17 November 2009
1.1 The ATO's audit and risk review policies, procedures and practices have a significant impact on business, not only in terms of the cost of compliance but also the potential for further, and unnecessary, disputation.
1.2 The ATO states that its active compliance program for large business (involving risk assessment and audit) is aimed at encouraging voluntary compliance, identifying areas for law clarification and addressing failure to meet tax obligations. The ATO has designed a suite of audit and risk review products such as Forward Compliance Arrangements (FCAs), Annual Compliance Arrangements (ACAs), Client Risk Reviews (CRRs) and comprehensive and specific issue audits to assist in improving compliance behaviour and facilitating collaborative tax risk management practices.
1.3 In relation to large business comprehensive and specific issue audits, many including the Inspector-General of Taxation (IGT), welcomed the ATO's aspiration to resolve large business audits within two years and client risk reviews within six months.
1.4 However, during consultations on the IGT's work program, representatives of businesses and the tax profession repeatedly raised concerns that audits are often being finalised within the two years, but the way they are being handled is not achieving the aim of trying to resolve issues and disputes as early as possible. They submitted that delays in the early stages of these audits were resulting in important processes being truncated towards the end of the two years in order to achieve the targeted timeframe. Important processes allegedly being compromised include providing taxpayers with a reasonable opportunity to respond to ATO position papers, serious consideration by the ATO of taxpayer responses, and the extent of dialogue between taxpayers and the ATO in establishing agreed facts.
1.5 Stakeholders expressed concern with the ATO's exercise of its informal and formal information-gathering and access powers (section 263 and 264 of the Income Tax Assessment Act 1936) during risk reviews and audits. Some believed that the ATO was exercising these powers inappropriately, alleging that the ATO uses information-gathering requests to intimidate taxpayers. Others were of the view that the information gathered by the ATO was of limited or, indeed, no use in future proceedings although the associated taxpayer costs of compliance and stress can be enormous.
1.6 Taxpayers also raised concerns with the ATO's application and remission of penalties, in particular whether a reasonably arguable position exists. Some have suggested that the ATO will apply lack of reasonable care penalties whenever there is a disagreement notwithstanding the merits of the taxpayer's case. Others have also asserted that the ATO does not adequately consider the reputational risk associated with the ATO applying penalties, especially Part IVA penalties, and the financial duress caused where the disputed primary tax amounts are large.
1.7 This review will seek to establish whether taxpayer concerns such as the above are justified. It will examine the management of selected large business audit cases handled by the Large Business and Internationals (LB&I) business line with a focus on important milestone events and the underlying issues and behaviours. It will consider if ATO behaviours and decision-making processes are leading to extended timeframes or unnecessary disputes. This will provide a basis for conclusions to be drawn and recommendations of best practice in the handling of comprehensive and specific issue audits in the large market segment.
1.8 The review will also consider other ATO audit and risk products, some of which are relatively recent developments, such as FCAs and ACAs. Whilst other products, for example, comprehensive and specific issue audits, have existed for a much longer period, even these have undergone some changes, particularly in relation to timeframes as stated above. There have been suggestions that the ATO's explanation and application of its various audit and risk review products is contributing to uncertainty and delaying the timely progress of audits and risk reviews. Equally, others have also suggested that the principles contained in the ATO's Large business and tax compliance 2006 booklet are not being communicated or applied in practice. Both the ATO and taxpayers are likely to benefit from analysis of these products in order to determine whether each may be better employed.
1.9 A preliminary question also worth considering is how much information should be provided with the income tax return. Some have suggested that given that large business taxpayers are subject to ongoing CRRs then more information should be gathered upfront, rather than requested down-the-track during the audit. It has been submitted that the benefit of this could include better information capture for large business by knowing in advance what information the ATO is seeking, thereby leading to more timely and open dialogue and taxpayer certainty. The IGT is interested to hear from stakeholders on whether, and in what circumstances, it may make sense to have large businesses disclose more information as part of the income tax return process.
1.10 Given the IGT's relatively recent review of the ATO's administration of GST audits for large taxpayers, this review will focus primarily on income tax audits conducted by the LB&I business line.
Terms of reference
1.11 In accordance with subsection 8(1) of the Inspector-General of Taxation Act 2003 (IGT Act), the IGT on his own initiative will conduct the following review:
The IGT will examine aspects of the ATO's large business audit and risk review policies, procedures and practices, with a focus on:
- the ATO's comprehensive and specific issue audits, client risk reviews and related processes and behaviours, including:
- whether audits and risk reviews are finalised within the appropriate timeframes without increasing the level of disputation;
- the ATO's exercise of its information gathering powers (both formally and informally) and whether these powers are being used appropriately and effectively;
- the ATO's application and remission of penalties and interest.
