Conduct of the review

1.1 This is the report of the Inspector-General of Taxation's (IGT) review into the Australian Taxation Office's (ATO) Income Tax Refund Integrity Program (ITRIP). It is one of three concurrent reviews examining aspects of the ATO's compliance approaches to individual taxpayers. The other reviews look at the ATO's use of data matching and its administration of the superannuation excess contributions tax. The IGT is also undertaking a related review into the ATO's use of compliance risk assessment tools. The ITRIP is one such tool.

1.2 The report is produced pursuant to section 10 of the Inspector-General of Taxation Act 2003 (IGT Act 2003).

1.3 This review was commenced pursuant to subsection 8(1) of the IGT Act 2003, following complaints made to the IGT in 2011 and during the IGT's consultation to develop the 2012-13 forward work program. General community dissatisfaction was expressed with the level of delay in the ATO's processing of returns and issuing of refunds that were held under the ITRIP for manual review to investigate identified risks of potentially incorrect or fraudulent claims being made. Stakeholder submissions also expressed concerns about the lack of sufficient communication by the ATO and that the impact of the ITRIP on taxpayers and their agents was disproportionate to the risk that the ATO was seeking to address.

1.4 Notwithstanding acknowledgments by some stakeholders that 2012-13 has seen considerable improvement in income tax return processing times over the previous year, some concerns continue to be raised. Moreover, stakeholders have submitted that an examination of the learnings and improvements made since 2011-12 could provide a strong basis upon which the ATO manages the ITRIP and similar programs in future years.

1.5 Terms of reference for this review were announced on 20 November 2012. A copy of the terms and the submission guidelines are reproduced in Appendix 1.

1.6 The IGT received submissions from a diverse stakeholder group including taxpayers, tax practitioners and their respective representative bodies. The IGT met with interested stakeholders to better understand their experience and those of their clients in dealing with the ATO on this matter.

1.7 The IGT review team also liaised with ATO staff in the Individuals Compliance and Data Management (ICDM) stream of the Micro Enterprises and Individuals (MEI) business line who have primary responsibility for managing the operation of the ITRIP. In addition, the IGT examined case documents from the ATO's enterprise case management system, Siebel, to better understand taxpayer complaints in this area and analysed ATO statistics relating to performance and impact of the ITRIP.

1.8 The IGT also worked progressively with ATO senior management to distil potential areas for examination and to agree on specific improvements.

1.9 In accordance with section 25 of the IGT Act 2003, the Commissioner of Taxation was provided with an opportunity to make submissions on any implied or actual criticisms in this report.

Individual income tax returns and associated risks

1.10 The ATO currently holds 19.3 million active tax file numbers (TFNs) for individual taxpayers.1 Under Australia's self assessment system, individual taxpayers are responsible for lodging annual income tax returns in which all assessable income is to be declared and only deductions, offsets and credits to which that taxpayer is entitled are to be claimed. From this information, the ATO processes and determines the net amount of tax payable or refundable to the taxpayer.

1.11 Each year, the ATO receives approximately 12.4 million individual income tax returns, over 10 million of which contain claims for deductions, offsets or credits totaling $54.1 billion.2

1.12 The ATO acknowledges that within this system there is an endemic risk of taxpayers and tax return preparers lodging incorrect or fraudulent returns. Left untreated, the ATO considers that such risks may result in reduced community confidence, an erosion of voluntary compliance and significant revenue leakage.3

1.13 Given the high volumes of lodgements within this market segment, the ATO employs complex analytical models to risk assess and select certain returns for manual checking. These analytical models are generally contained in the ITRIP4 and its predecessor the High Risk Refunds (HRR) program.

1.14 The use of analytical models to detect instances of overclaimed or fraudulent deductions is not ordinarily problematic. However, problems emerge where systems-based issues give rise to extended delays as a result of a misalignment between increased workflows and ATO resourcing and responsiveness. Such delays were experienced by taxpayers and tax agents in relation to the ITRIP in 2011-12.

