«A report to the Assistant Treasurer Inspector-General of Taxation October 2013 Review into aspects of the Australian Taxation Office’s use of ...»
8.91 Should the ATO be unable to persuade the community that their compliance interactions are low cost, there is a risk that compliance costs for taxpayers may be increased even without any ATO compliance activity through the cost of audit insurance premiums or overpayment of tax. These costs are separate to ‘baseline compliance costs’ such as those associated with record keeping and correct reporting which all taxpayers must bear. Acknowledgment of these risk premium compliance costs is useful to the revenue authority in terms of appreciating the overall compliance cost burden imposed on taxpayers. The ATO has already commenced some work in this area with its TPALS ‘environmental scan’. The IGT is of the view that awareness of these types of risk premium compliance costs should be enterprise-wide and could be included in the compliance cost considerations in the current enterprise risk framework.
8.92 The IGT observed in his Benchmarking Review that taxpayers can be expected to incur a ‘baseline’ level of compliance costs in administering their tax affairs, such as
H&R Block Tax Accountants, ‘ATO Scrutiny must not stop Labourers from claiming their entitlements’ (Media release, 26 July 2013).
Australian Taxation Office, TPALS draft July-October 2012 environmental scan.
adequate record keeping.393 These are the costs associated in complying with tax law requirements. The taxpayer may be subject to additional compliance costs as a result of interactions with the ATO. The IGT is focussed on ensuring that these additional compliance costs are minimised through more targeted compliance interactions and the manner in which they are carried out.
PROJECT MANAGEMENT — BALANCING RISK, RESOURCES AND TIME
8.93 The IGT’s ITRIP Review has shown that the number of refunds stopped during the 2011-12 year exceeded the expected case load. As such, the ATO did not have adequate staffing resources to action all the stopped returns within the original expected timeframe.
8.94 The ATO applied extra resources by bringing on additional staff and using overtime to assist in clearing the cases. The escalation of such resources, however, was not substantially implemented until six months after the ATO was aware of the increased workload.
8.95 In addition to applying additional resources, the ATO sought to manage the increased workload by contacting taxpayers and tax agents to alert them of longer delays, seeking efficiencies in case work and releasing ‘lower-risk’ refund cases that were stopped by the ITRIP.
8.96 From a project management perspective, the above scenario highlights the ‘triple constraint394‘ or ‘project management triangle’, in which there is a tension between the scope of, the time taken to complete, and the resources required to execute the project. For example, in the event that a project’s timeline has been shortened, the project would normally require additional resources or a consideration to reduce the scope of work or a combination of both to successfully complete the project within the reduced timeframe.
8.97 Applying this model to the ITRIP, the increased case load can be regarded as an increase to the scope of work requiring the ATO to take some or all of the following
• reducing the scope of the increased workload, by re-configuring the risk models to release previously stopped lower risk refunds;
• increasing the resources available to action the stopped refunds, by using overtime, or bringing in additional staff from other areas; and
• accepting the scope of work and resetting expectations of the completion timeframes.
8.98 As set out in the figure below, each option carries an impact.
8.99 One of the objectives of risk management is to effectively allocate resources and one of the enterprise risks is ‘client experience’.395 Therefore, if workload or scope increases unexpectedly, the ATO must decide how much additional risk of non-compliance it can accept (that is, ‘letting through’ potential non-compliance cases)
due to the risk models. This may be done by either:
• raising the threshold of what it would regard as a significant enough risk to stop the refund for pre-issue verification activity; or
• differentiating its case actioning so that the refunds with most risk were stopped pre-issue, with the remainder released but subject to verification activity post-issue as resources allowed.
8.100 There is a direct relationship between the level of risk the ATO is willing to retain and/or treat and the scope of work planned for a project such as the ITRIP. The
nature of the trade-offs is further illustrated in the table below:
8.101 In planning to address a particular risk through a strategy such as the ITRIP, the level and type of risk is known. However, due to a degree of uncertainty, the actual work generated by this approach is not known until the income tax returns are lodged.
It should be noted that ‘stress-testing’ or ‘scenario-testing’ is one method the ATO can use to predict the workloads generated by new risk models.
8.102 As part of the ITRIP, the ATO did use some scenario testing for the 2011-12 financial year by applying the new risk rules to the tax returns lodged in 2010-11 to predict the workload for the 2011-12 year. Limitations with the testing, however, meant that the actual workload was far in excess of that anticipated.
8.103 In planning future risk treatment initiatives, the ATO would benefit from considering, in advance of implementation, the triple constraint trade-offs it is willing to make. For example, where it is important for the ATO to audit every case generated by a risk model and where it is also important for the ATO to ensure case timeframes This is currently under review by the ATO. Australian Taxation Office, Cost of Compliance Tasking Plan, ATO response to Information Request 4.
are met as planned, then a plan needs to be developed to ensure the ATO can call on additional appropriate resources at relatively short notice to complete the additional work.
8.104 A failure to adequately consider the implications of changes to the triple
constraints may result in:
• unexpected increases in taxpayer compliance costs;
• unexpected increases in ATO administrative costs; and
• the ATO unexpectedly raising its risk thresholds or differentiating its risk treatments.
8.105 This requirement is consistent with observations made by the ANAO in its
Better Practice Guide Administering regulation:
In circumstances where compliance risks increase suddenly and significantly, insufficient resources may be available to a regulator to conduct the necessary monitoring activities.
