Initial communications with taxpayers and their advisers
5.1 Communication, particularly when a return is to be delayed, is critical in ensuring a productive working relationship amongst all parties, namely, the taxpayer, their tax agents and the ATO. Specifically, clear and appropriate communication as to expected timeframes and reasons for delays assists taxpayers and agents to better engage with the ATO and to address its concerns in an effective and efficient manner.
5.2 Where communication is insufficient or inadequate, it has the potential to give rise to significant uncertainty and anxiety on the part of taxpayers. This may also have a flow-on effect to tax agents acting as intermediaries between their clients on the one hand and the ATO on the other.
5.3 The ATO uses both a standardised suite of written correspondence as well as telephone contact to communicate events and outcomes as a result of ITRIP audits. The IGT has reviewed the suite of ITRIP written correspondence used by the ATO in the years between 2009-10 and 2012-13 and the ATO's procedures and instructions to staff, together with concerns raised in submissions. The following sections provide further details on different aspects of ATO ITRIP communication as well as the IGT's related observations.
Communicating reasons for holding returns and delays
5.4 In submissions to the IGT, concern has been raised regarding the ATO's inability or unwillingness to disclose specific reasons for delays in processing and the specific elements of a taxpayer's return that caused it to be held.
5.5 One case study brought to the IGT's attention noted that despite ongoing requests by the tax agent for reasons for delay in processing his client's return, including a formal complaint, the ATO ultimately finalised the case by issuing the tax refund. No information was provided regarding why the return was held and delayed in the first instance.
5.6 Such a situation creates difficulties for tax agents in maintaining credibility with their clients as an absence of ATO explanation can raise doubt in the taxpayer's mind as to whether reasons for the delay related to the tax agent's diligence or professionalism. As a consequence, the ATO exposes itself to a risk that it will lose credibility and respect from the tax agent community, taxpayers or both.
5.7 In reviewing the standardised correspondence used by the ATO as part of the ITRIP between 2009-10 and 2012-13, the IGT notes significant shifts in the content and level of information provided in relation to the nature of the ATO's concerns and potential reasons why returns have been held.
5.8 In 2009-10, for example, the ATO's initial delay letter was accompanied by a schedule of items and original figures with instructions for taxpayers to review the items in the schedule and provide evidence to substantiate those claims. The letter carries a consequence that inaction on the part of the taxpayer will result in the claimed items being removed and the return adjusted accordingly.159
5.9 The following year, the ATO took a more general approach with instructions that taxpayers should review their income tax returns and make voluntary disclosures on any errors or omissions in the attached generic schedule. This letter provided no details as to which particular items the taxpayer should focus on, unlike the letters in the previous year.160
5.10 In 2011-12, the initial ATO delay letters were devoid of any specific instructions for taxpayers. The only references made to reasons for returns being held were a generic list of possible risks identified by the ATO. Specifically:161
Some of the common issues identified include:
- understated income and/or fictitious payment summary details;
- overstated or fraudulent deductions;
- non entitlement to claimed offsets/rebates; and
- instances of identity takeover.
5.11 The change in approach is likely to be a result of an expansion of the scope of the ITRIP's application from e-tax lodgements only, to include lodgements through other channels. While the IGT acknowledges the added difficulties in extracting areas of concern from non-electronic lodgement channels, it is nonetheless important that taxpayers and tax agents be made aware of the ATO's areas of concern.
5.12 With the benefit of user-testing of its standardised correspondence, the ATO received feedback on the uncertainty of a generic list of concerns, as contained in the ITRIP 2011-12 letters. Specifically, the simulation centre report noted the following:162
The uncertainty regarding what caused the tax return to be selected for review may result in the recipient spending time reviewing parts of the tax return which are not the subject of the review. It may also result in the letter recipient calling the ATO to discover which parts they should start reviewing. Providing the information in this first letter may also cause the recipient to feel more certain about the review process.
