The Australian Taxation Office (ATO) currently holds 19.3 million active tax file numbers for individual taxpayers.1 Each year, it receives approximately 12.4 million income tax lodgements from this market segment, over 10 million of which contain claims for deductions, offsets or credits totalling $54.1 billion.2 It is the largest market segment accounting for 49 per cent of total net tax collections.3
The ATO takes a risk-based approach to the management of its compliance activities. Given the high volume of transactions within this segment, the ATO uses computerised approaches to stop returns for integrity checking where certain risk indicators or flags are triggered. Broadly, these indicators or flags are triggered where there are potentially incorrect or fraudulent claims. Consequently, some refunds owing to taxpayers are delayed pending the outcome of the ATO's checking. This overall process is the essence of the ATO's 'income tax refund integrity program'.
In 2011, the ATO's parameters for detecting such claims resulted in a higher number of returns being stopped. This appeared to contribute to lengthy delays of refunds issuing and increased complaints to both the ATO and the Commonwealth Ombudsman.4
In response to these complaints the ATO undertook a significant review of its income tax refund integrity program, taking on board feedback received from the Ombudsman. This feedback reflected taxpayers and tax practitioners concerns relating to timely processing of returns, issuing of refunds and better explanations for any delays or adjustments made.5
Despite the improvements made as a result of the above ATO review, the Inspector-General of Taxation (IGT) has continued to receive representations from taxpayers and tax practitioners regarding delayed tax refunds arising from the integrity program. Specific concerns raised include whether the delay and its impact on taxpayers are proportionate to any potential risk. The inadequacy of the ATO's communications regarding these delays or adjustments has also been cited.
This IGT review is one of three concurrent reviews examining the ATO's compliance approach to individual taxpayers. It aims to explore the underlying causes for these concerns with a view to identifying opportunities for improvement.
The other two reviews conducted in this area are the review into the ATO's administration of the excess contributions tax and the review of the ATO's use of data matching.
Terms of Reference
In accordance with subsection 8(1) of the Inspector-General of Taxation Act 2003 (IGT Act 2003), the IGT will review the ATO's income tax refund integrity program (or individuals' delayed income tax refunds) with a specific focus on:
ATO systems and processes
The strategy underpinning the integrity program and its expected outcomes including the impact on taxpayers.
The accuracy of the integrity program in detecting incorrect or fraudulent claims.
The efficiency of the integrity program in terms of the timeliness of actions taken and mechanisms for early intervention to release refunds in appropriate cases.
The effectiveness of the improvements made to the integrity program to address the problems experienced in the 2010-11 financial year.
Impact on taxpayers and tax practitioners
The impacts of the integrity program on taxpayers and tax practitioners including financial impacts.
The proportionality of adverse impacts on taxpayers to the potential risk to revenue identified by the integrity program.
The nature of support and assistance provided by the ATO to taxpayers and tax practitioners impacted by the integrity program.
The effectiveness of ATO communication and action taken to minimise adverse impacts on taxpayers and tax practitioners, including whether taxpayers:
- received timely notification of their tax returns being held for integrity checking and were provided with reasons for such action;
- were provided with an opportunity to provide additional information or evidence to expedite the checking;
- were informed of the length of time the integrity checking was expected to take and when they might expect their refunds; and
- received any advice as to action they might take to streamline return processing in future years.
The IGT invites you to provide written submission to assist in this review. The IGT envisages that your submission will be divided into two parts:
- your experience in dealing with the ATO's income tax refund integrity program (or delayed income tax refunds); and
- opportunities for improvement.
Your experience in dealing with the ATO
It is important to provide detailed accounts of your experiences in dealing with the ATO. It would be useful to provide a timeline of events outlining your key interactions with the ATO including any correspondence, telephone communications, information requests and responses from the ATO. It would also be helpful to understand the time taken to deal with the ATO and any costs you incurred, such as the retaining of a tax practitioner to assist you in these dealings. Separately tax practitioners may wish to outline any irrecoverable costs incurred.
It is important to provide details of specific factors, including the ATO practices and behaviours that, in your view, delayed resolution of the issues, resulted in increased costs and impacted on your personal or business affairs. The IGT also seeks examples of positive factors in the ATO's income tax refund integrity program.
