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6.22 The expert business rules, the pattern detection model and the identity crime and network detection model are used in the ITRIP. The use of these rules and models is described in the IGT’s, Review into the Australian Taxation Office’s Compliance Approach to Individual Taxpayers — Income Tax Refund Integrity Program (ITRIP Review).334 Risk Assessment and Profiling Tool (RAPT)
6.23 The ATO’s ME&I business line has commenced developing profiles and rules within RAPT for a number of key populations and risk areas including Pay As You Go Instalments (PAYGI) and the ‘High Income Individuals’ population. The ME&I business line currently use other risk models outside the RAPT. The intent, however, is for these models to be migrated in the RAPT over time.335
6.24 Although the IGT is conducting an in-depth review into the ATO’s ITRIP and data-matching in separate reviews, it is useful to draw certain high level observations here about the ITRIP and data-matching from a risk management perspective.
Inputs and accuracy
6.25 Stakeholders had raised concerns that the risk models used in the ITRIP were not accurately detecting cases of incorrect or fraudulent returns. As part of his IGT ITRIP Review, the IGT has analysed the strike rates to determine the rate at which returns stopped and held for investigation were the subject of adjustments.
6.26 Furthermore, the IGT has also examined the average adjustment amounts to assist in determining the actual risk posed by returns stopped via the ITRIP models.
However, the use of strike rates and average adjustments as a means to assess the accuracy of risk tools used in ITRIP is limited if there are no benchmarks against which the results can be judged.
6.27 For example, a random sampling of the risk population may indicate a certain strike rate if the returns were stopped at random. Ideally, risk assessment tools would yield strike rates above this benchmark. Chapter 8 further discusses the use of strike rates and random sampling.
6.28 Any changes in the strike rate and average adjustments may be attributable to changes in other variables, such as general community compliance levels and the behaviour of the risk population, rather than directly being attributable to the risk models themselves.
6.29 With respect to data-matching, the ATO receives data from a variety of sources. Each data-set has a different level of quality and usefulness. For example, legislative data, such as interest payment information received from financial institutions, is generally of a high quality since the type of information and its format is mandated by law. For example, the type and format of information is designed to Inspector-General of Taxation, Review into the Australian Taxation Office’s Compliance Approach to Individual Taxpayers – Income Tax Refund Integrity Program.
ATO, above n 329.
allow the ATO to readily match the identity of the account holder with the identity of the taxpayer.
6.30 Other data sources, known as non-legislative data, may have a low quality and may not be a reliable source of information for the ATO. For example, some state-based property disposal data does not have sufficient identifiers to enable the ATO to match the vendor’s identity with that of the taxpayer. This is because state-based property disposal data is mostly focussed on the identity of the purchaser, as they are usually the party liable for stamp duty.
6.31 When data cannot be relied upon with a high level of confidence, the ATO needs to take care in any subsequent compliance activity which is based on that information. The ATO notes that for pre-filling electronic tax returns, the ATO will only use information that has a high confidence level. Medium and low level confidence level data is disregarded.
6.32 The IGT also notes that the government has included additional funding in the 2013-14 Budget to enhance the quality of data provided to the ATO. This includes data in relation to real property. Such measures should increase the quality of data, and the level of confidence with which the ATO can rely on it.
6.33 In relation to data matching, concerns regarding proportionality differ according to the specific data matching program. For example, adjustments of low amounts of income may be reasonable for one taxpayer in their circumstances but for other taxpayers with lower incomes, such amounts and associated compliance costs may represent a much higher proportion of their income. Therefore, the actual adjustment amounts, the associated compliance costs as well as the circumstances of the target population, are important factors in understanding proportionality.
6.34 In relation to ITRIP, stakeholders have raised concerns that the ATO compliance approach with respect to refunds was not proportionate to the risk posed.
An important element of risk is the distinction between fraudulent claims (fraud) and incorrect claims resulting from errors and mistakes (over-claiming).
6.35 The ATO regards fraud as a higher risk compared to over-claiming. This distinction is consistent with the ATO’s Compliance Model in Figure 3 in Chapter 2. It is important, therefore, that the ATO’s compliance approach is sufficiently differentiated so that those taxpayers who over-claim due to mistakes are not subjected to ATO activity more appropriate for fraud cases.
6.36 In the IGT’s ITRIP Review336, it has been observed that the ATO often bundled fraud and over-claiming concerns in the same communication. For example, reason codes given to tax agents to explain why their clients’ tax returns were being held included ‘Reason code 1: Potentially fraudulent and/or overstated claims’.
6.37 Furthermore, since the ITRIP stopped refunds as part of pre-issue compliance activity, stakeholders raised the question of whether cases of potentially limited over-claiming that are not fraud are more appropriately addressed as a post-issue activity, that is, after the refund is issued, to reflect the lower level of risk.
6.38 Lack of differentiation of different risk such as the one in the ITRIP example above, may increase taxpayer and tax agent perceptions of unfairness in the way the ATO is treating taxpayers and may negatively affect levels of voluntary compliance.
6.39 As indicated in the ATO Compliance Model, the ATO attempts to distinguish between taxpayer attitudes to compliance, ranging from ‘willing to do the right thing’ through to those who have decided not to comply. The model also indicates, that in light of different taxpayer attitudes, the ATO should also respond in such a way as to positively influence taxpayer behaviour.337 This distinction is reinforced elsewhere in ATO publications. For example, in the ATO’s Second Report of the Cash Economy
Taskforce, it is asserted:
The community expects fairness and individual treatment. The ATO needs to recognise and differentiate between those trying to do the right thing and those who intentionally disregard their taxation obligations. This will require the ATO to be firm, but also fair, in bringing to account those who are not meeting their obligations.