- the ATO's audit and risk review product framework and related management, including:
- whether they are meeting taxpayer expectations;
- whether the ATO's application of the various risk products is promoting taxpayer certainty, collaboration and the timely resolution of issues and disputes; and
- whether certain products (such as client risk reviews) are being employed in a manner that is consistent with the ATO's design and taxpayer expectations and understanding.
- Large business' expectations around how audits and risk reviews should be handled so as to promote their timely, efficient and fair resolution.
Aim of the review
1.12 The IGT will identify issues and make recommendations which, when addressed, should improve the use of ATO's audits and risk review products and framework, including its exercise of its information-gathering powers, and minimise potential adverse impacts on large business. This will include the identification of practices that promote the early resolution of disputes and minimise the costs of compliance.
1.13 The IGT will:
- publish a copy of the terms of reference for this review on his website;
- take submissions on this review from members of the public generally, or from particular people or organisations, within the time frame set out below; and
- request the Commissioner of Taxation to provide information and/or documents relevant to this review.
1.14 The IGT invites written submissions to assist with this review. Submissions should address the terms of reference set out above and the issues and questions outlined in the attached submission guidelines. It is not expected that each submission will necessarily address all of the issues and questions raised.
1.15 The closing date for submissions is 31 December 2009. Submissions can be sent by:
Inspector-General of Taxation
GPO Box 551
SYDNEY NSW 2001
Fax to: 02 8239 2100
Email to: email@example.com
1.16 The IGT is seeking detailed accounts of large businesses experiences in dealing with ATO audits and risk review products. This would greatly assist the IGT in identifying potential systemic issues and allow for the more efficient and effective examination of these issues. If necessary, submissions may be provided to the IGT in confidence, in which case the information contained in such submissions will not be made available to any other persons including the ATO.
1.17 These guidelines envisage that, broadly, your submissions will be divided into a number of parts.
1.18 At the outset of your submission, it is important to provide a detailed account of specific ATO practices and behaviours that, in your view, impact upon the timely, efficient and effective resolution of an audit or risk review. In addition, the IGT is also seeking examples of positive ATO practices and behaviours that contributed to the timely resolution of an audit or risk review.
1.19 In investigating the ATO's audit and risk review practices and related behaviours, it may be useful to provide a time line of events outlining your key interactions with the ATO including information requests, key meetings, the issuing of position papers and ATO amended assessment (if relevant).
1.20 Any adverse or detrimental impacts of the ATO's audit and risk review practices and behaviours should then be set out and, if possible, quantified. These might include unanticipated tax liabilities raised in amended assessments (including tax, penalties and interest) for prior years, increased compliance costs in dealing with the ATO directly during the audit or increased ongoing compliance costs thereafter and potential restructuring of significant commercial arrangements.
1.21 The submission should list alternative actions, practices or behaviours which, in your view, could have minimised the adverse effects.
1.22 The following is provided to assist you in developing these parts of your submission. It includes a range of questions to assist you in considering issues that have been raised during community consultations.
ATO's audit and risk review processes and behaviours
1.23 This review will consider the following:
- how the ATO handles and completes comprehensive and specific issue audits and client risk reviews within the appropriate timeframes;
- how the ATO is exercising its informal and formal information-gathering and access powers during CRRs and audits; and
- the ATO's application and remission of penalties and interest.
ATO's timeframe for completing audits and risk reviews
1.24 Concerns were raised during the consultation process that the ATO does not provide sufficient time for taxpayers to test the factual and evidentiary basis for compliance decisions. It is alleged that the ATO spends a great deal of the two-year period gathering facts and developing its view before issuing a position paper to the taxpayer. Taxpayers only become aware of the facts relied upon when the position paper is issued and it often relies on incorrect or irrelevant facts or omits important facts altogether. This is also pertinent to how the ATO applies penalties and the facts, evidence and assumptions upon which penalty decisions are based. It was also alleged that taxpayers are usually given no more than 60 days to consider and respond to the position paper.
1.25 Some believed that this practice arises because the ATO relies too heavily on taxpayer bearing the onus of proof. It has been suggested that rather than relying on the burden of proof, the ATO should be required to determine the correct basis for raising the assessment. Alternatively, others suggested that the ATO, during the initial stages of the audit, should determine which facts are relevant to the issues in question and ensure that the facts are tested before applying the law to the facts and developing its technical view with the taxpayer.
1.26 It has been suggested that audits involving multiple or complex issues have the same two-year timeframe but no additional ATO resources. This effectively reduces the time allowed for either the ATO or advisers to consider any one issue, leading to the issuing of a premature amended assessment based on untested facts and evidence. Others believe that the ATO issues lengthy position papers with the expectation that taxpayers respond to each issue. Some stakeholders have indicated that they cannot determine the primacy of issues and, given the limited timeframes for response, are often pressured to be selective about the issues they challenge without being able to assess the relative importance or significance of that issue.