5.13 This user feedback is consistent with observations made by the IGT in his Review into the ATO's use of benchmarking to target the cash economy (the Cash Economy Benchmarking review) regarding the ways in which bulk letter campaigns may influence taxpayer behaviours and impose a cost on them and the ATO. Specifically, that report noted the letter design issues resulting in taxpayers taking unnecessary action or contacting the ATO or their tax agents to seek clarification.163
5.14 In line with the simulation centre recommendations, the initial delay letter was updated in 2012-13 to include a table of the items which may require verification. The letter was also amended to give guidance to taxpayers that they should ensure they have sufficient evidence to substantiate the claims, in case such evidence is requested.164 An extracted sample of this table, included in the initial delay letter, is outlined below:165
The table below shows the information provided in your <Year> income tax return that may require further verification:
Label/s on return Section 13 P&T NPP Distribution from partnerships Income Supplement D1 Work-related car expenses Deduction D5 Other work-related expenses Deduction T1 Spouse (without dependant child or student), child-housekeeper or housekeeper (P) Tax Offsets
5.15 The initial delay letter used in 2012-13 represents an improvement on the previous year's letter in providing taxpayers and their agents with the labels which may be the subject of the ATO enquiry. The ATO has advised that, where possible, it will seek to verify the labels of concern against third party data and will only contact taxpayers for further information if third party data verification is not possible.166
5.16 However, the IGT remains concerned that the letters may still be somewhat uncertain, potentially leading taxpayers to gather or collate evidence in anticipation of ATO enquiries, or direct their tax agents to do so. In either case, there is a potential for time and costs to be incurred and borne by either the taxpayer or the agent. The IGT considers that much of this may be addressed through future enhancements in letter design and ongoing user-testing to discern areas of confusion and uncertainty and to address those prior to implementing standardised letters.
5.17 Notwithstanding improvements which the ATO may make in the future, the IGT notes there will always be instances in which cautious taxpayers, in seeking to do the right thing, may provide information to the ATO which is not strictly necessary. In such instances, the ATO should be in a position to acknowledge receipt of the information and inform these taxpayers or their agents of the next steps in the process and what the ATO intends to do with the information.
5.18 A similar issue was also encountered in the Cash Economy Benchmarking review where taxpayers provided information in response to the ATO's advisory letters, when a response was not strictly required.167
5.19 This, together with recent observations made by the Commonwealth Ombudsman regarding the ATO's communication with individual taxpayers indicates that the ATO's awareness of the 'behavioural' responses to its letters presents an opportunity for improvement.168
5.20 The IGT notes that applied research emerging from the United Kingdom through the Behavioural Insights Team within the UK Cabinet Office supports such an approach. The research notes:169
… that even relatively minor changes to processes, forms and language can have a significant, positive impact on behaviour. Evidence also suggests that the effectiveness of interventions depends heavily on the context and setting, and that — in some instances — interventions in one domain might not be as effective when translated into other areas.
5.21 Accordingly, the Behavioural Insights Team notes that:170
Central to this is the development of randomised controlled trials (RCTs), which are considered to be the gold standard of research trials.
This involves dividing the study population into two or more groups and randomly assigning individuals to each of these groups. By giving the intervention (for example the modified letter, the changed process, the new text message) to one of these groups while continuing to treat the other group as business per usual, we can determine the difference in effectiveness of each of the interventions. The key ingredient to this approach is the randomisation of individuals to groups, which enables us to assume that any difference in outcomes is attributed to the intervention rather than other factors.
5.22 In this respect, the IGT considers that there may be significant benefit in the ATO having regard to this applied behavioural insights research when considering improvements to its letter design process and communications with taxpayers. Such a process should specifically consider whether the proposed letters will generate the intended taxpayer response by reference to such matters as the level of content, detail and direction for taxpayers. It should also seek to minimise compliance costs arising for taxpayers, tax agents and the ATO itself by reducing unnecessary action.