… Importantly, the ATO needs to be sure that those already in the system have full knowledge of their obligations and have been given every opportunity to comply. The ATO must be sure that previous good behaviour, or a history of poor behaviour, is acknowledged and taken into consideration in current dealings. The use of stronger enforcement measures on an industry or individual taxpayer will be supported by evidence that lesser measures have proved unsuccessful.338
6.40 The extract above highlights the importance of taxpayer perceptions of fairness. In the context of the ITRIP, this means the ATO action should also be proportionate to the risk posed by the taxpayer. The ATO Compliance Model needs to be viewed in its historical context. It was originally a model for guiding ATO decision making in relation to sanctions for confirmed non-compliance. The approach in more recent times requires a more holistic consideration of the taxpayer experience and relationship.
Australian Taxation Office, Introduction to the Compliance Model (25 March 2009) http://www.ato.gov.au.
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CHAPTER 7 — TAX PRACTITIONERS AND ADVISORS
BACKGROUND7.1 As discussed in the IGT’s Self Assessment Review, tax practitioners have an important and significant role to play in Australia’s self assessment system.339 Tax practitioners assist taxpayers in managing their tax affairs and have a role in ‘ensuring that their clients understand their rights and obligations’.340 7.2 According to the OECD’s 2008 Study into the role of tax intermediaries, there is a tripartite relationship between taxpayers, advisors and revenue authorities.341 By engaging advisors and involving them in the compliance process, taxpayer compliance will be enhanced, potentially at a lower cost to the ATO. Each party has a unique set of
experiences and a different perspective on issues:
A strategy of positive engagement with tax advisors offers potentially significant benefits to all parties in the tax system. In particular, it can add to revenue bodies’ understanding of tax advisors and the role they play in the tax system, as well as improved risk and compliance strategies and better-focussed information requests and dialogue with taxpayers, resulting in reduced compliance costs for all.342
7.3 The ATO has acknowledged the crucial role that tax practitioners play,
expressing it in the following manner:
… tax agents (and other intermediaries) are a critical and crucial leverage point as a key intermediary in the tax and superannuation system. There are around 53,000 registered tax practitioners (of which around 23,000 are observed to act on behalf of taxpayers with income tax lodgment obligations) representing over 15 million taxpayers. In a given year, tax agents are responsible for the lodgment of over 90 per cent of business tax returns and over 70 per cent of individual income tax returns.343
7.4 Considering tax practitioners’ important role in optimising voluntary compliance of taxpayers, the ATO seeks to encourage desired behaviours and support of the profession. Such support is largely reflected in the ATO’s Tax Practitioner Action Plan 2011-15.344 Therefore, the ATO’s monitoring of tax practitioners is important in promoting compliance.
7.5 Tax practitioners are also taxpayers themselves. They may be sole traders or part of a small, medium or large business. As taxpayers, they continue to have their own obligations to correctly register, lodge, correctly report their relevant tax information and pay tax liabilities on time. However, unlike other taxpayers, breaches
ATO communication to IGT, 25 February 2013.
Australian Taxation Office, Tax Practitioner Action Plan 2011-15 (7 February 2012) http://www.ato.gov.au.
of these obligations may affect their eligibility to practice. Principle 2 of the Code of Professional Conduct requires that tax practitioners ‘must comply with the taxation laws in the conduct of your personal affairs’.345 This Code is contained in the Tax Agent Services Act 2009 (TASA).
7.6 Whilst the ATO does not administer the TASA, where ATO compliance activities indicate that persons may be breaching the TASA, (for example, by providing unregistered tax agent services), the matter may be referred to the Tax Practitioners Board (TPB) for action.346
7.7 The TPB is the independent regulator of the TASA including the Code. Whilst independent of the ATO in its decision making and administration of the TASA, the TPB is supported by the ATO and constitutes an ATO program of work under the Government’s Portfolio Budget Statements framework.347
7.8 Tax practitioners may also be members of professional associations. These associations have their own standards and requirements for membership. These typically include being a ‘fit and proper person’, having relevant qualifications, experience and mandating continuing professional development. Any breaches may be subject to disciplinary action or even expulsion.
ATO APPROACHES TO TAX PRACTITIONER RISK IDENTIFICATION
7.9 During the IGT’s Self Assessment Review, the ATO advised that there were
three broad approaches to risk identification relating to tax practitioners:
Firstly, there is the question of management of risk, using a Risk Differentiation Framework (‘RDF’) which considers a variety of factors, including association with particular intermediaries like tax practitioners and/or advisors.
7.10 The first approach mentioned above is considered in Chapter 3 of this report whilst the other two approaches are dealt with below.
Tax Agent Services Act 2009 s30-10(2).
Promoter penalty regime
7.11 The ATO has advised that, where the ATO has concerns that a particular tax advisor is promoting contestable schemes, the matter would be referred to the ATO’s Aggressive Tax Planning (ATP) business line for further action under the promoter penalty regime.
7.12 The promoter penalty regime took effect from 6 April 2006 when Division 290 was inserted into Schedule 1 of the Taxation Administration Act 1953. The regime seeks
• the promotion of tax avoidance and evasion schemes (‘tax exploitation schemes’);
3.4 Furthermore, the Commissioner of Taxation (Commissioner) cannot currently take legal action to stop the promotion of tax schemes. It is possible to warn investors about the risk that tax benefits will not be available, but educational initiatives have limited ‘real time’ impact. In contrast, the ‘real time’ remedies of injunctions and voluntary undertakings in this Bill can stop the promotion of schemes before investors participate.350 7.14 In relation to the alleged promoter, the regime allows the Commissioner, to: