IRD Audit Preparation Checklist

The 10-Second Rule

Preparation is key to navigating an IRD audit smoothly. Retain all financial records for seven years, organise them systematically, engage a professional adviser, and communicate transparently and promptly with the Inland Revenue.

📋 In This Guide

IRD Audit Preparation Timeline

1. Understanding IRD Audits in New Zealand

An IRD audit is a formal examination of your business's financial records, tax returns, and compliance practices. The Inland Revenue Department conducts audits to verify that businesses are meeting their tax obligations accurately and completely. While being selected for an audit doesn't necessarily indicate wrongdoing, proper preparation is essential to navigate the process smoothly and demonstrate your commitment to compliance.

IRD audits can be triggered by various factors including:

• Random selection as part of IRD's compliance programme
• Discrepancies or inconsistencies in filed returns
• Industry-specific risk profiles
• Significant changes in reported income or expenses
• Third-party information that doesn't match your returns
• Late or incomplete filings — see our GST on Fines & Penalties guide for the cost of late filing

2. Pre-Audit Preparation: Essential Steps

1. Understand Your Notification

When IRD initiates an audit, you'll receive formal notification outlining:

• The tax types being reviewed (GST, income tax, PAYE, FBT)
• The period under examination
• Documents and records required
• Timeframes for providing information
• The assigned IRD investigator's contact details

2. Assemble Your Professional Team

Consider engaging the following professionals:

• Chartered Accountant: To review your records and provide expert guidance
• Tax Adviser: For specialised tax technical support
• Legal Counsel: If disputes or complex legal issues arise

Your accountant or tax adviser can act as your representative and communicate directly with IRD on your behalf, which can help manage the process professionally.

3. Complete Document Checklist

Financial Records (7 Years Required)

Under New Zealand law, you must retain business records for seven years. Ensure you have:

Document Type	What to Include	Retention Format
Tax Invoices	All issued and received invoices showing GST, IRD number, date, description	Digital or paper (must be legible)
Bank Statements	All business account statements showing deposits and payments	PDF or original statements
Purchase Orders	Records of all business purchases and supplier agreements	Digital or paper
Sales Records	Cash register tapes, receipts, sales summaries, point-of-sale reports	Electronic preferred
Expense Receipts	All business expense documentation including travel, entertainment, supplies	Digital scans or originals
Payroll Records	Wage records, PAYE calculations, KiwiSaver contributions, leave records	Electronic payroll system reports
Asset Register	Fixed assets, depreciation schedules, purchase and disposal records	Spreadsheet or accounting software
Stocktake Records	Physical inventory counts, valuation methods, year-end stock	Dated and signed reports

GST-Specific Documentation

For GST audits, ensure you can demonstrate:

• Valid Tax Invoices: All invoices meeting IRD requirements (supplier name, IRD number, GST amount shown separately)
• GST Calculation Records: How you calculated GST on supplies made and received
• Zero-Rated Supply Evidence: Documentation proving exports or other zero-rated supplies
• Input Tax Credit Claims: Clear business purpose for all claimed deductions
• Adjustment Records: Bad debt write-offs, price adjustments, returned goods
• Apportionment Calculations: If you make both taxable and exempt supplies — use our Business vs Personal GST Calculator

Income Tax Documentation

• Annual financial statements (profit and loss, balance sheet)
• Tax return calculations and working papers
• Depreciation schedules and calculations
• Shareholder salary and dividend records
• Loan agreements and interest calculations
• Partnership or trust distribution schedules
• Foreign income documentation (if applicable)

PAYE and Employment Records

• Employment agreements for all staff
• IR348 employer monthly schedules
• PAYE deduction calculations — verify yours with our PAYE Calculator
• KiwiSaver contribution records
• Student loan deduction records
• Contractor vs. employee determinations
• Fringe benefit tax calculations and payments

4. Digital Record-Keeping Best Practices

Acceptable Electronic Formats

IRD accepts electronic records if they meet these requirements:

• Records are complete, accurate, and accessible for the full retention period
• Digital copies are true representations of originals
• System has adequate backup and security measures
• You can produce records in readable format within a reasonable timeframe

Cloud Accounting Software Benefits

Using approved accounting software (Xero, MYOB, QuickBooks) provides:

• Automatic date stamping and audit trails
• Easy report generation for audit periods
• Bank feed reconciliation evidence
• User access logs and change history
• Direct integration with IRD filing systems — see our guide on filing your GST return in myIR

5. Organisation and Presentation Strategy

Create an Audit File

Organise your documents systematically:

1. Index Creation: Develop a master index of all documents by category and date
2. Chronological Order: Arrange documents within each category by date
3. Cross-Referencing: Link bank statements to invoices and receipts
4. Summary Schedules: Prepare reconciliation summaries (e.g., sales per bank vs. sales per returns)
5. Explanation Notes: Document any unusual transactions or one-off events

Reconciliation Preparation

Before the audit, complete these reconciliations:

Reconciliation Type	Purpose
Bank to Books	Ensure all bank transactions are recorded in accounting records
Sales Records to Returns	Verify all income is correctly reported
GST Collected vs. Paid	Confirm GST calculations match filed returns
Creditors to Payments	Match supplier invoices to bank payments
Debtors to Receipts	Verify customer invoices to receipts

6. Common Audit Issues and How to Address Them

Missing Documentation

Issue: Cannot locate original invoices or receipts

Solution: Request duplicate copies from suppliers immediately. For older records, provide statutory declarations explaining the circumstances and any available supporting evidence (bank statements, emails, contracts).

