IRD Tax Compliance Warning: Red Flags, Audits & Penalties

A letter from the Inland Revenue Department (IRD) arriving in your mailbox can make anyone’s pulse quicken. Tax compliance in New Zealand is tightening, and the consequences for getting it wrong are more serious than many realise.

Warning letters sent for crypto transactions: 160 ·
Estimated undeclared crypto income identified: $2.7 million ·
Increase in audit activity: Noticeable increase (2025)

Five key facts from official guidance, one pattern: IRD has both strict penalty scales and mechanisms to reduce them for cooperative taxpayers.

What are some red flags that can trigger a tax audit?

Common triggers for IRD audits

• Income discrepancies between your return and data IRD holds from employers, banks, or third parties – PAS 2008
• Large or unusual deductions compared to your income level, especially for home office, vehicle, or travel expenses – MYOB
• Cash-intensive businesses where underreporting is historically more common – Nexia NZ
• Cryptocurrency transactions: the IRD reportedly sent 160 warning letters to crypto investors in 2025, flagging an estimated $2.7 million in undeclared income – BusinessLike
• Offshore accounts or foreign income that hasn’t been disclosed – IRD

The pattern: any significant deviation from expected norms can put your return in the review pile.

Red flags in tax returns

• Inconsistent reporting year over year without a clear reason – PAS 2008
• Claiming business losses repeatedly while also earning salary or wages – MYOB
• Mismatch between your tax return and GST returns (if registered) – Nexia NZ

The implication: clean, consistent records are your strongest defence against being flagged.

Why do I owe money to the IRD?

Common reasons for tax debt

• Using the wrong tax code (e.g., M instead of S secondary code) can lead to under-withholding – IRD
• Not declaring all sources of income, such as freelance work, rental income, or investment gains – MYOB
• Claiming ineligible expenses or deductions that are later disallowed during an audit – PAS 2008

Underpayment of tax

If your employer’s PAYE deduction didn’t account for secondary income or student loan repayments, you may end up with a bill at year-end. IRD’s system flags these mismatches automatically – IRD.

Penalties and interest

The IRD charges interest on overdue amounts from the day after the due date. For failing to file or pay on time, shortfall penalties apply: 20% for not taking reasonable care, 40% for gross carelessness, and 150% for evasion – Inland Revenue IR297.

What this means: if you receive a notice saying you owe money, don’t ignore it. The sooner you clarify the reason, the less you’ll pay in the long run.

What happens if you don’t pay the IRD?

IRD enforcement actions

The IRD has a stepped enforcement process. First, they send reminder letters and may issue a formal demand. If the debt remains unpaid, they can escalate to:

• Wage garnishment (attachment orders) – your employer deducts a portion of your wages – BusinessLike
• Bank account deductions – the IRD issues a notice to your bank to debit outstanding amounts – PAS 2008
• Legal proceedings, including court judgments that can lead to property liens – IRD
• Company liquidation applications for business debts – BusinessLike

Collection methods

The IRD can also use debt collection agencies and offset any tax refund you may be entitled to against the amount owed – IRD.

Legal consequences

In serious cases of evasion, prosecution is possible. Secondary sources report seven prosecutions completed in late 2024 – BusinessLike. The IRD’s penalty guide confirms evasion carries a 150% shortfall penalty – Inland Revenue IR297.

The trade-off: negotiating a payment plan early can stop the escalation, but ignoring the debt leads to far harsher outcomes.

Can the IRD take money from your bank account?

IRD’s power to deduct

Yes. Under New Zealand tax law, the IRD can issue a deduction notice to a bank or other financial institution to recover overdue tax debts – IRD.

When can IRD access bank accounts

Before making a deduction, the IRD must send a formal notice giving you a reasonable opportunity to respond or arrange payment. The deduction can be for the full amount owed, not just a partial sum – PAS 2008.

How to prevent or respond

• Contact the IRD as soon as you receive a deduction notice to discuss a payment plan – IRD
• You can challenge the deduction if you believe the amount is incorrect – MYOB
• Seek professional advice if you’re unsure about your options – Nexia NZ

The implication: proactive communication with the IRD is the only reliable way to keep your bank account safe from a deduction order.

What to do if your tax return is reviewed or audited?

Steps to take during an audit

1. Respond promptly to any IRD request for information – delays can be interpreted as non-cooperation – IRD
2. Gather and organise all supporting documents: receipts, invoices, bank statements, contracts – MYOB
3. Understand your rights: you are entitled to a full explanation of what is being examined and why – IRD
4. Consider consulting a tax professional – they can negotiate on your behalf and help identify any mistakes in the IRD’s assessment – Nexia NZ
5. Be cooperative, but do not admit liability for amounts you haven’t verified – PAS 2008

Responding to IRD inquiries

Keep copies of all correspondence. If you receive a notice of audit, the clock starts ticking. Most audits are desk-based, meaning IRD reviews documents without visiting your premises – MYOB.

Seeking professional help

A tax advisor who knows the IRD’s processes can help you avoid unintentional admissions. They can also apply for penalty reductions if your compliance history is good – Inland Revenue IR297.

Why this matters: how you handle the first few weeks of an audit often determines whether the outcome is a small adjustment or a major penalty.

What’s confirmed, what’s unclear

Confirmed facts

• The IRD issued 160 warning letters for crypto transactions (2025) – BusinessLike
• Inland Revenue compliance work increased in 2025 – IRD media release
• IRD warns about phishing scams on its official website – IRD
• Shortfall penalties range from 20% to 150% depending on the level of care – Inland Revenue IR297

What’s unclear

• Exact percentage of taxpayers audited annually – estimates vary and IRD hasn’t published a single figure
• Average time to resolve an audit – depends on complexity and taxpayer cooperation
• Future compliance enforcement plans – IRD has not released a public schedule for 2026

“Our compliance work continues at pace, particularly in areas like property and cryptocurrency.”

Inland Revenue Department, IRD media release (2025)

“We have seen a notable increase in audit activity this year, especially around crypto and high-wealth individuals.”

Andersen New Zealand, BusinessLike (reporting Andersen’s comments)

“Responding quickly is critical – delays only make the process harder.”

Kiwitax, tax consultancy (as reported in secondary sources)

“The penalty framework is designed to reward those who come forward voluntarily.”

Inland Revenue Department, IR297 penalty guide

Related reading: How to Calculate Tax Refund NZ · Minimum Wage NZ 2025

Frequently Asked Questions