Tax cheats and how to catch them

The World Bank estimates New Zealand’s hidden economy at more than $20 billion. Michelle Duff meets the IRD investigators chasing down the cash. This is the first in a series on the heroes and villains of tax. Illustration by Toby Morris.

When investigators arrived at the Auckland couple’s expansive property, it was a suburban sort of a day. It was the kind of day you might slip on your most comfortable Diane Von Furstenberg, rustle up a Nespresso and relax on the chaise lounge for a catch-up on The Brokenwood Mysteries. That is, until the real cops show up at your door, with no interest in a Nespresso, thanks, but here’s a question; how did you pay for that machine?

By the time the Inland Revenue’s investigation bureau had secured a court-issued search warrant to enter their house, the Auckland pair had hidden more than $1 million in earnings from their award-winning restaurant. It had started, they explained later, with just a small amount. Just $50 here, $100 there; maybe just leave that employee off the official PAYE roll, dear. But the justs added up, and in a contrite confession elicited almost immediately, the pair owned up to everything. They were honest people, they said. They didn’t know how it had gone so far.

When the IRD swoop in, investigators know what to  look for. Sometimes, like in the case of East Tamaki restaurateurs Zai Jian and Guan Hong Liang, it’s just a dog-eared red notebook, with the details of undeclared employees scrawled in the margins. Sometimes, like for the Taranaki couple who owed $1.18 million, it’s a USB stick full of cooked books. Occasionally, the physical evidence is found in the form of cold hard cash – when he was door-knocked in April, Hutt Valley’s Jackson’s Cafe and Bistro owner Adam Li had a cool $180,000 stashed around his house.

The IRD had been keeping tabs on the Auckland couple for months. The new car, the properties, the overseas holidays, the mortgage repayments, the private schools for the kids. They didn’t square up, and as far as the IRD were concerned, there was no way they were being funded from the businesses’ official balance sheet. There had to be another set of records.

Because the thing about money is this; it’s really not as easily hidden as you think.

From the top of the Sky Tower, the city unfurls like a flower. In the rain, everything looks shiny and new; from the tiny excavators on Albert Street, the bane of inner-city traffic for months, to the tree-tops of Mount Eden. For visitors, the Sky Tower is a kind of a beacon – the epitome of big-city wealth and glamour, it’s both an aspirational symbol and landmark against which to orient oneself in the urban sprawl.

It was a city that Ronnie Message helped to build. The labour hire company owned and run by the East Tamaki businessman provided workers for multi-million dollar legacy projects including the Victoria Park and Waterview Tunnels. But Message has never seen the completed $1.4 billion Waterview Tunnel, never taken the faster route it provides from the airport. When the first cars drove through the motorway tunnel on July 2, Message had already been in jail for two weeks.

For the five years it took to build the tunnel, Message’s company was sub-contracted to provide labour. He also avoided $2 million in taxes. This was achieved in a multitude of ways, including falsifying GST returns to give himself tax refunds, ignoring personal income tax, and not meeting his PAYE obligations as an employer.

The tunnel Ronnie Message built, and stole from. (Photo Getty Images).

As with many of the cases overseen by IRD Investigations Manager Jonathan Matthews, Message’s undoing was an addiction to gambling. Message gave police a simple enough explanation for why he had defrauded the government of $2,071,893 worth of taxes since 2010. He told them he knew he should have been paying taxes, but that he had an addiction to gambling and that’s where the money went.

It’s only 11.5 kilometres from the Waterview Tunnel to SkyCity Casino, about a 20-minute drive.

Message could not pay back the money he owed. Inland Revenue prosecuted him for tax fraud. He lost his company, was declared bankrupt, and in June he was jailed for two and a half years.

On the police summary of facts, there’s a lonely sentence. It’s last on a numbered list, like it’s the end of the story.

“The defendant has no previous convictions.”

For so many of New Zealand’s tax cheats, that’s how it begins. Compared to thuggish crimes like robbery or assault, tax fraud doesn’t seem that bad. In fact, it barely seems like a crime at all. It’s not like there’s a victim, right? I’m just taking the money I’m entitled to.

From his office in Takapuna, Matthews sees it differently. The view out the window takes in Auckland’s expansive harbour. But in Matthew’s vision, there is another layer. This one is like a web running over and around the city, with fine lines branching out to each person – threads of eftpos transactions and hire purchases, mortgages and car repayments.

Matthews runs an investigations team of around 100, based in Takapuna and Manukau. Each investigator is looking into around a dozen cases at any given time. Nationwide, there are currently around 2000 active cases. Their job is to pull on the threads that don’t seem to belong, to unravel parts of the web that could be used to conceal money.

