Discovering a mistake in your past tax returns — whether from miscalculated income, forgotten rental income, or incorrect deductions — is stressful. The good news is that Inland Revenue has a voluntary disclosure process that significantly reduces penalties for taxpayers who come forward proactively, before IRD investigates.
If you have made a mistake on your tax return, you can make a voluntary disclosure to IRD and receive a significant penalty reduction — up to 100% reduction in shortfall penalties if you disclose before an audit begins, and 75% if you disclose after an audit starts but before it concludes. You still owe the unpaid tax plus interest (UOMI — use of money interest). File via myIR, mail, or through a tax agent. Acting promptly is critical — the earlier you disclose, the greater the penalty relief.
What Is a Voluntary Disclosure?
A voluntary disclosure is a formal notification to IRD that you have identified an error in your tax affairs and want to correct it. Common reasons to make a voluntary disclosure:
- Undeclared income (rental income, freelance income, overseas income)
- Overstated deductions (excessive home office or vehicle claims)
- Missed GST obligations
- KiwiSaver or employer compliance errors
- Underpaid PAYE
- Errors discovered during a bookkeeper or accountant review
Penalty Reduction for Voluntary Disclosure
Under the Tax Administration Act 1994, voluntary disclosure reduces shortfall penalties:
| When you disclose | Shortfall penalty reduction |
|---|---|
| Before IRD begins an audit or investigation | 100% reduction (no shortfall penalty) |
| After audit starts but before it concludes | 75% reduction |
| After audit concludes | No reduction |
Important: Even with a 100% penalty reduction, you still owe:
- The unpaid tax (the shortfall)
- Use of money interest (UOMI) — IRD’s interest rate on underpaid tax (currently around 10.91% per annum, applied from when the tax was due)
Late payment penalties (separate from shortfall penalties) may also apply if tax is overdue.
Shortfall Penalties — What You Are Avoiding
Without voluntary disclosure, IRD can apply shortfall penalties based on the type of error:
| Type of error | Shortfall penalty |
|---|---|
| Not taking reasonable care | 20% of the tax shortfall |
| Gross carelessness | 40% of the tax shortfall |
| Abusive tax position | 100% of the tax shortfall |
| Tax evasion | 150% of the tax shortfall |
On a $20,000 tax shortfall, a “not taking reasonable care” penalty alone would be $4,000 — before interest. Voluntary disclosure eliminates this.
How to Make a Voluntary Disclosure
Option 1: Via myIR (Recommended)
- Log in to myIR
- Select the relevant tax type (income tax, GST, PAYE, etc.)
- Use the “voluntary disclosure” or “request an amendment” function
- Describe the error and the corrected amounts
- Submit — IRD will contact you with the tax and interest owing
Option 2: Written Disclosure (Letter or Email)
You can write to IRD with:
- Your name and IRD number
- The tax type and period(s) affected
- Details of the error
- Corrected figures
- An explanation of how the error occurred
Send to your local IRD office or through a tax agent.
Option 3: Through a Tax Agent
A chartered accountant or tax agent can prepare and file the disclosure on your behalf — recommended for complex disclosures involving multiple years or large amounts.
Before vs After an IRD Audit
The timing of your disclosure relative to an IRD investigation is critical:
Pre-audit (best outcome):
- You have not received any notification of an audit or investigation
- 100% penalty reduction applies
- You pay tax + UOMI only
Post-audit commencement (still beneficial):
- IRD has notified you of an audit or investigation
- Disclose before the audit concludes for a 75% penalty reduction
- Still significantly reduces your liability
How to know if an audit has started: You will have received a letter or phone call from IRD notifying you that your tax affairs are under review.
Frequently Asked Questions
What if IRD contacts me before I’ve had a chance to disclose?
If you receive a letter indicating an audit has begun, you can still get the 75% penalty reduction by disclosing during the audit process — before it concludes. Contact IRD or your tax agent immediately.
Do I have to pay the tax and interest immediately when I disclose?
IRD will issue an assessment of the tax and interest owing. You typically have time to pay — IRD can arrange instalment arrangements if you cannot pay in full immediately. Letting IRD know you are willing to pay and making arrangements is viewed positively.
Can I make a voluntary disclosure for GST errors?
Yes — voluntary disclosure applies to all tax types: income tax, GST, PAYE, FBT, and others.
I made an innocent mistake — do I still need to disclose?
If IRD discovers an error you knew about but did not disclose, they may treat it as gross carelessness or worse. Proactive disclosure protects you and demonstrates good faith.