1.27 It has also been suggested that the ATO does not seek to narrow the issues in contention during the audit or risk review process. Often all issues remain on the table until the ATO's final position paper and subsequent issuing of amend assessments. Taxpayers believe that such practices and behaviours do not contribute to the timely resolution of audits and increases the potential for further and more costly disputation.
1.28 One of the aims of this review is to investigate the above allegations and to determine whether the ATO is satisfactorily completing comprehensive and specific issue audits within two years and client risk reviews within six months without increasing the level of disputation.
1.29 The methodology for this review may include:
- selecting a sample of representative comprehensive and specific issue audit cases (those that went on to dispute and those that did not);
- examining the timeframes for critical milestone events (dialogue, the issuing of position papers and the time allowed for taxpayer response); and
- seeing whether these variables influence the likelihood of early resolution.
1.30 The review will consider whether there is any pattern in the type of audits going on to dispute. This will then provide a basis for conclusions to be drawn and recommendations of best practice in the handling of audits in the large market segment.
Questions for consideration in your submission
- What aspects of the current comprehensive and specific issue audit and risk review processes work well? Why do those processes work well and how have they contributed to the timely resolution of an audit or risk review?
- What aspects of the current audit processes do not work well? Why and how could these be improved?
The quality and timeliness of ATO position papers
- Do you believe that the ATO position papers accurately and succinctly set out the facts and evidence and issues in contention?
- Does the ATO adequately test the facts and evidence set out in its position papers with taxpayers?
- At what stage in the two year audit timeframe has the ATO issued you with a position paper? Has the ATO ever issued you with a position paper just prior to the end of the two-year timeframe? If so, what was the impact on your business?
- What is the usual period of time that the ATO has allowed for you to respond to its position paper? Do you believe that the ATO provides you with sufficient time to respond to its position papers?
- Do you believe that the ATO adequately considers your responses to its position papers? Has the ATO changed its view or approach after considering your responses to its position papers?
- How could position papers be improved?
Level of engagement and interaction
- Did you feel that there was an appropriate level of engagement during the audit or risk review?
- Did you encounter delays caused by a change in ATO personnel dealing with the audit or risk review?
- Did the ATO provide you with updates at key stages of the audit or risk review process?
- If problems arose in the course of an audit or risk review, did you have clear information on the escalation processes? Did you ever have to escalate concerns with the progress of an audit or risk review?
- Has the ATO ever issued you with a premature amended assessment just prior to the end of the two-year timeframe? If so, what were the impacts on your business?
- How could the level of engagement and interaction be improved to promote the more timely resolution of audits and risk reviews?
- It has been suggested by some tax practitioners that the top 50 company's receive disproportionately better ATO service and access to decision-makers than other large corporations. Have you found that the ATO's practices, behaviours and level of engagement differ dependent upon the size of the taxpayer? If so, do you believe that this difference was justified in the particular circumstances?
ATO's exercise of its information gathering and access powers (both formally and informally)
1.31 During the consultation process, it was asserted that the ATO is using its information gathering and access powers in a majority of client risk reviews and comprehensive and specific issue audits. Some argue that very little of this information is actually used in any subsequent litigation. A number of reasons have been suggested for this occurring including information requests that are not well prepared (thereby leading to inconclusive and non-probative answers) are due to the fact that the Commissioner does not have the burden of proof (which lies with the taxpayer).
1.32 It has been submitted that the ATO's information requests are often not well-targeted, with a prevailing culture of asking questions about everything, even on issues which are not under audit. Some stakeholders commented that the associated taxpayer costs of compliance and stress with information requests can be enormous, with nearly $500,000 in costs in one case alone. Others have said that poorly targeted information requests can lead to taxpayers having to expend significant resources, in terms of staff time and management focus, beyond the associated external costs of compliance. Calls have been made for greater accountability around how the ATO exercises its information gathering and access powers, especially the relevancy and admissibility of the information obtained by the ATO in any subsequent dispute.
1.33 Some have also proposed that the ATO should request more information as part of the income tax return so as to allow for a more targeted audit or risk review focus.
1.34 The review will include an examination of whether the ATO is exercising its information-gathering powers in accordance with its Access and Information Gathering Principles of only using powers where informal requests fail and minimising taxpayer compliance costs. It will also examine the subsequent use of that information and how the ATO assesses the effectiveness of its information requests in finalising audits or client risk reviews.
Questions for consideration in your submission
- During an audit or risk review, has the ATO requested you provide information or documents? If so, was this requested first informally (by way of letter)? Was the information-gathering process explained to you?
- Was it made clear how the requested information or documents related to the risks and issues under audit or risk review?
- Did you believe that the ATO's information requests were well-targeted and relevant to the issues under consideration? Please explain your situation?