5.23 Although the ATO already conducts some user-testing on Tax Time material, the ATO could ensure such user-testing seeks feedback from a diverse range of stakeholders to assure itself of the accessibility of its correspondence to the target group of taxpayers and tax agents. The development and inclusion of randomised controlled trials is an important design feature in this regard.
The IGT recommends that the ATO, having regard to the applied research emerging from the UK's Behavioural Insights Team:
- assess the effectiveness of the ITRIP letters to generate the intended behavioural response from individual taxpayers through the use of randomised controlled trials in correspondence design; and
- ensure that it acknowledges and deals with any information received by taxpayers or their agents in response to the ATO's ITRIP letters, including in cases where the ATO has not specifically requested information be provided.
Use of Reason Codes
5.24 Tax agents had previously raised with the ATO concerns regarding the lack of clarity as to why returns had been held and the specific reasons for delays in processing of income tax returns. In 2012-13 the ATO adopted a system of reason codes to inform tax agents of reasons for their clients' returns being delayed.
5.25 Specifically, the process involved the ATO sending a monthly email to the relevant tax agent, with an attached spreadsheet containing details of each of their clients whose returns were delayed and an accompanying reason code to provide a generic reason for such delay. Tax agents are then able to check these codes against more detailed explanations on the ATO's website171 or through the Tax Agent Portal.
5.26 The eleven reason codes which were used by the ATO in 2012-13 are:172
- Reason code 1: Potentially fraudulent and/or overstated claim.
- Reason code 2: Compromised TFN.
- Reason code 3: Manage an existing debt where the client is or has been insolvent and/or the debt requires further manual processing.
- Reason code 4: Compliance activities are being undertaken.
- Reason code 5: Verifying information provided in the return, cross-checking information held on our systems and/or performing manual calculations.
- Reason code 6: Processing other forms and/or payments for the client.
- Reason code 7: Manage an existing debt for the client.
- Reason code 8: Verify the identity of the client and/or tax agent.
- Reason code 9: Natural disaster impacts.
- Reason code 10: Awaiting advice from other Commonwealth Government agencies.
- Reason code 11: Accounting action in progress.
5.27 A sample of this report which the ATO issues to tax agents is provided in Figure 5 below.
Figure 5: Sample report sent to tax agents
5.28 Submissions to the IGT have noted that the reason codes are an improvement and provide a focus for discussion between tax agents and their clients. However, submissions have also suggested that the codes, while a good initiative, are so broad as to not be sufficiently informative.
Grouping fraud with overstated claims and lack of specificity of reason codes
5.29 It is clear from the list above that the ATO's reason codes are general in nature. For example, the ATO advises that reason code 1 'potentially fraudulent and/or overstated claim' is the code that it applies to all returns which are delayed as a result of review under the ITRIP or the HRR program. It notes that the remaining codes are applied to returns which are delayed for reasons unrelated to ITRIP or the HRR program, such as where it identifies that a return has been lodged with a TFN that the ATO considers to be compromised (reason code 2).173 Two concerns were raised by stakeholders in relation to the ATO's current reason codes which are addressed below.
5.30 The first issue of significant concern related to the ATO's grouping of 'potentially fraudulent' and 'overstated claim' in the one category as denoted by reason code 1 above. Taxpayer submissions to the IGT have noted the considerable shock and anxiety caused by the perception that the ATO considers them to be fraudulent. This is especially so for taxpayers who have a good compliance history and who strive to continue to comply in relation to their tax obligations.
5.31 Similarly, where returns were lodged through tax agents, submissions to the IGT have highlighted the tensions this has created between agents and their clients. In these cases taxpayers can perceive that their agent has acted fraudulently or negligently in the lodgement of the return.
