statement needs to be filed, whichever is later. The employer monthly schedule has to be paid within the 5th day following the month in which it needed to be filed. However, if the gross amount of withholding tax of employer is less than $500,000, it needs to be paid within the 20th day of the following month. For GST returns, it needs to be paid within the 28th of the second month after the end of GST period. If GST period is December it needs to be paid before the 15th of February, and if GST period is April it needs to be paid before the 7th of June.
Late payment penalties consist of two components – initial late payment penalties and monthly incremental penalty.
The initial late payment penalty is calculated on the amount of late or unpaid tax. The initial penalty is 5% of unpaid tax, and additionally 1% the day after the due date and further 4% of total outstanding amount if not paid within a week of due date. No initial late payment penalties are due for unpaid tax of $100 or less.
Monthly incremental penalty is 1% on the amount of late or unpaid tax and penalties.
If taxpayer is in financial difficulty, inland revenue may remit tax or help arrange payments. 4% penalty or incremental late payment penalty can be waived if IR is contacted before due date and the incremental late payment penalty can be waived if IR is contacted after the due date
Shortfall penalties occur when the taxpayer fails to calculate tax correctly. Penalty is imposed on unpaid tax that should have been included in the original tax calculation. There are 5 categories of behaviour – failure to take reasonable care with 20% penalty; adopting an unacceptable tax position with 20% penalty; gross carelessness with 40% penalty; abusive tax position where shortfall exceeds $50,000 with 100% penalty; and tax evasion with 150% penalty.
Aiding or abetting another person to commit a tax offence results in the person aiding being liable for the same criminal penalties as the person helped. Criminal penalties for knowingly offending include imprisonment for a maximum of 5 years and up to $50,000 for each offence.
If taxpayer obstructs Inland Revenue regarding calculating correct tax obligations, an additional civil penalty of 25% on unpaid tax may be imposed.
Penalties can be reduced if tax shortfall is disclosed. If disclosed tax shortfall before the notice of Inland Revenue investigation, taxpayer can reduce penalty for not taking reasonable care or for taking an unacceptable tax position or an unacceptable interpretation by 100%. If taxpayer discloses tax shortfall before notice of an IR investigation, they can reduce other shortfall penalties by 75%. Finally, if they have disclosed after notice of an IR investigation but before it starts, taxpayer may reduce all shortfall penalties by 40%
Penalties and lawyer’s expense in defending criminal or civil penalties are not deductible.
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