1.15 It is worth noting that refund and other assessment processing delays are not confined to the ITRIP. As the IGT observed in his Review into the Australian Taxation Office's Change Program (Change Program review),5 significant delays and associated issues were also identified in relation to the ATO's HRR program.6 In that review, the IGT noted the large numbers of income tax returns received by the ATO and not processed within the ATO's 14 day service standard.7 The IGT also noted that one of the causes of this delay was the high numbers of income tax returns stopped by the ATO's HRR program which required review by ATO officers. The delays in finalising these HRR reviews resulted in notices of assessment being issued late.8

1.16 Relevantly, the Change Program review observed the contingencies put in place by the ATO to resolve the delays in HRR reviews, including a redeployment of staff to manually process and release delayed income tax returns.9 Notwithstanding this, the IGT noted the ATO's acknowledgement that many of the delayed returns were not as a result of pending taxpayer information or awaiting review by ATO officers. Instead, the ATO conceded that the delays were as a result of other systems-based problems, including the resolution of amendment cases or processing of other return types.10

Pre-issue vs post-issue compliance activities

1.17 In relation to the endemic risks of incorrect or potentially fraudulent individual income tax returns, the ATO notes:11

Incorrect or fraudulent refunds

Our efforts to tackle incorrect and fraudulent refund claims include both pre-emptive action — warning taxpayers about the risk of potentially incorrect claims before they lodge their returns — and checking all returns for potentially incorrect claims before we issue a refund. We identify potentially incorrect claims through data mining and other analytical tools.

Incorrect claims may involve:

  • basic errors and oversights or misunderstanding of entitlements
  • a lack of documentation to support claims as required by the law
  • lodgment of deliberately false claims
  • identity crime.

Where a taxpayer makes incorrect claims as a result of an oversight or error we will work with the taxpayer and their tax agent to reduce the level of errors in the future.

Where it is apparent that deliberate fraud has occurred or the taxpayer has acted recklessly in making a claim, they may be prosecuted and penalties may be imposed.

1.18 Given the different behaviours which may lead to an incorrect return being lodged, the ATO has a number of risk treatment options available to it. These include activities to address accounting or system keying errors as well as compliance activity to verify taxpayers' claims. These activities may be classed as either pre-issue or post-issue.

1.19 Pre-issue activity involves the ATO taking action to correct errors or to verify the details and amounts reported in an income tax return before a notice of assessment (and any associated refund) issues to the taxpayer. Post-issue activity is action taken after a notice of assessment (and any associated refund) has issued to the taxpayer.

1.20 Under the self assessment system, the vast majority of income tax returns are accepted by the ATO without adjustment and, as such, most compliance verification occurs post-issue.12 However, post-issue compliance activity brings with it a number of inherent risks including the ATO not being able to properly identify the correct person for audit or review (such as where there has been identity fraud) or incorrectly paid refunds being irrecoverable where assets have been dissipated.

1.21 Accordingly, the ATO takes the view that certain risks should be addressed prior to issuing the notice of assessment and before any refunds are paid to the taxpayer. The ATO's approach in this regard is outlined in Table 1 below.

Table 1: Planned pre/post-issue risk treatment for the ITRIP

Image of a table showing the ATO’s planned pre/post-issue risk treatment for the ITRIP.

Source: Pre/post-issue treatment risk management criteria 29 May 2012, ATO Enterprise Risk Manager.

1.22 Table 1 indicates that the ATO will take pre-issue compliance action against clear cases of fraudulent income tax return lodgements, regardless of the channel through which it is received. The ATO further considers that cases in which taxpayers or the ATO clearly made errors, such as entering incorrect data against designated labels in the tax return or other simple keying errors, should also be treated in the pre-issue environment.

1.23 However, in relation to over claiming, the ATO recognises that there is a spectrum of behaviours which may lead to this outcome. In seeking to address this risk, the ATO considers that both pre-issue and post-issue compliance activities may be appropriate depending on, amongst other things, the person who prepared the income tax return, the channel through which the return was received and the quantum of the claims made. The ATO illustrates this differentiation in Figure 1 below:13

Figure 1: Differentiated pre/post-issue treatments

Diagram showing differentiated pre/post-issue treatments. Both pre-issue and post-issue compliance activities may be appropriate depending on, amongst other things, the person who prepared the income tax return, the channel through which the return was received and the quantum of the claims made.

Source: Pre/post-issue treatment risk management criteria 29 May 2012, ATO Enterprise Risk Register.

