Whether you run a small business or just want your personal tax affairs tidy, the thought of an audit can be enough to unsettle anyone. The good news is that most audits aren’t random. Inland Revenue (IRD) looks for certain patterns and red flags. Knowing what these are helps you stay off their list, says chartered accountants Affinity.
Photo credit: Affinity Accounting
IRD’s data-matching systems have become sharp. They compare tax returns with details from banks, property transactions and even overseas databases. When something doesn’t line up, that’s when attention turns your way.Â
Common triggers
- Income not matching cash flow — If your declared income doesn’t reflect what’s going through your bank account, IRD takes notice. Large unexplained deposits are especially risky.
- Ongoing business losses — Continuous losses over several years, without changes in how the business runs, might point to under-reported income.
- Unusual or excessive deductions — Claiming high deductions compared to revenue can draw questions, particularly when vehicle or home office use seems overstated.
- Late or inconsistent filings — Missed deadlines, constant amendments, or patchy records suggest weak bookkeeping.
- High-risk industries — Businesses handling a lot of cash, like cafés, construction, or hospitality, tend to face more scrutiny.
- Related-party transactions — Shifting profits through loans, fees, or dividends within linked companies can raise flags.
- Whistleblower reports — Verified tips or shared documents can trigger checks even when your numbers look fine.Â
Compliance history matters
Once you’ve been audited, IRD tends to keep a closer eye. A track record of late filings or questionable deductions increases your risk of being checked again. Industry norms and your general compliance history shape how IRD profiles you. Businesses that show consistency and accuracy often face less scrutiny.
Reduce audit risk
Avoiding IRD attention isn’t about hiding anything. It’s about being organised, transparent, and careful with your records. When your paperwork is clear, small mistakes are less likely to look suspicious.Â
Some good habits to keep:
- Keep personal and business spending completely separate.
- Use logbooks to back up vehicle and travel claims.
- File GST, PAYE, and income tax on time and accurately.
- Match your bank deposits with reported income each month.
- Make voluntary disclosures if you uncover past errors.
If something in your return looks out of the ordinary, add a brief note explaining it. A little context can show honesty and prevent confusion later.
Many accounting professionals now suggest setting up a simple tax governance framework, a structure that keeps your systems accountable and your records consistent.
Staying off the radar
You can’t guarantee you’ll never face an audit, but you can make yourself a low-risk taxpayer. Reliable systems, clear records, and steady compliance speak louder than promises. When IRD sees consistency and openness, you’re far less likely to end up under review.
Affinity Accounting & Advisory Limited
A few more common triggers
Unless you like living dangerously, step back and think things through. Take advice from a good, practical accountant with plenty of experience in the world of small business. If you are struggling to keep up with business admin and keeping good records, it’s time to consider a good bookkeeper.
IRD Watchlist:
- Spending far outpaces income If your drawings (money in) are consistently low and you have no other sources of income.
- Paying undeclared earnings into the bank If you can’t explain where the cash came from it’s like an own goal.
- Involving others in evasion behaviour Business owners sometimes fall into the trap of paying employees undeclared takings.
- Using diverted or undisclosed cash to live off Living off undisclosed or diverted amounts of cash is a big red flag for the IRD.
- Using credit cards in unexpected locations Some think they can get away with heading overseas with undeclared cash to avoid the eye of the IRD.
- Diverting cash to buy assets Extravagant purchases tend to get noticed
- Paying for materials via credit when the job is for cash Never pay for materials through your bank account and then use these in a cash job. Tradies are at particular risk here.
- Maintaining a suspiciously low gross profit margin You are going to stick out when the IRD run your figures through their benchmarking system
Source MYOB
The information provided here is of a general nature and only applies in New Zealand. You should not act upon this information without obtaining appropriate professional advice and only after a thorough examination of your particular circumstances by an experienced tax advisor.