Can I be penalised for an honest mistake on my tax return?

Inland Revenue applies a graduated penalty regime under the Tax Administration Act 1994, with the level of shortfall penalty depending on the taxpayer's culpability, ranging from a lower penalty for not taking reasonable care, through gross carelessness and unacceptable interpretation, up to much higher penalties for evasion or intentional acts. A genuine, honest mistake made despite taking reasonable care may attract no penalty at all, or a modest one, whereas deliberate understatement attracts far higher penalties. If you discover the error yourself and make a voluntary disclosure to Inland Revenue before they notify you of an audit or investigation, this generally results in a significant reduction of any penalty, and can reduce it further if made before you are notified of an audit. Correct the return, explain the circumstances clearly, and consider getting a tax agent to assist with the voluntary disclosure.