- Did you feel that the ATO properly explains how the information and documents it requested has been used and relied upon in forming its final view?
- Where an audit went to further dispute (objection or litigation) do you believe that the earlier requested information or documents were relevant or did the ATO make further requests for information or documents?
- Did the ATO seek to minimise compliance costs associated with information requests? What discussions did you have?
- In relation to information requests you have received, what were the associated compliance costs? What impact did it have on your business?
- What steps could the ATO take to minimise taxpayers' compliance costs associated with information requests yet still obtain the necessary information and documents it requires for its audits or risk reviews?
- Have you claimed legal professional privilege or the accountants' concession with respect to an information request? If so, what has been your experiences in terms of the process, interactions with the ATO and costs of maintaining legal professional privilege or the accountants' concession?
- Is the level of information capture as part of a company's income tax return appropriate? Should more information be gathered upfront, and if so, what would be an appropriate trade-off for the associated increased up-front compliance costs?
ATO's application and remission of penalties and interest
1.35 Concerns continue to be raised with the ATO's application of penalties and interest. Some suggest that penalties are still being used as a bargaining tool while others believe that the ATO will apply lack of reasonable care penalties whenever there is a disagreement notwithstanding the merits of the taxpayer's case. Particular disquiet has been noted with the ATO's assessment of whether a reasonably arguable position exists. Many believe that the ATO's administration of this mitigating factor has made it more and more difficult for taxpayers to successfully maintain a reasonable arguable position. Others believe that there is a need for a more independent and objective assessment of penalties and interest following an audit.
1.36 It has also been asserted that the ATO does not adequately consider the reputational risk associated with the ATO applying penalties, especially Part IVA penalties, and the financial duress caused where the disputed primary tax amounts are large.
Questions for consideration in your submission
- Has the ATO applied a penalty following the completion of an audit? If so, what was the level of that penalty?
- Did the ATO properly explain the basis for the imposition of the penalty? Did the ATO provide you with a draft penalty decision? If so, did the ATO provide you a reasonable opportunity to provide a response to its draft penalty decision?
- Do you believe that the ATO considered your response in finalising its penalty decision?
- What have been your experiences in seeking to maintain that a reasonably arguable position existed as a mitigating factor in the application of penalties? What type of evidence did the ATO require so as to satisfy it that a reasonably arguable position existed?
- In the event that you subsequently disputed the audit decision, or entered in settlement negotiations, was there a reduction in the level of penalty? If so, did the ATO indicate the basis for that reduction or was it wrapped up as part of settlement or negotiation?
ATO's audit and risk products
1.37 The review will consider other ATO audit and risk review products as part of the wider examination of the ATO's large business audit and risk review practices.
1.38 The ATO has designed a suite of audit and risk review products such as Forward Compliance Arrangements (FCAs), Annual Compliance Arrangements (ACAs), client risk reviews and audits (both comprehensive and specific issue) to assist in improving compliance behaviour and facilitate collaborative tax risk management practices. The content, explanation, orientation and application of these products will have an important bearing on the progress of an audit or risk review.
1.39 During consultations, it was suggested that there may be scope to change the ATO's audit and risk review approaches. Some proposed that the ATO's audit and risk review product framework, and how it is implemented, should be more tailored around the particular taxpayer by taking greater account of its internal risk governance arrangements.
1.40 The IGT is now seeking to better understand large businesses' experiences and their interactions with the ATO in relation to these audit and risk review products including the circumstances that one type of product should be employed over another and the effect this has on taxpayers. Accordingly, the consideration of the following in your submissions would be most useful.
Questions for consideration
- Have you been subject to one or more ATO audit or risk review products? If so, which audit or risk review products?
- Did you feel that the nature of the audit or risk review product was explained to you carefully? Was there a clear picture of the key steps, milestone events and outcomes?
- Was there sufficient flexibility in the timetable design to accommodate business requirements?
- Did you feel that you understood the difference between the various ATO products and how the product applied in your circumstances?
- How was the Taxpayers' Charter, and its application in the audit or risk review context, explained to you?
- Were you adequately informed of the type of resources that would be required from you (information requests, access to premises) during the audit or review?
- What was your overall experience in relation to the particular risk product in terms of the ATO engagement, its responsiveness and the alignment of the ATO response with the identified risk?
- Did you feel that the particular audit or risk review product was properly managed by the ATO?
- Did you feel that any changes in the nature of the audit or risk product were adequately explained to you — for instance, moving from a risk review product to an audit product?
- Based on your experience, in what circumstances do you believe the ATO should conduct a comprehensive or specific issue audit and in what circumstances should it offer taxpayers the opportunity to employ one type of product over another? For example, when should a FCA be employed rather than an ACA?
- Are there any barriers to entering into either FCAs or ACAs?
- As ATO clients, what improvements could be made to the ATO's audit and risk review product framework?