1.24 To facilitate this differentiated risk approach, the ATO utilises the ITRIP and, until its recent integration into the ITRIP, the HRR program to identify which cases should be reviewed pre-issue and those which may be released.14

1.25 The ATO has advised that the ITRIP does not directly select any cases for post-issue compliance activity. However, post-issue compliance activity can occur indirectly where:

  • an auditor expands the scope of a pre-issue audit to include prior year cases if there is evidence of compliance risk in prior years is detected;
  • the ATO uses past cases to test new or revised expert business rules prior to implementing these rules in the pre-issue environment;
  • reviews are undertaken of cases which were incorrectly released owing to system errors; and
  • reviews are undertaken of returns which were released but would otherwise have been selected under expert business rules implemented part way through the financial year.

What is the Income Tax Refund Integrity Program (ITRIP)?

1.26 The ITRIP was developed and introduced in the 2008-09 financial year and commenced operation from 1 July 2009. It comprises a series of analytical models designed to detect errors and potentially fraudulent claims in income tax returns.

1.27 As the ATO explains:15

The Income Tax Return Integrity program detects potentially fraudulent or over claimed refunds through a suite of analytical models that run independently of, but complementary to, the Integrated Core Processing system. The analytical models run in the ATO data warehouse environment and refunds detected by the models for review are then suspended from further processing in the Integrated Core Processing system pending a review as part of the Income Tax Return Integrity program.

1.28 When it was first introduced, the program focused solely on detecting identity crime perpetrated by individuals and networks through the ATO's electronic income tax lodgement system, e-tax. In the years which followed, the ATO expanded the ITRIP to examine returns lodged through other channels in addition to e-tax and developed systems-based 'expert business rules' to detect risks within specific labels of lodged returns.16

1.29 A more detailed discussion of the ITRIP models is contained in Chapter 2.

The ITRIP process

1.30 The end-to-end ITRIP process ensures that all individual income tax returns lodged are checked against the ITRIP risk models. This process occurs over a 48 hour period following lodgement. Given that the return is assessed against a range of models and expert business rules, it is possible that one return may trigger a number of different risks.17 Where a particular return triggers more than one model or expert business rule, the ATO attributes the risk to a single model for checking, based upon a risk hierarchy.18

1.31 Any return which triggers a risk item in any of the ITRIP models is stopped. System suppressions are put in place to stop these returns from being processed further pending manual ATO review. At the same time that a system suppression is put in place, a work item is created in the ATO's enterprise case management system, Siebel.

1.32 It should also be noted that there is a range of in-built monitoring auto-release rules to minimise returns being incorrectly stopped.

1.33 This end-to-end ITRIP process from lodgement of a tax return to the notice of assessment issuing is illustrated in Figure 2.19

1.34 Figure 3 is a diagrammatic representation of the current actioning timeline for ITRIP cases, with the ATO's expected timeframes for commencement and completion of each of the steps within the process, including steps for any objections or litigation in relation to the ITRIP adjustment.

Figure 2: ITRIP end-to-end process

Chart setting out the ITRIP end-to-end process.

Source: ATO

View image enlarged

Figure 3: ITRIP case actioning timeline

Chart setting out the ITRIP case actioning timeline.

Source: ATO

View image enlarged

1.35 As illustrated in Figure 2, after the return has been suppressed, a letter is issued to the taxpayer or their tax agent to advise them that the return has been stopped for further checking. Figure 3 indicates that in 2012-13, the ATO expected these letters to be sent to taxpayers or agents within 10 to 12 days following lodgement of a tax return.

1.36 Between 13 and 63 days after lodgement, the ATO expects to commence its review of tax returns which have been held. These reviews can involve matching information reported in a tax return with third party data or it can involve an audit of the tax return.

1.37 If the relevant risk is matched and verified against third party data subsequently lodged, for example employers' pay-as-you-go withholding summaries, the return may be processed and the tax refund issued without further action. In such cases, no further interaction occurs between the ATO and the taxpayer or their agent.

1.38 However, where the identified risk cannot be checked against third party data, the ATO will issue an audit letter inviting taxpayers to submit further information or explanations to support their claims with the consequence that claims, which are not sufficiently substantiated, are disallowed.