For example, if an unexpected event affects the risk profiles of a substantial number of regulated entities, the regulator may have insufficient resources to conduct not only the compliance assessments that are scheduled, but also the additional high-priority assessments that are required to address the increased regulatory risks.
When this occurs, a special interim monitoring strategy needs to be designed and implemented. The interim strategy operates until either the regulatory environment returns to normal or a new monitoring strategy is implemented because the nature and extent of regulatory risks have fundamentally changed.
8.106 The above factors, which should be considered in developing compliance risk assessment tools, have been summarised into a checklist in Appendix 12 of this report.
The IGT believes that the ATO may improve the quality of its compliance risk assessment tools by incorporating this checklist in the design of those tools. The checklist is not prescriptive, but requires those responsible for designing and implementing compliance risk assessment tools to turn their mind to key issues and, in particular, to any problems that may arise and how to mitigate them.
Australian National Audit Office, Better Practice Guide, Administering Regulation (2007) p 58.
(a) the checklist in Appendix 12 of this report should be incorporated into the ATO’s compliance risk assessment tool design processes; and (b) the ATO’s Enterprise Risk Management Framework consider risk premium compliance costs as a type of taxpayer compliance cost.
The ATO currently considers taxpayer cost of compliance as a fundamental component of its operations and actions. While the associated Enterprise Risks are currently under review, the ATO agrees where appropriate and feasible, to give consideration to risk premiums in relation to taxpayer compliance costs.
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APPENDIX 1 — TERMS OF REFERENCE
BACKGROUNDRisk management is a well-known concept in the commercial environment. Many revenue authorities have also adopted risk management approaches in the allocation of resources, particularly in an audit and compliance context.1 The Australian Taxation Office (ATO) has summarised its approach in the following
The compliance model is a structured way for the ATO to select the most appropriate activity to optimise taxpayer compliance based on an understanding of the factors that influence taxpayer behaviours and attitudes towards compliance.3 The ATO uses a range of risk assessment tools to identify potential non-compliance as well as selecting which compliance activities should be conducted. A range of quantitative techniques may be used, including specialised software or models using various data sets. They may also incorporate qualitative input based on a given ATO officer’s experience, judgement or expertise.
One of the more important ATO risk assessment tools is the Risk Differentiation Framework (RDF). Broadly, the RDF assesses taxpayer’s actions or anticipated behaviours and provides a framework for determining the nature of the ATO’s engagement with the taxpayer. The ATO’s risk assessment concerns may also originate directly from a specific transaction type where significant tax implications are anticipated. Currently, the RDF approach is used in relation to large businesses4, small to medium enterprises and wealthy Australians5 as well as tax practitioners6 and other intermediaries.7 Other important risk assessment tools that the ATO uses include: the small business benchmarks targeting the cash economy, the income tax refund integrity program (which may withhold individual taxpayer refunds pending further inquiry, if certain Forum on Tax Administration, Compliance Sub-group, Organisation for Economic Co-operation and Development, Information Note: Managing and Improving Compliance: Recent Developments in Compliance Risk Treatments (2009) para 14.
Michael D’Ascenzo, ‘Good Governance and Tax Risk Management’ (Speech delivered at the Australian Risk Policy Institute, University of Canberra, 10 July 2008).
Australian Taxation Office, Large business and tax compliance publication (2012), p 23.
Australian Taxation Office, Tax compliance for small-to-medium enterprises and wealthy individuals (26 October 2012) http://www.ato.gov.au..
Australian Taxation Office, Compliance Program 2012-13 (2012), pp 12-13.
ATO, Guide for Tax Intermediaries – Good Governance and Tax Promoter Laws (2011).
risk flags are triggered) and data matching activities such as with AUSTRAC on foreign sourced funds transfers.
During the consultation on the Inspector-General of Taxation’s (IGT) work program, a range of concerns were raised by taxpayers, tax practitioners and representative bodies with the ATO’s approach to compliance risk management. These concerns may be
summarised as follows:
• The ATO’s overall approach to risk management — The design and adequacy of the ATO’s risk management framework not resulting in effective and accurate predictions of non-compliance or exclusions of compliant taxpayers.
• The inputs into the ATO’s risk assessment processes —The accuracy, relevance, reliability and appropriateness of the inputs used in risk assessment processes.
• The relationship between the ATO’s risk assessment processes and its compliance approaches — The frequency, intensity and formality of compliance activities not being commensurate with the comparative level of taxpayer risk and perceptions of undue influence of risk assessment processes on tax officer conduct during compliance activities — that is, presumptions of taxpayer wrongdoing.
• Taxpayer opportunities to reduce or mitigate risk —Limited opportunities for taxpayers to reduce their risk due to the lack of transparency of risk assessment processes and barriers to entry into cooperative arrangements, such as Annual Compliance Arrangements (ACAs).
Through this review, the IGT seeks to establish the underlying reasons or causes for these concerns, their systemic impacts and opportunities for improvements.
The IGT has also announced a separate review in which two specific types of risk assessment tools (the income tax refund integrity program and the use of third party data) will be reviewed in relation to the ATO’s compliance approaches to individuals.
Terms of reference for that review will be released in the near future. The IGT has also recently completed a review of another risk assessment tool, the ATO’s small business benchmarks, in his Review into the ATO’s use of benchmarking to target the cash economy.
It is expected that the findings in both of those reviews would inform the work in this review.