From Matthew’s perspective, tax fraud is not victimless crime. In each society, every person, every transaction, is connected. If you enjoy the benefits of living in this country – accessing healthcare and education, driving on the roads, living a relatively safe life – and you don’t pay your fair share of tax, then you shouldn’t be patting yourself on the back. You’re just a different brand of thief. As a veteran of 17 years in the job, Matthews is matter-of-fact. “The victim is actually the New Zealand citizen. It’s everybody. I think some of them think it’s victimless, but it’s not.

“I haven’t really gotten into the psychology of why some of them do it, I just see it happening all the time. There are hundreds of cases a year.”

The focus for Matthew’s team is what’s known as the hidden economy – also referred to as the shadow, or underground, economy. The IRD’s Investigations and Advice Unit is split into nine portfolios, of which the hidden economy is one. (The others include goods and services tax, property, complex tax arrangements and significant enterprises.)

In short, the hidden economy is comprised of all of the economic activity where people are not paying the tax they should be. “Put simply, that’s where people are not returning all their income – they’re suppressing cash or they’re over-claiming their expenses,” says Matthews. Estimates as to the size of this hidden economy vary, with no completely reliable figures – reports such as those from the World Bank put ours as being around 12% of official gross domestic product, which would put it at upwards of $20 billion. The IRD don’t like putting a number on it, saying it’s too complicated to measure –  but last year alone, their investigations uncovered $159 million in tax that should have been paid. This is a number that’s been fairly consistent for the past decade.

The IRD agree this figure may seem small compared to the probable size of the tax gap. However, each year thousands of people are risk assessed, contacted, and taught about compliance to try and keep the numbers down. Last year, investigators closed 1132 cases, with an average of $140,000 in additional taxes recouped from each case. Prosecutions, of which there were 114 last year, are considered a last resort – the IRD consider it is more successful to get the customers to cooperate and learn how to comply, while paying the money back. Around half of all the people who dodge their tax are also punished with a shortfall penalty, which ranges from 20% to 150% of their tax bill.

The ways people operate in the shadow economy are many and varied. It can be a tradie installing a kitchen and being paid in cash, with no paperwork; or restaurant owner who leaves employees off the official payroll to avoid PAYE tax. It can be a retailer who doesn’t ring your purchase through the till, pocketing the cash, or a company that doesn’t declare offshore income. It encompasses activities like money laundering, illicit trafficking of goods across borders and the proceeds from organised crime. It includes “ghosts” who have never registered for tax – which the government now tries to avoid by allocating IRD numbers to babies at birth – and the “moonlighters” who pull shifts at different employers and aren’t paying tax for all their jobs.

The latest OECD report, Shining Light on the Shadow Economy, says worldwide the hidden economy accounts for between 1 – 20% of GDP in each country. The 12% estimate for New Zealand falls somewhere in the middle. Not only does it mean less revenue collected to fund public services, but its wider impacts include undermining trust in the tax system and the wider social norms around tax payment, providing unfair competition for honest businesses, raising the cost of government services and enabling the exploitation of migrant workers. It also raises the level of tax for the rest of us, who have to cover the share of government services the tax evaders should be paying for.

In New Zealand, the government has pumped $83 million of extra funding into trying to tackle the hidden economy since 2010. Its main focus are the hospitality and construction sectors, which global research has shown are some of the most at risk of tax evasion practices. There are currently 800 investigators stationed around the country, and they’ve brought in hundreds of millions of dollars for the government’s investment.

The character description of a good investigator is kind of like Neo, Keanu Reeve’s character in The Matrix. Matthews, himself a chartered accountant and forensic examiner, says it takes someone with an enquiring mind, who is willing to believe there’s more going on than meets the eye. In the Matrix, there’s a scene where Neo’s eye is caught by a woman in a red dress – she stands out from the crowd, a trap, designed to distract.

An investigator, too, would notice the woman in the red dress – but it  would be out of a desire to know where she bought it from, how she paid for it, and how that had been accounted for.

We like to think of ourselves as private islands. That the only person privy to our personal affairs is us. A morning with Matthews and this is proven – somewhat terrifyingly – untrue.

“Let’s say we’re investigating you,” he says. There is a silence, and he gives a short laugh, which does nothing to reassure me. “I’m not investigating you, let’s make that quite clear.”

If I owned a hospitality or construction business, my accounts would already be under scrutiny. These industries have been risk-profiled, across the whole of the country, using the IRD’s computer program Connect. Developed in Britain over seven years at the cost of $153 million, Connect has been used by HM Revenue & Customs in that country since 2008. The IRD here use a version tweaked for our system. It allows them to trawl through billions of items of data, accessing personal and commercial financial information in seconds and comparing it to the returns filed by the taxpayer. If there are any discrepancies, these are flagged and could prompt an investigation.