1.39 Where the taxpayer provides sufficient evidence in support of their claim, the return is released for processing and the refund is issued in due course. However, where evidence is not provided or evidence provided is not sufficient to address the ATO's concerns, the actioning case officer disallows all unsubstantiated items by making adjustments to the tax return before processing.

1.40 The ATO expects that notices of assessment will issue to taxpayers within seven days following completion of the audit. In addition, taxpayers, whose income tax return has been adjusted following an audit, receive a finalisation letter usually within four days of audit completion to outline the reasons for any adjustments made. Taxpayers whose returns are released without adjustment also receive a finalisation letter, and may request further explanation as to why the return was held.20

1.41 As the notices of assessment and audit finalisation letters are issued separately, there is a slight time difference between when each is sent to the taxpayer. The ATO expects that audit finalisation letters would issue between 59 and 123 days after lodgement and notices of assessment would issue between 62 and 126 days after lodgement.

1.42 The ATO has advised that where a return has been checked and adjusted by an officer, an audit indicator is placed against the return to ensure that taxpayers are not able to later reverse the adjustment through lodgement of an amended tax return.21 The audit indicator operates to divert such amendments for manual review and verification by an ATO officer before processing is completed.

1.43 It is important to note that ATO officers reviewing returns are required to ensure that the returns are 'correct'. In some cases, the ATO notes that this may lead to a 'negative adjustment'. A negative adjustment is an adjustment which is made in favour of the taxpayer.22 The rates of adjustments, including negative adjustments, are discussed in Chapter 6.

IGT observations

1.44 The IGT notes that the ATO's case actioning timeline and associated timeframes for 2012-13 are an improvement on those in 2011-12. Outlined in Table 2 below is a comparison between the ATO's expected timeframes in 2011-12 and 2012-13.

Table 2: ATO expected case actioning time frame comparison 2011-12 and 2012-13
Task Timeframes (number of days following lodgement)
2011-12 2012-13 Difference
Shortest Longest Shortest Longest Shortest Longest
Initial delay letter issued 12 14 10 12 2 2
Initial audit letter issued or ATO phone contact 15 99 13 63 2 36
ATO audit action 57 141 55 119 2 22
Audit finalisation letter issues 61 145 59 123 2 22
Notice of assessment issues 64 148 62 126 2 22
Objection lodged 94 178 92 156 2 22
Objection determined 150 262 148 212 2 50
Litigation commences 180 - 176 - 4 -

Source: ATO

1.45 The IGT further notes from the data contained in Table 2, that in respect of its shortest expected timeframe, the ATO has consistently applied a reduction of two days at each stage of its ITRIP process. The changes to the ATO's timeframe expectations are most pronounced in relation to its longest expected timeframes where it has reduced its expectations by more than three weeks at each stage. Specifically, the IGT notes the 36 day difference in issuing initial audit letters or telephoning the taxpayer and a consistent 22 day reduction in undertaking and finalising audits.

1.46 It should be noted that the above table and associated discussion relate only to expected timeframes. Actual timeframes are discussed in Chapter 4 with some concerns persisting.

What is the High Risk Refund (HRR) program?

1.47 The HRR program, which preceded the ITRIP, was established in 2002 and was jointly managed by the MEI and the Client Account Services (CAS) business lines. The aim of the program was to detect refunds classified as 'high risk' based on certain risk criteria. At the time, the ATO defined a high risk income tax refund as a 'potentially incorrect refund claimed through an income tax return, that could result in a significant risk to revenue, or that could undermine the community's confidence'.23

1.48 The risk-based criteria underlying the HRR program were hard-coded into the ATO's National Taxpayer System (NTS). Where a particular tax return triggered these risk-based criteria, the return would be held for pre-issue review by an ATO officer before the return was processed and the refund released to the taxpayer.

