What is a Shortfall Penalty?
Shortfall penalties occur from certain actions on the part of the tax payer. The law divides these actions into five categories of fault or breach and each category has a specified penalty rate that increases in proportion to the seriousness of the breach.
According to the Tax Administration Act 1994 s. 141 the five categories are:
1. Lack of reasonable care – 20% Penalty
2. Unacceptable tax position – 20% Penalty
3. Gross carelessness – 40% Penalty
4. Adopting an abusive tax position – 100% Penalty
5. Evasion – 150% Penalty.
Under s. 141 These shortfall penalties may be reduced or increased under these circumstances:
1. Good Behaviour – a shortfall penalty may be reduced by 50% if the taxpayer has a past record of good behaviour, by which is meant no convictions for tax matters and no relevant shortfall penalties within four years
2. Pre-audit voluntary disclosure - A taxpayer can reduce a shortfall penalty by making a full voluntary disclosure of all details of the shortfall. Reduction can reach up to 75%-100% depending on the timing that the voluntary disclosure was submitted.
3. Disclosure of tax position at time of filling - A taxpayer who takes a tax position, believing it is correct but apprehending a risk that the Commissioner’s position may differ, can reduce exposure to the ‘unacceptable tax position’ penalty by making adequate disclosure of the taxpayer’s tax position at the time of filing the return.
4. Temporary Shortfall - if the taxpayer has permanently reversed or corrected the shortfall, or if it is clear that the matter will reverse itself through operation of the law or circumstances.
5. Increased penalty obstruction – A shortfall penalty may be increased by 25% for obstructing an IR officer.
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