To complete a risk-profile of, say, the hospitality sector, the IRD will compare similar businesses and tease out anomalies in their tax returns. They will analyse their income and cashflow, measuring them against their assets to see what a typical cash-sales ratio for a business of their size and location would be. If the accounts of a restaurant fall outside of these parameters, then an investigation could be warranted.

“Typically, we would ask for some information from you to support the return you’ve filed – things like business bank accounts and invoices,” Matthews says. “We’d do some trends analysis, so we’d look at the percentages of expenses to income, and we would look at how those expenses compare to say three or four previous years. We’d also then look at patterns of activity, to see if your returns balance.”

Matthews gives the example of a painter his team caught recently. He had been filing returns haphazardly, and recording very low profits. When investigators looked more closely, they found he had been claiming all his purchases as work expenses, and not returning anything he earned. He was finishing big jobs suspiciously quickly, and it didn’t take long to figure out he was paying subcontractors without being registered as an employer.

IRD investigator Jonathan Matthews has a very particular set of skills. Skills acquired over a very long career. And if you do not pay your tax, he will find you (Photo Joel Thomas).

In the end, they found the money – by then, he owed around $100,000 – secreted away in one of his kid’s bank accounts. “Everything’s traceable,” Matthews says. “Even if they get the money in cash or via internet banking, they still have to pay the monthly payment on the Ford Ranger they’re using for their business, which might be $500 a month, and they’ve still got the mortgage payments on the house they live in. How are they paying for that? Often it’s in the account that’s not the business account.

“Or, if it’s not traceable, then they’ll find it difficult to answer the questions we put to them.”

If something doesn’t add up in an initial sweep of your accounts, investigators will turn to your lifestyle. “If the initial risk assessment says your income to live on is low, then we will do more analysis. We’ll start saying; “Do you own property? Do you own a car? We’ll go to the banks and ask what other accounts you have. We can go to Customs and request information about travel movements.”

Matthews goes on to rattle through an extensive list of personal information that the IRD are given power to access under the Tax Administration Act. This includes but is not limited to; any information held about you by other Government departments – for example Customs, Land Information New Zealand, and Land Transport New Zealand – as well as records from national and international banks, spends on loyalty cards from retailers, commercial organisations like TradeMe, electricity companies, and casino or gambling accounts. The IRD also have exchange information agreements with other tax departments worldwide, allowing them to request data from more than 60 countries.

And in today’s hyper-connected world, there is more easily accessible open-source data than ever. Previously, the IRD might have had to drive past your house to see if you owned a sports car, or go down to LTNZ and sift through car ownership papers. Now, a simple Google of your street address might reveal a Lamborghini parked in the driveway, or a sift through publicly accessible social media accounts like Instagram, Twitter and Facebook might show you photographed with a new purchase. Data from the Companies Office is online, as is registry information for many occupations – for example, if an investigator wanted to see if a plumber was currently active, they could check the online register of the Plumbers, Gasfitters and Drainlayers Board.

“Often they think we can’t trace the cash,” Matthews says, “But typically with cash you have to spend. You’re either spending on travel, living, assets, gambling, the mortgage … whatever it is, we can find it. There’s very limited ways of hiding that type of money. That’s why we talk about there being a trail, they leave a trail or footprint behind them.”

An investigation into the Auckland restaurateurs we met earlier was triggered after a risk profile of eateries in their area, which established their cash-sales ratio was very low. Put another way: the restaurant was very popular, and it seemed like the proprietors should have been making more money. In other cases, suspicions are often raised through targeted visits, when investigators will question what type of till system the restaurant is running, how many staff they have, how they’re being paid, and what the average eftpos transaction is. “We’re pretty open about it,” Matthews says. “We have done unannounced visits, but that is rare.”

This was one of the times the investigators did not call ahead. Digital forensics experts were sent to the couple’s house and restaurant. At the workplace, the forensics team cloned the till’s hard drive – and, at home, the personal computer’s. They uncovered a sophisticated system which involved two sets of digital records. “One was presented to their accountant, to do the returns. The other was so they could trace how much they were deriving as income from the business,” Matthews says. “They were on the same till system, and they were very well kept records.”

Once they had the duplicate records, investigators reconstructed the restaurateurs’ accounts and asked for an explanation. The accountant knew nothing. The couple owned up: over four years, they had hidden more than a million dollars of income. They did this by opening other bank accounts behind their accountant’s back, using the money from these accounts to pay their mortgages and fund overseas travel.

