The New Zealand tax system is based on 'voluntary compliance'.

This loosely means that taxpayers and their advisors will do their best to take correct tax positions and Inland Revenue Department (IRD) will accept those tax positions as presented.

One of the vital lynchpins of voluntary compliance is a robust audit program. Not only are audits designed to detect and collect tax from that particular taxpayer, they are also intended to deter non-compliance by others aware of the review. In 2010 IRD were allocated an additional 20 million to be spent in future years on audit and debt recovery activity. Suffice to say we have noticed an increase in IRD audit activity in some areas over recent years.

When I was an IRD investigator, a large percentage of audit targets were selected randomly. Times have certainly changed and IRD now has much more sophisticated methods of targeting non compliers.

One effective method which is employed is referred to as 'data mining'. This is a process where computer software is run across a database to extract particular information based on set parameters. In a simplistic example, the Land Information New Zealand (LINZ) database could be searched for entities or individuals that transferred more than a certain number of properties. This information could then be used as a starting point for targeting entities or individuals who may not have complied with the land sale provisions. IRD has several specialist units set up solely for reviewing land transactions.

Another example where IRD is likely to use a focused technique of audit selection is in relation to recent changes to foreign superannuation repatriation. There are a number of databases IRD can search that will provide a telltale of what was withdrawn, by whom and when. This information will then be data matched with tax returns.

IRD has always received anonymous information regarding false tax positions, which are often from disgruntled, previous partners or employees. They do follow up on this information. So while the IRD selection process is certainly more targeted based on risk, there will always be a certain element of serendipity. Even though your door may not have been 'knocked on' for a number of years, you cannot rule out it happening tomorrow.