1.49 On 1 November 2007, the Australian National Audit Office (ANAO) released its report into the ATO's administration of high risk income tax refunds in the individuals and micro enterprises market segments.24 The ANAO's report made a number of findings including that the ATO had historically only adjusted 3 to 6 per cent of returns held by the HRR program.25

1.50 The ATO also recognised the issues associated with the HRR program. In particular, it observed the tension between estimated and actual risk, the high rate of 'false positives'26 detected by the program and the similar nature of the work undertaken by MEI and CAS, leading to inconsistent work practices across these business lines.27

1.51 Further, the ATO noted that the risk-based criteria underlying the HRR program were difficult to modify, having been hard-coded first into the NTS and then later into the Integrated Core Processing (ICP) system as part of the ATO's Change Program.28 An internal ATO project document also noted that:29

An internal audit conducted late in 2011 by Internal Fraud Prevention and Control identified that the current High Risk Rules were at risk of not reflecting current and emerging risks due to the lack of regular reviews of the rules and have recommended that Client Account Services undertake this review on an annual basis.

1.52 The ATO has advised that in the 2011-12 financial year it commenced a project to consolidate aspects of the HRR program concerning individual income tax compliance and the ITRIP. It notes that the project was initially approached in a piecemeal fashion with a more formal review commencing in earnest in November 2011.30

1.53 Through this program of work, the ATO aimed to deliver, amongst other things, a 'pre-issue environment managed consistently and effectively for the individual market' and 'an end-to-end risk differentiated treatment strategy based on risk and client behavior which delivers an optimum client experience to the community, including meeting service standards.'31

1.54 The ATO has advised the IGT that as at 1 July 2013 those aspects of the HRR program which concerned individual taxpayer compliance have been fully integrated into the ITRIP. As a result, the HRR rules which focused on individual taxpayer compliance risks have been replaced with expert business rules as part of the ITRIP.32 As this would only impact 2013-14 and subsequent years, it was not possible to comment on the effectiveness of these measures during this review.

1.55 Other aspects of the HRR program, such as those rules relating to accounting errors which do not present a compliance risk, or those relating to non-individual income tax returns, have not been integrated and will continue to be managed by the CAS business line.

1.56 Prior to 1 July 2013 and during the period of time relevant to the IGT's current review, the ITRIP and HRR program operated in tandem. All returns lodged in a particular year were run first through the ITRIP risk models prior to being processed through the ATO's ICP system. Where a return triggered risks in an ITRIP model, that return was suspended and routed to a relevant ITRIP team (or a Tax Agent Strategy team, in certain cases) for manual review before further processing.33

1.57 Any returns which had not triggered the ITRIP and which required a refund to be made were then run through the HRR program. If a HRR risk was identified then the relevant tax return is routed to either a CAS or MEI HRR team for review and processing. The ATO had advised that returns which triggered the HRR program were allocated to CAS and MEI on a 50/50 basis rather than on the basis of the identified risk needing to be addressed.34

1.58 Once a tax return was examined and cleared by the ITRIP, it is also run through the HRR program before processing was finalised and a notice of assessment issued to the taxpayer. This interaction between the ITRIP and the HRR program is illustrated in Figure 4 below.

Figure 4: Interaction between the ITRIP and the HRR program

Diagram showing the interaction between the ITRIP and the HRR program.

Source: Adapted from ATO information.

View image enlarged

1.59 The ATO has advised the IGT that the rules for the HRR program and the ITRIP were designed to detect different risks. The IGT has also been advised that the potential for a return to trigger both the ITRIP and the HRR program were small. Where there was such a double trigger, the HRR processes required the relevant officer to investigate whether the return had been the subject of review under the ITRIP. If so, the return would be processed and the tax refund issued to the taxpayer without further HRR action.

1.60 As there were different processes and risk treatment strategies used by each of the areas administering the ITRIP and the HRR program, taxpayers would have been subject to different approaches, correspondence and expected completion times.

Management and budget structures in the ITRIP

ITRIP management and governance

1.61 There are three broad levels of management oversight and governance for the ITRIP. Generally, these are placed at the ATO-wide, sub-plan and business line levels. The different forums at each of these levels are outlined below:35

  • ATO-wide level — the ITRIP is overseen by the ATO Executive which is headed by the Commissioner of Taxation, the Tax Crime Steering Committee, the Income Tax Steering Committee and the Service Improvement Steering Committee;
  • Sub-plan level — there is the Compliance Executive headed by the Second Commissioner, Compliance, the Active Compliance Steering Committee, the Tax Time Steering Committee, the Tax Time Nerve Centre, the Account Integrity Steering Committee, the Account Integrity Senior Business Management Group and the Tax Practitioner Steering Committee; and
  • Business line level — the primary oversight forum is the MEI Executive which is headed by the Deputy Commissioner MEI, the MEI Risk Management Committee, the Active Compliance Forum and the Refund Integrity Project Stakeholders Meeting.