Personal vs. Business Expenses

Issue: Mixed personal and business use of assets or expenses

Solution: Prepare detailed apportionment calculations showing business-use percentage. Maintain contemporaneous logs (vehicle logbooks, home office calculations) to support claims. Our Business vs Personal GST Calculator can help you determine the correct split.

Cash Transactions

Issue: High volume of cash sales or payments without adequate documentation

Solution: Implement robust cash handling procedures going forward. For the audit period, provide daily cash reconciliations, bank deposit records, and till tapes to demonstrate completeness of income recording.

Contractor Payments

Issue: Uncertainty whether workers should be employees or contractors

Solution: Review IRD's employee vs. contractor guidelines. Prepare written documentation of working arrangements showing genuine independent contractor relationships (own equipment, multiple clients, ability to refuse work). Read our detailed Contractors vs Employees GST guide for more.

7. During the Audit: Communication Best Practices

Initial Meeting Protocol

• Designate a single point of contact (you or your accountant)
• Take detailed notes of all discussions and requests
• Confirm all verbal requests in writing via email
• Never volunteer information beyond what's requested
• Remain professional, cooperative, and honest

Responding to Information Requests

When IRD requests documents or information:

1. Acknowledge receipt of the request promptly
2. Clarify any unclear requests before responding
3. Provide only what's asked for – stay focused
4. Meet agreed deadlines or negotiate extensions early
5. Keep copies of everything you provide
6. Send documents with a cover letter listing what's included

Site Visit Preparation

If IRD requests to visit your premises:

• Designate a private meeting space away from daily operations
• Inform staff not to discuss business matters with the auditor
• Have all requested documents ready and organised
• Ensure computer access is set up if electronic records review is needed
• Have your accountant or adviser present if possible

8. Potential Outcomes and Next Steps

Possible Audit Conclusions

No Adjustment Required

Your records are accurate and complete. IRD will issue a letter confirming no changes to your tax position. Keep this letter with your audit file.

Minor Adjustments

Small errors requiring additional tax payment or generating refunds. Review the proposed adjustments carefully with your accountant. You can accept and pay within the specified timeframe to avoid further interest charges.

Significant Discrepancies

Substantial underreporting or overclaiming identified. IRD will issue a Statement of Position outlining:

• Proposed tax adjustments
• Use of money interest calculations
• Potential shortfall penalties
• Your rights to dispute the findings — see our GST Audits & Disputes guide

Penalty Structure

IRD may impose shortfall penalties ranging from 20% to 150% of the tax shortfall, depending on:

• Lack of reasonable care (20%): Unintentional errors despite trying to comply
• Unacceptable interpretation (20%): Taking unreasonable tax positions
• Gross carelessness (40%): Significant disregard for tax obligations
• Abusive tax position (100%): Entering into tax avoidance arrangements
• Evasion (150%): Deliberately hiding income or falsifying records

Penalties can be reduced through voluntary disclosure, previous compliance history, and cooperation during the audit.

Dispute Resolution Options

If you disagree with IRD's assessment:

1. Conference: Request an internal review with an IRD adjudicator
2. Disputes Process: Enter formal disputes process with structured timeframes
3. Taxation Review Authority: Independent tribunal hearing for unresolved disputes
4. Courts: Appeal to High Court or Court of Appeal on points of law

9. Post-Audit Improvements

System Enhancements

Use audit findings to strengthen your compliance systems:

• Implement recommended record-keeping improvements
• Upgrade accounting software if manual systems proved inadequate
• Establish regular internal compliance reviews
• Train staff on documentation requirements
• Set calendar reminders for filing deadlines

Professional Relationships

• Schedule regular meetings with your accountant (quarterly minimum)
• Arrange annual tax planning sessions
• Join relevant industry associations for updates on tax changes
• Consider tax compliance insurance for larger businesses

10. Preventative Measures for Future Compliance

Monthly Compliance Checklist

• Reconcile all bank accounts to accounting records
• File GST returns accurately and on time — follow our step-by-step myIR guide
• Submit PAYE employer monthly schedules by deadline
• Review and code all transactions properly
• Chase missing supplier invoices
• Update asset register for purchases and disposals

Annual Compliance Tasks

• Complete year-end stocktake
• Review depreciation schedules
• Reconcile shareholder current accounts
• Document significant transactions or one-off events
• File annual income tax returns before due date
• Update business continuity and record retention procedures

Red Flag Avoidance

Reduce audit risk by avoiding these common triggers:

• Consistently late or incomplete filings
• Frequent amendments to previously filed returns
• Unusual fluctuations in income or expenses
• High expense-to-income ratios compared to industry norms
• Excessive personal expense claims
• Repeated use of tax planning arrangements

11. Essential Resources and Support

IRD Official Resources

• MyIR Portal: Access your tax records and correspondence at www.ird.govt.nz
• IRD Helpline: 0800 377 774 for general tax enquiries
• Record Keeping Guide: IR320 available on IRD website
• Audit Information Sheet: Request "Understanding Tax Audits" factsheet

Professional Organisations

• Chartered Accountants Australia and New Zealand (CA ANZ): Find qualified accountants
• Tax Management New Zealand: Specialist tax practitioners
• Institute of Financial Professionals NZ: Bookkeeping and accounting professionals

Key Takeaways

• Maintain complete, accurate records for seven years in accessible format
• Engage professional support early when audit notification received
• Organise documents systematically with clear reconciliations
• Communicate professionally and only provide requested information
• Use audit experience to strengthen ongoing compliance systems
• Prevent future audits through consistent, timely, accurate filing

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