5.32 As discussed earlier in this report, the difficulties and impacts associated with grouping fraud together with overstated claims are exacerbated by the ATO's public communications which emphasise the fraud element.174
5.33 The ATO acknowledges the need to distinguish between those taxpayers making a mistake while trying to do the right thing, and those who are intentionally disregarding their taxation obligations. As the ATO noted in the Second Report of its Cash Economy Taskforce:175
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.
5.34 The second concern in relation to the ATO's reason codes is that they do not appear to accurately reflect the taxpayer's circumstances and the reasons why the tax return has been delayed for processing. Examples provided by stakeholders include:
- reason code 1 [potentially fraudulent and/or overstated claim] being used where taxpayers have lodged nil tax returns;
- reason code 6 [processing other forms and/or payments for the client] in cases where no other lodgements or payments have been made to the ATO;
- reason code 7 [manage an existing debt for the client] where tax agents cannot see any debt owing by the taxpayer to the ATO through the Tax Agent Portal; and
- reason code 11 [accounting action in progress] which stakeholders have suggested is vague and does not specifically point to any factor which should delay processing of the tax return.
5.35 Moreover, the IGT observes some overlap between reason codes 3 and 7, both of which appear to centre on ATO's management of debt which may be owing by the taxpayer.
5.36 During the course of this review, the IGT was advised that the ATO is in the process of updating its reasons for delay to more accurately reflect the circumstances surrounding the delay and to address feedback from tax agents regarding some confusion which currently exists between reason codes 1 and 4. The ATO intends to use the updated reason codes from 1 July 2013.176 As at the date of this report, the ATO had not yet finalised its drafting of updated reasons for delay and as such, it was not possible to review the content of these updated reasons.
5.37 The IGT considers that there is significant merit in communicating reasons for delays with greater specificity. This is likely to better inform tax agents and allow for more meaningful engagement between the agent and their client as well as with the ATO and minimise costs for all parties. The IGT acknowledges that greater specificity may only be achievable to an extent, having regard to the high volumes of interactions within this market segment. However, where it is not possible to achieve a high degree of specificity, the IGT considers that the ATO could supplement its standardised letters with direct contact points to ATO officers who are able and authorised to provide taxpayers and their agents with more specific reasons.
5.38 A key area in need of greater specificity is more clearly distinguishing between fraud and overstated claims. It is important to remember that such a distinction necessarily turns on the intent and mindset of the person lodging the income tax return, which is not always readily discernible by automated processes. This is recognised in recent academic literature.177
5.39 Notwithstanding this difficulty and the ATO's move away from a focus on fraud in official communications, it is critical that the ATO develop mechanisms to differentiate between the types of risks, behaviours and taxpayer categories to ensure that compliance activities are both appropriate and proportionate to the situation. A failure to do so creates an appreciable risk of reduced community confidence in the ATO as a fair administrator and potentially undesirable behaviours being generated.
5.40 The IGT recognises that the ATO is seeking to better differentiate not only between cases of fraud and over-claiming, but also between higher risk over-claiming and lower risk over-claiming.178 In doing so, the ATO should also be mindful to ensure that its public communications reflect the fact that the vast majority of income tax returns reviewed are not dishonest or fraudulent.
The IGT recommends that as part of its ITRIP work to improve communication of reasons for delays in processing of income tax returns, including through the use of reason codes, the ATO:
- better distinguish between 'potential fraud' and 'overstated claims' cases;
- provide greater specificity as to why certain tax returns have been held for review, such as what label or what claims the ATO is seeking to address; and
- implement a mechanism for taxpayers and their agents to easily obtain more information where specific reasons cannot be provided in correspondence.
Agree in principle.
Changes to IT systems and business processes will be required to implement the requirements of this recommendation around updated reason codes. In some cases these requirements are quite complex. This work will be subject to prioritisation on the Enterprise Solutions and Technology Forward Program of Work.
Requesting taxpayer information and related timeframes
5.41 The ATO's general approach to information gathering for ITRIP cases is outlined in its pre-issue compliance business procedures. These procedures outline a general process to assist ATO officers in actioning pre-issue compliance cases.