1.62 The ATO has advised that, with the exception of the Account Integrity Steering Committee and the Account Integrity Senior Business Management Group, the other committees and forums at the ATO-wide and Sub-plan levels have no direct decision-making role in the ITRIP. It notes that all functional and operational decisions relating to the ITRIP are made at the business line level by the relevant Assistant Commissioners within the MEI business line, with ultimate decision-making responsibilities residing with the Deputy Commissioner of the MEI business line.

1.63 The IGT acknowledges that a large scale compliance initiative such as the ITRIP requires robust oversight and governance. However, there does seem to be a large number of committees involved at each of the above three levels even if not all of them have decision-making powers. There is a risk of over-governance resulting in duplication, inefficiencies and uncertainty relating to ownership of issues needing resolution.

ITRIP budgeting and staff allocation

1.64 The ATO allocates a certain portion of its general funding to the ICDM stream for the purposes of administering the ITRIP and the associated reviews and audits. The ATO refers to this as 'business as usual' funding

1.65 Table 3 below outlines the funding which the ATO has allocated and proposes to allocate to the ICDM stream between 2011-12 to 2014-15.

Table 3: ICDM budget and staffing
  2010-11 2011-12 2012-13 2013-14 2014-15
Budget Allocation - 10,748,505 13,684,548 14,891,000 13,114,000
Full time equivalent staff - 121.54 144.60 124 105

Source: 2011-12 and 2012-13 are based on information provided by the ATO to the IGT. 2013-14 and 2014-15 projection figures are sourced from an internal ATO staffing request document.

1.66 In addition to the ATO's existing budget funding, the ITRIP has also received substantial financial support from government. In 2011, the-then Assistant Treasurer announced that the government would provide additional funding to the ATO to address 'a substantial increase in fraudulent tax refund claims.'36

1.67 In the 2011-12 Federal Budget, the government committed to provide $54.6 million over four years to the ATO for the purposes of addressing fraudulent tax refund claims. Specifically, the additional funding and expected revenue in fiscal balance terms over the four financial years 2011-12 to 2014-15 are as follows:37

Table 4: Government budget funding
Revenue ($m) 2010-11 2011 -12 2012-13 2013-14 2014-15
Australian Taxation Office - 63.9 67.2 59.3 42.2
Related expense ($m) Australian Taxation Office - 14.4 15.1 14.3 12.6

Source: Budget Measures 2011-12, Budget Paper No. 2

1.68 The government expected that, in underlying cash terms, there would be an estimated increase in receipts of $225.6 million over four years.38

1.69 The ATO has provided information from its Revenue Analysis Branch (RAB) to outline the levels of revenue raised or protected and the level of cash collection which it has achieved as well as its forecasts for meeting its commitment to government. These are outlined in Table 5 below.

Table 5: Liabilities and cash collection as a result of the Budget measure
Year 2011 -12 2012-13 2013-14 2014-15
Expected liabilities raised or revenue protected ($m) 67.2 70.8 62.4 44.4
Actual liabilities raised or revenue protected ($m) 67.23 68.4539 - -
Expected cash collections ($m) 60.4 64.7 58.1 42.4
Actual cash collections ($m) 60.4 - - -

Source: ATO, Revenue Analysis Branch

1.70 Table 5 indicates that in relation to the levels of revenue expected to be raised or protected (that is, refunds prevented from issuing where the taxpayer is unable to substantiate the claims), the ATO exceeded its forecasts in 2011-12 and in the year to date (to April 2013) has achieved revenue levels of $68.45m, which is 96.7 per cent of its expected level, for 2012-13.

1.71 The ATO further notes that it achieved its expected cash collection levels in 2011-12. As the 2012-13 financial year had not ended when the RAB provided the above information, the level of cash collections for that year are not presented in this report.

1.72 The ATO has advised that based on the levels of revenue raised to April 2013, and the level of cash collections achieved in 2011-12, it is confident that it will be able to meet its commitments to government.40

How the ATO measures its commitments to government

1.73 In discussions with the ATO, the IGT was advised that the additional ITRIP funding was added to the existing funding already allocated by the ATO. As such, the ATO does not measure and report its ITRIP commitments to government under a separate project.