They had squirrelled away the cash mostly through actively dodging PAYE tax. Some of their employees weren’t registered on the official payroll at all, and for those who were, the owners were pocketing the PAYE tax they should have been returning to IRD.

What was their reasoning? “They had children going to private schools, they were buying rental properties plus they were doing up their own house to quite a high standard, so they were using those funds to support that lifestyle,” Matthews says.

“It grew over time. This is typically what happens with this type of offending. If someone is taking $50 from the till over a period of time that will add up, and they don’t realise how bad it has become, as an income tax problem and a GST problem. They’ll take on more staff, and as they do that they pay more staff under the table and they have to take more money out of the till to do that. So yes, the problem can escalate.

“It won’t decrease. You won’t see it decrease – until they get caught.”

The couple were remorseful. They had a reputable business, and they didn’t want their reputation tarnished. They sold a property and paid all the money back, the entire tax bill. “While we were doing the audit, the investigation, you could see they had changed their behaviour. They were filing on time, their sales were closer to what we thought they should be, all their employees were on their PAYE schedule, they were paying it on time. They changed their compliance behaviour and their accountant.”

We can’t tell you who these restaurateurs are. They kept their business. It is still open. The repercussions for them were in the shortfall penalties applied by IRD – these can vary, but can be anything from 20% of the tax bill for lack of reasonable care, to 150% for evasion. All up, the couple’s bill was approaching $500,000.

But they could afford a way out.

Ronnie Message did not have this option. He couldn’t pay his $2 million tax bill, but Matthews says that’s not the only reason IRD might choose not to prosecute.

Before the IRD even progress to an investigation, they’ll often give the business owners a chance to ’fess up. “We’ll say look, maybe you want to do a review of your accounts and see if there’s anything incorrect or wrong. If you come forward at that stage before we’ve progressed it there’s a reduction in penalties.”

If they deny all knowledge, the IRD will go ahead with an investigation. At any stage during this period, there are discounts in penalties for coming forward early. “In larger cases, with no co-operation and if it’s serious offending, we end up having to prosecute them,” Matthews says.

“Sometimes they have no way of paying it and end up in bankruptcy, but often we end up in an installment arrangement where they pay it off over time.”

Last year, the department closed 114 prosecutions. A flick through some of the court cases of the tax evaders Inland Revenue has chosen to prosecute makes interesting reading. They are painters, builders, bodyguards, mothers, restaurateurs, accountants, property developers. There is often one similarity. “There is no suggestion of a previous history of dishonesty,” Justice Neave mulled in Christchurch District Court in February, when sentencing IT contractor Grant Ovenden to six months home detention for evading $347,000 worth of tax.

“You have no previous convictions,” Justice Gilbert told project manager Lance Gray, in March. “I acknowledge that being here today will be in itself a very uncomfortable position to be in. You are not by nature a criminal and from the array of references I have read in relation to you, quite the opposite. You are in fact one of the good guys.”

Justice Gilbert sentenced Gray to four months home detention and 250 hours of community work, for a $300,000 tax debt he would never pay.

If all these tax evaders are such “good guys”, why do they do it?

Sometimes, there is malicious intent. But in many others, it’s an incremental slide into criminality. “I think some of it … especially in, say, the construction industry, there’s an element of getting caught up in the pressure to do the work for cash – so they’re competing for jobs,” Matthews says. “Often people will ask if there’s a discount for cash, so that behaviour has crept into New Zealand society.”

It is, however, becoming less so.

In a 2017 survey of attitudes to the hidden economy, 90% of New Zealanders surveyed said they thought paying tax was the right thing to do. However, though 51% of Kiwis also thought cash jobs were acceptable, this is trending downwards. Since 2012,  the number of construction industry workers who do cashies has dropped 10%, to 19%. And in each of the six years  IRD has run the Nationwide Survey of Hidden Economy Attitudes and Cash Job Behaviour, fewer people say they would have a cash job done.

It’s promising, Matthews reckons. “When people are asking for a cash price there can be consequences for them too, like the warranties for the work. If a tradie has an accident, then they can get ACC but it’s based on income returned, not evaded. When they go to sell a restaurant, it’s based on sales, not the hidden income. It can have flow-on effects and it is impacting on the reputation of everyone in that industry.”

And the chances of not being caught? I wouldn’t bet on it. Across all their investigations last year alone the IRD found $1.3 billion worth of times where people didn’t get their tax right.

That’s enough to make me want to file my invoice for this piece, stat.


This content is brought to you by the Inland Revenue. 

Every undeclared cash job leaves a trail. Declare it all or risk everything. If you’ve been doing undeclared cash jobs, we can help you get back on track – visit our website to find out how

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