5.42 Relevantly, these procedures instruct ATO officers that:179
The preferred method of contact is by phone, however, a letter is required if:
- you have been instructed to issue a letter by your team leader
- the review item requires a more detailed explanation
- you are instructed to issue a letter by the relevant method.
5.43 The instruction notes that where telephone contact is successful, the ATO officer is to seek additional information from the taxpayer to address the risks identified by the ITRIP. Specifically, the instruction states:180
If phone contact successful:
Obtain information and determine if documents are required from the taxpayer. The intent of phone contact is to:
- quickly obtain information,
- focus the review on the main areas of risk,
- discuss available documentation, and
- determine which risks require substantiation documents to be supplied (sampling).
Include a detailed note about the conversation and seek a timeframe for a response from the client if information has been requested. Include in your note:
- the person you have spoken with
- the information you requested
- the date that the response is due, and
- any other relevant information provided during the course of the telephone call
5.44 As the IGT observed in the Review of the Australian Taxation Office's use of early and Alternative Dispute Resolution (the ADR review), the ATO is not a party to the transactions which it seeks to review. As such, information is required from taxpayers to enable the ATO officer to arrive at the correct decision. However, the IGT also notes that sometimes, taxpayers may be unclear as to the exact nature of the ATO's inquiry and therefore may not understand what information is requested or how it is likely to assist the ATO to address its concerns.181
5.45 In the case of ITRIP reviews, submissions to the IGT have noted that the ATO's initial communications regarding areas of concern are sometimes unclear. Where the ATO does not clearly communicate its concerns and its area of inquiry, it may be difficult for taxpayers to appreciate the ATO's information requests. The IGT's recommendation 3.2 in the ADR review aimed to address this issue by ensuring taxpayers understood the reasons for information requests and enabling engagement and discussion on the scope and relevance and any alternative evidence which may assist the ATO.182 The ATO agreed with the recommendation but considered that it applied to larger more complex cases within the Large Business and International and Small and Medium Enterprise market segments.183
5.46 The IGT considers that dialogue and engagement of the type described above can, and should, occur in all compliance activities, including high volume cases such as those under the ITRIP. This is even more important in the present circumstances where the ATO interacts with a wide taxpayer population with varying degrees of tax technical proficiency. In particular, where taxpayers are not represented by tax agents, it is incumbent on the ATO to ensure that taxpayers understand the case against them and the reasons for information being sought. In the latter stage of this review, the ATO indicated to the IGT that its officers have begun to contact taxpayers by telephone to assist them with ATO enquiries before their case is finalised.184
5.47 The IGT notes that the ATO's pre-issue compliance business procedures do not expressly instruct or provide guidance as to how ATO officers can seek to ensure taxpayers possess the level of understanding necessary to manage ITRIP audits. It is implicit in the instructions that, given the ATO's preference for telephone contact, the ATO officers would verbally engage with taxpayers or their agents to outline the specific areas under review, what information is sought and why it is relevant to the ATO's inquiry.
Timeframes to provide information
5.48 Where telephone contact is made and additional information is to be provided, ATO officers are to allow 21 days for the provision of such information with a further seven days extension available at the taxpayer's request and subject to consideration of surrounding circumstances.185 Where telephone contact cannot be made, ATO officers are instructed to make detailed notes of the attempts. Officers are then required to make three further attempts before issuing correspondence to advise of any proposed adjustments and request that substantiating information be provided within 21 days.186
5.49 Submissions to the IGT have raised concerns that the 21 day period is sometimes insufficient. In this regard, stakeholders observed that the 21 day period is relatively short, especially where the information requested by the ATO may be difficult to obtain or where relevant parties are unavailable. Submissions have also compared the relatively short time allowed to taxpayers to provide information with instances of the ATO taking many weeks before making first contact with the taxpayer or their agent.