1.74 Instead, when calculating ITRIP revenue which could be generated by the extra funding, the ATO undertakes these calculations by reference to an expected base revenue amount. The base revenue amount is calculated from past data and represents the amount of revenue the ATO expects to have protected or raised without the government funding. The ATO then revises its expected base amount in accordance with the additional government funding. For example, if the additional funding represented a 20 per cent increase over the 'business as usual' funding then the ATO would increase its expected revenue by 20 per cent.

1.75 The ATO allocates and reports the total revenue raised or protected on a pro-rata basis as against its 'business as usual' funding and the government funding. As such, where the ATO meets or exceeds its revenue expectations, it can report that it has met its commitments both in terms of 'business as usual' and to government. Conversely, where the ATO does not meet its revenue expectations, it will report a shortfall in relation to its 'business as usual' and government commitments.

1.76 The ATO indicates that where appropriate, it will look to first allocate revenue to its 'business as usual' before accounting for government commitments. Where government funding does not result in a separate project being commenced, the ATO advises that there are no circumstances in which it would account for government commitments first. In the ATO's view, this minimises the risk of perception that it is 'cherry picking' reported revenue figures to demonstrate that it has delivered on expected returns from a particular funding measure.

1.77 The IGT notes that the ATO's approach essentially measures the difference between expected revenue without government funding and actual revenue with government funding. Such an approach may provide an indication of the effectiveness of additional government funding in these areas. However, it is important to note that changes in the level of revenue raised or protected in any given year may be influenced by a range of extraneous environmental factors not related to funding and resources.

1.78 The ATO recognises this and indicates that in its revenue estimates and forecasts, it seeks to account for market drivers and other factors which may impact the level of revenue protected under the ITRIP. As outlined in its 2011-12 Annual Report, these extraneous factors include global economic conditions, the strength of the Australian dollar, legislative change and judicial pronouncements, all of which have a bearing on the level of collections.41

1.79 The ATO has further advised that impacts which are not accounted for when revenue estimates are generated are taken into account by the ATO when finalising its reporting. However, notwithstanding this, it is unclear to the IGT how the ATO specifically accounts for these factors in finalising its reports in relation to certain Federal Budget measures.

Stakeholder concerns regarding the ITRIP

1.80 In 2011-12, the ITRIP stopped more returns than was previously estimated by the ATO, resulting in significant delays in processing. These delays and general community dissatisfaction gave rise to significant media attention as well as complaints made to the ATO itself,42 the Commonwealth Ombudsman43 and the IGT.

1.81 Flowing from this experience, the ATO undertook work to improve the ITRIP and the overall taxpayer and tax agent experience when dealing with ITRIP matters.

1.82 Consultations and submissions from stakeholders conveyed to the IGT have welcomed the improvements made by the ATO but some concerns remained. These may be broadly summarised as follows:

  • a perception that the ITRIP is not accurately detecting cases of incorrect or fraudulent claims;
  • the ATO's processes for reviewing returns stopped by the ITRIP could be more timely and there is still no mechanism for early intervention to expedite processing;
  • the actions taken under the ITRIP are perceived to be disproportionate to the risks posed;
  • the ATO is not clearly communicating with taxpayers and their advisers in a timely manner, particularly in providing reasons for certain returns being stopped or for adjustments being made with sufficient specificity;
  • the ATO is not affording taxpayers sufficient time to address its concerns before making adjustments; and
  • the ITRIP is adversely impacting both taxpayers and their tax agents through increased anxiety, cash flow problems and agents undertaking work which is not billable.

Structure of the report

1.83 The remainder of the report examines the ITRIP in detail, seeking to address the concerns and identify opportunities for improvement. It is structured as follows:

  • Chapter 2 discusses the ITRIP processes, the models which comprise the ITRIP and the effectiveness of the ITRIP in identifying at-risk income tax returns requiring manual review; and
  • Chapter 3 examines the taxpayer and tax agent experience, relating to ITRIP delays in 2011-12, which gave rise to much of the concerns underpinning this report and the general improvements made by the ATO in 2012-13.