The following questions are designed to assist you in setting out your experiences.
Questions for consideration — your experiences
Q1. When and how did you first become aware that your return, or your clients' return(s), had been held by the ATO for integrity checking? Did the ATO contact you or did you have to contact the ATO to check on the status of the return? Please specify the financial year of the return in question.
Q2. How much time elapsed between lodgement of the return and when you were made aware that it would be held for integrity checking?
Q3. Did the ATO communication provide you with an explanation as to:
- the reason(s) why the return was stopped;
- the specific issue it was checking;
- the time the checking was expected to take; and
- any action you could take to address its concerns?
Q4. What action did you take or what further information did you provide to the ATO to address its concerns? What action did the ATO take as a consequence of the additional information or action you took?
Q5. Overall, how long did the ATO take to issue your tax refund? Was the refund processed and issued in a timely manner? How did the ATO update you on further delays? Did they provide sufficient reasoning? Please explain your views.
Q6. What impact has dealing with this matter had on you? For example, did you incur additional costs such as seeking assistance from a tax practitioner? Please quantify any additional costs. How could these have been minimised?
Q7. If you are a tax practitioner with a significant number of clients who were the subject of data matching processes, what impact did this have on you or your practice? Were you satisfied with the level and quality of information and supported provided by the ATO?
Opportunities for improvement
The IGT also invites you to identify opportunities to improve the ATO's processes and procedures in identifying potential errors in income tax lodgements and in undertaking refund integrity checks.
Your submission may outline alternative frameworks, actions, practices or behaviours which, in your view, could minimise costs or adverse impacts arising from the current system and its operation.
Set out below are questions to help you outline any improvements which you believe could be made in this area.
Questions for consideration — improvements
Q1. How could the ATO's income tax refund integrity program be improved?
Q2. Having regard to the possible risk to government revenue, how should the ATO verify potentially incorrect or fraudulent claims? Should the ATO stop a refund until all checks are completed or should the ATO issue the refunds and conduct compliance activities and take recovery action afterwards? In balancing negative impact on taxpayers with risk to government revenue, should certain thresholds or amounts be considered for triggering refund integrity checking? Please explain your views.
Q3. How could the ATO's communication and taxpayer engagement in relation to refund integrity checks be improved? Who should the ATO communicate with in relation to integrity checks? For example to the taxpayer or tax practitioner or both?
Q4. Should time limits be imposed on integrity checks? Should these be indicative or strict timeframes? What do you consider as reasonable timeframes? Should these timeframes vary in certain circumstances? Please explain your views.
Q5. Currently taxpayers receive basic interest after a certain period of time has elapsed as compensation for delayed refunds. Would it be appropriate for taxpayers and tax practitioners to receive further compensation for delays extending beyond any fixed refund retention period? If so, what form should this compensation take and what factors should be considered? Please explain your views.
Q6. Are there other specific improvements you would like to raise?
Submissions should address the terms of reference and submission guidelines set out above. It is not expected that each submission will necessarily address all of the issues and questions raised.
The closing date for submissions is 18 December 2012. Submissions may be sent by:
Inspector-General of Taxation
GPO Box 551
SYDNEY NSW 2001
fax to: 02 8239 2100
email to: [for enquiries regarding this review, please email firstname.lastname@example.org]
Submissions provided to the IGT are dealt with in strict confidence. This means that the identity of the taxpayer and/or of the tax practitioner and any identifying information contained in such submissions will not be made available to any other person, including the ATO. Sections 23, 26 and 37 of the IGT Act 2003 safeguard the confidentiality and secrecy of such information provided to the IGT — for example, generally the IGT cannot disclose the information as a result of a Freedom of Information request, or as a result of a court order. Furthermore, if such information is the subject of legal professional privilege, disclosure of that information to the IGT is protected and will not result in a waiver of that privilege.
1 Australian Taxation Office (ATO), Annual Report 2011-12 (2012) p 39.
2 ATO, Compliance Program 2012-13 (2012) p 10; ATO, Taxation Statistics 2009-10 (2012) p 10.
3 ATO, above n 1, pp 53-54.
4 Commonwealth Ombudsman, Submission No 4 to Joint Committee of Public Accounts and Audit, Annual Public Hearing with the Commissioner of Taxation, 14 September 2012, p 4.