5.50 The ATO's procedures allow for limited extensions of time (to a maximum of seven days) based upon reasons provided by the taxpayer. Whether such an extension is sufficient, however, is dependent on the particular taxpayer and tax agent circumstances. These procedures make some reference to the possibility of longer or additional extensions of time subject to the ATO officer conferring with a technical adviser. However, the procedures do not outline when and in what circumstances extensions of time beyond the seven days would be granted.187
5.51 The ATO has advised that in developing longer term improvements to its management of ITRIP cases, it is seeking to provide taxpayers with sufficient time to provide the requested information.188 The ATO proposes to clarify in its internal procedures that stated timeframes are negotiable and should be based on the specific circumstances of the taxpayer or their agent.189
5.52 In addition to ensuring an appropriate level of understanding by the taxpayer, the IGT believes that ATO officers should possess greater authorisation, within appropriate guidelines, to allow extensions of time for taxpayers and tax agents to provide additional information. This would provide a more flexible platform for the ATO, taxpayers and their agents to effectively negotiate suitable timeframes within which to provide the requested information.
5.53 Where ATO officers possess greater authorisation and more guidance for good decision-making, the negotiations as to timeframes are likely to be more streamlined as the circumstances requiring technical adviser interjection should be limited. Accordingly, those cases in which referral to a technical adviser for consideration should only include those in which the circumstances are unique or more complex.
5.54 Extensions of time necessarily result in further delays in processing of tax returns and issuing of tax refunds. This consequence should be communicated clearly by the ATO to taxpayers and their agents to ensure they appreciate this trade-off.
The IGT recommends that the ATO augment its ITRIP information gathering procedures, including relevant written guidance or scripting, to:
- ensure that taxpayers understand the nature of the ATO's inquiry and information which may assist to address the ATO's concerns, including how the requested information is likely to impact any potential adjustments; and
- authorise ATO officers to grant extensions of time for the provision of additional information in appropriate circumstances, such as where the relevant taxpayers are unavailable or the information is difficult to obtain.
Communicating reasons for adjustments
5.55 It is important for the ATO to communicate specific reasons why it has made adjustments to a taxpayer's return. For individuals who prepare and lodge their own tax returns, this provides a good opportunity to better inform them for future years. For tax agents, the provision of specific reasons for adjustments enables a meaningful dialogue to be had between the agent and their client regarding improvements to future years' lodgements.
5.56 The ATO's standard finalisation letters (used since 2010) has a table for indicating which labels have been adjusted, the adjusted amount and a standardised reason for amendment. The reason provided in these letters is extracted from an internal spreadsheet by the ATO audit officer and incorporated into the finalisation letter.
5.57 The IGT's review of this spreadsheet shows that while it canvasses a wide range of income tax return items, many appear to have generic reasons, including:190
- as per your response we have removed the income declared in your return;
- as per your response we have reduced the income declared in your return;
- our records show you omitted this income from your tax return;
- income has been returned correctly; or
- based on your response we have increased the income declared in your return.
5.58 In dealing with specific deduction claims, the ATO's list of reasons seems more expanded. Outlined below are the available standard reasons for adjusting interest expense deduction on rent:191
- we have removed this claim from your return as you did not reply or provide the requested information by the response due date in the letter;
- as per your response we have removed the interest deductions declared in your return;
- you did not apportion your interest expense to account for private use of the funds;
- you did not provide evidence of your interest expense;
- your rental property was not rented on a commercial basis;
- you did not claim the interest expenses according to your ownership interest in the property;
- you did not provide the loan documentation to establish your entitlement to the interest deductions;
- interest expenses relate to a different financial year;
- interest deductions have been returned correctly; or
- based on your response we have increased the interest deductions declared in your return.
5.59 The ATO has advised that given the high volume of cases involved in the ITRIP, and in particular during 2011-12 when focus was shifted to processing and releasing refunds as quickly as possible, it was not practicable to deliver detailed reasons for adjustments made to taxpayer returns.