1.84 The following chapters explore further opportunities for improvement in the administration and management of the ITRIP:

  • Chapter 4 outlines the delays experienced by taxpayers arising out of the ITRIP and looks to identify opportunities to minimise those delays and to mitigate the impact on taxpayers;
  • Chapter 5 examines the ways in which the ATO communicates and engages with taxpayers and their agents throughout the ITRIP process; and
  • Chapter 6 looks at the proportionality of adjustments made by the ATO as a result of the ITRIP and the level of disputation this has generated.

1 Commissioner of Taxation, Annual Report 2011-12 (2012) p. 39.

2 Australian Taxation Office (ATO), Compliance Program 2012-13 (2012) p. 10; ATO, Taxation Statistics 2009-10 (2012), p. 10.

3 ATO, Risk Treatment Plan Income Tax Return Integrity (December 2011), internal ATO document, p. 5.

4 Ibid, p. 7.

5 Inspector-General of Taxation (IGT), Review into the Australian Taxation Office's Change Program (2011).

6 Ibid, pp. 70-73.

7 Ibid, pp. 69 and 70.

8 Above n 5, pp. 72 and 73.

9 Above n 5, p. 74.

10 Above n 5, p. 73.

11 ATO, Compliance Program 2012-13, above n 2, p 19.

12 ATO, Self-Assessment and the Taxpayer webpage (7 March 2013).

13 ATO, 'Pre/post-issue treatment risk management criteria' (29 May 2012), internal ATO document, page 4.

14 ATO, communication with the IGT, 30 May 2013, p. 6.

15 ATO, Communication with the IGT, 13 March 2012.

16 ATO, Evolution of the Income Tax Refund Integrity Program - 2009-2013, Presentation to the Inspector-General of Taxation (18 February 2013).

17 Above n 7, p. 8.

18 Ibid.

19 ATO, 'Income Tax Return Integrity - End to End Process' (August 2011), internal ATO document.

20 Above n 15; ATO, 'Income Tax Refund Integrity case actioning timeline' (2013), internal ATO document.

21 Above n 7, p. 6; Above n 15.

22 ATO, 'IGT Review - Delayed Refunds definitions' (12 April 2013), p. 7.

23 Australian National Audit Office (ANAO), Administration of High Risk Income Tax Refunds in the Individuals and Micro Enterprises Market Segments, Report No. 12 (2007-08) p. 12.

24 Ibid.

25 Ibid, p. 13.

26 Where the HRR program incorrectly detected a risk against certain tax returns when in fact no risk existed; see Manish Gupta and Vishnuprasad Nagadevara, 'Audit selection strategy for improving tax compliance -application of data mining techniques' in Ashok. Agarwal and V. Venkata Ramana (eds), Foundations of E-government (2007) p. 378.

27 Above n 16.

28 Above n 5, p. 6.

29 ATO, 'Project Outline: Individuals Pre Issue Re Design,' (9 February 2012), internal ATO document, p. 4.

30 Ibid.

31 ATO, 'HRR and ITRI Current State and Issues' (December 2011), internal ATO document.

32 ATO, Office Minute to Deputy Commissioner, MEI (21 June 2013); ATO, Accounting Integrity Business Management Group, Minutes (27 June 2013); ATO, Credit Refund Business Management Group, Minutes (September 2012); ATO, Office Minute to Assistant Deputy Commissioner, MEI (August 2012).

33 Above n 31.

34 Above n 31.

35 ATO, 'Micro Enterprises - Individual Income Refund Integrity Program - Governance Structure' (December 2012), internal ATO document.

36 Bill Shorten MP, Assistant Treasurer, Improving Tax Fairness and Compliance, Media Release, 10 May 2011.

37 Treasury, Budget Measures 2011-12, Budget Paper No. 2, p. 46.

38 Ibid.

39 This figure represents revenue raised or protected by the ATO in the year to date as at April 2013.

40 ATO, Communication with the IGT, 16 May 2013.

41 Above n 1, pp. 57, 68, 72.

42 The ATO received 7,381 unique complaints in 2011-12 for the ITRIP compared with 1,269 complaints in 2010-11.

43 Commonwealth Ombudsman, Submission to the Joint Committee of Parliamentary Accounts and Audit Annual Hearing with the Commissioner of Taxation (September 2012), p. 4.