IRD tax disputes process

New Zealand’s tax laws can be complex, so it’s not surprising practitioners sometimes disagree with Inland Revenue on how to interpret the provisions. Achieving resolution isn’t always easy, and two years ago the New Zealand Law Society pressed for changes to the tax disputes process. What’s happened since then? Thanks to a collaborative approach, several administrative enhancements to the process have been introduced from 1 April this year.

To resolve a disagreement formally between the Commissioner and a taxpayer about a tax law, the provisions of the Disputes Resolution and Challenge Procedures (disputes process) must be followed. These provisions, in Parts IVA and VIIIA of the Tax Administration Act 1994, were added to the Act in 1996 to help resolve tax disputes quickly and cost-effectively.

Now that more than 10 years have passed, it’s appropriate to question whether these goals been achieved. Many tax professionals would say “No”.

In August 2008, the New Zealand Law Society (NZLS) and the New Zealand Institute of Chartered Accountants (NZICA) made a joint submission to the Minister of Revenue requesting a review of the disputes process.

The submission raised some important issues. Two key issues were:

  • The current disputes process is convoluted, slow, expensive and involves a lot of duplication; and,
  • Increasing numbers of taxpayers with a legitimate dispute are withdrawing from the disputes process because they can’t afford to follow all the steps involved.

In response, we began an internal review of the disputes process. The review was carried out in close collaboration with NZLS and NZICA. NZLS was represented by Casey Plunket, Joanne Dunne and Geoff Clews, while NZICA’s representatives were Geof Nightingale, Craig Macalister, and Aylton Jamieson.

Regular meetings chaired by Mr Plunket were held over the course of last year to analyse the issues. I would like to acknowledge the time and commitment from NZICA and NZLS. The collective input given by both was invaluable, and much appreciated.

After considering everyone’s comments, we produced a report proposing several administrative changes.

All three parties found they agreed on many of the proposals. For example: improvements to our Notices of Proposed Adjustment (NOPAs) conferences with a clearer purpose and guidelines to clarify when we will allow a dispute to go straight to a hearing authority after the conference phase.

There remain however, some areas of difference. NZLS and NZICA would like to see legislative changes that will impose more timeframes on Inland Revenue, allow taxpayers to opt out of the latter stages of the disputes process unilaterally and improve the small claims procedures.

Inland Revenue would prefer to change the administrative guidelines wherever possible, rather than make amendments to the legislation. We believe this approach gives greater flexibility – particularly helpful when larger or more complex cases are involved.

Let me now go over some of the changes to the disputes process Inland Revenue has already put in place.

Improvements to our NOPAs

We’re now asking staff to produce NOPAs that are more concise and easier to read. NOPAs won’t normally exceed 30 pages in length, and in many cases they will be much shorter. Our legal staff will provide input earlier, and we’ll strengthen our quality reviews. We’ll issue a NOPA only once the investigation is substantially complete.

Improvements to the conference phase 

The submission told us that conferences are often merely a recitation of both sides’ views or the opportunity for Inland Revenue to progress an investigation. Rarely is there a serious attempt at settlement or a narrowing of the issues in dispute.

Conferences should be mandatory, and have a focus on settlement, according to NZICA and NZLS.

We agree a conference is an important part of the disputes process. It’s a chance for the parties to exchange information, gain an understanding of the facts, laws and legal arguments, and in many cases, achieve resolution.

From 1 April of this year, taxpayers whose dispute remains unresolved after the notice of response (NOR) phase will be invited to attend a conference meeting, and offered the opportunity to have any meetings facilitated by an Inland Revenue facilitator. A number of our people have already been trained as conference facilitators, and they can attend a conference on request.

Our conference facilitators are experienced tax-technical staff who will have had no previous involvement in the case. The role of the facilitator will be to:

  • Manage the meeting, ensuring items on the agenda are addressed and the ground rules are followed;
  • Encourage structured discussion of the issues in dispute;
  • Help both parties find common ground;
  • Encourage exploration of options to resolve the dispute; and,
  • Ensure a timeframe for completing the conference phase is agreed.

A facilitator doesn’t have the authority to resolve issues. However, they do have the ability to determine that the conference phase is at an end - if the parties are unable to agree on this point.

Clarifying our position on the opt-out process

The submission also proposed that taxpayers should have the right to “opt out” of the disputes process after the conference phase. After the NOPA, NOR and conference phases, both parties should have a good view of each other’s arguments and whether there is a prospect of resolving the matter. Taxpayers should be able to decide how best to apply their resources – either by continuing with the disputes process or proceeding directly to the courts.

We agreed, and have produced guidelines setting out the circumstances in which we will agree with a taxpayer’s request to opt out after the conference phase. For most cases, these are when one of the following applies:

  • The total amount of tax in dispute is $75,000 or less, except where the dispute is part of a wider dispute. The $75,000 excludes shortfall penalties, use of money interest, and late payment penalties if applicable;
  • The dispute turns purely on issues of fact;
  • The dispute concerns facts and issues that are already waiting to be resolved by a Court; or,
  • The dispute concerns facts and issues that are similar to those already considered by the Adjudication Unit of the Office of the Chief Tax Counsel in a past dispute.

Improvements in timeliness

It was pointed out that there are no statutory time limits on Inland Revenue after the NOPA/NOR stage. If there are delays on our part, the taxpayer is unable to progress the dispute further. The submission proposed a set of statutory timeframes for Inland Revenue to work to (like those imposed on taxpayers).

We accept our disputes documents could sometimes be issued in a timelier manner.

However, a legislative approach may not provide the flexibility we need in more complex cases. We have now set tighter internal deadlines for our staff, and these will be closely monitored.

After the conference phase, we’ll advise the taxpayer how long it will take to issue a statement of position (SOP). Internal senior approval will be required for cases that may take longer than three months, such as those involving complex or precedential matters.

What are the next steps?

We’ve issued revised guidelines to our staff to implement the changes I’ve talked about: the new-look NOPAs, the improvements to conference meetings, our policy about opt-outs, and the tighter internal timeframes.

From now on, you can expect to see briefer NOPAs that are much easier to read – and, if you have a client with a tax dispute that remains unresolved after reaching the NOR stage, they will be invited to attend a facilitated conference. Our letter will include an insert, Getting the best out of a disputes resolution conference with Inland Revenue, which outlines the “ground rules” for conferences, and includes information about the opt-out process.

Many of these new guidelines will be incorporated in revised standard practice statements. The current standard practice statements (SPS 08/01 Disputes resolution process commenced by the Commissioner of Inland Revenue and SPS 08/02 Disputes resolution process commenced by a taxpayer) are currently being updated and drafts will be available for comment mid-year.

While the revised administrative arrangements cover many of the areas we discussed with NZLS and NZICA, there remain some areas that require further consideration. These will be the subject of a policy paper we will release later this year.

Martin Scott is Group Manager Assurance, Inland Revenue Department.

This article appeared in LawTalk 752, 14 June 2010, page 10.