5.60 The ATO notes that subsequent feedback from tax agents suggested that this practice of using generic reasons created some difficulties for tax agents in managing their relationships with their clients.192
5.61 A further concern which has been raised with the IGT is that it does not appear that the ATO considers additional information provided by taxpayers prior to the ATO arriving at its final position. This may be symptomatic of the reasons for adjustments not being clear and sufficiently detailed.
5.62 In this respect, the ATO's pre-issue compliance business procedures do not outline any specific instruction or guidance as to how an ATO officer is to consider taxpayer-provided information in the conduct of their audit or review. It does, however, generally instruct:193
Make a decision on the outcome of the review based on available information.
If further information is considered necessary, phone the client, their representative or any third party and allow a further seven days to provide additional information.
5.63 It is reasonable to assume that by 'available information', the instructions refer to all available information whether it is derived from the ATO's systems, the ATO officer's independent research or information provided by taxpayers and their advisers.
5.64 These procedures, however, do not direct ATO staff to communicate with taxpayers or their advisers regarding how they considered the information in finalising the ATO position.
5.65 The IGT considers that where ATO officers and taxpayers have not had meaningful discussions about how the information obtained may affect potential adjustments of the taxpayer's return, the limited reasons contained in the finalisation letter may lead taxpayers to the view that ATO officers have not, or have not sufficiently, considered the taxpayer's information. This perception may also be as a result of taxpayers' returns, in some cases, being adjusted before the additional information provided by the taxpayer is received by the ATO.
5.66 The IGT notes that in developing longer term improvements for the management of ITRIP cases, the ATO intends to provide more detailed reasons for adjustments to taxpayers through its audit finalisation letters. The ATO also aims to deliver even more detailed reasons when requested by taxpayers if those contained in correspondence are inadequate.194
5.67 The IGT considers that improvements in the ATO's communication of reasons for adjustments made to taxpayers will improve the taxpayer and tax agent experience in relation to ITRIP. It will provide on the one hand an understanding of the reasons for adjustments and what further information may be provided in support of any review requests and, on the other, it will serve as a means to educate taxpayers on perceived ATO risks in relation to their returns for future years.
5.68 In developing such a mechanism, the IGT considers that the ATO should seek to ensure that:
- the provision of improved reasons does not unnecessarily delay the processing of tax returns and issuing of tax refunds; and
- the process is informal and minimises time and cost on the part of the taxpayer or their agent.
5.69 Another way in which taxpayers and their advisers may be assured that the ATO has considered information provided by the taxpayer or their agent is through direct dialogue and engagement. The ATO's preference for telephone contact in the conduct of ITRIP cases should facilitate timely and informal discussions between the ATO officer, the taxpayer and/or their agent as to how the ATO officer has considered the information, what implications this may have for potential adjustments and what further information may assist to address the ATO's concerns and to finalise the audit or review.
5.70 Consistent with the IGT's observations in his ADR review, such a dialogue early in the ITRIP process could assist to limit the need for lengthy detailed reasons for adjustments as the ATO officer, the taxpayer and their agents should be able to achieve a common understanding of the reasons for adjustments, how information provided has been considered and how it has impacted the adjustments.
The IGT recommends that the ATO:
- consult with external stakeholders on strategies to improve the specificity of communicated reasons for adjustments; and
- provide specific reasons for ITRIP adjustment decisions including how the ATO has considered information provided by taxpayers in making adjustment decisions.
Contacting taxpayers directly
5.71 An ancillary issue to those set out above relates to the ATO contacting taxpayers directly in ITRIP cases where taxpayers have listed tax agents as primary contacts and neither has indicated to the ATO that the taxpayer should receive correspondence directly.
5.72 Submissions to the IGT have indicated that where this occurs, it has the potential to create some anxiety for taxpayers, requiring the tax agent to first allay their client's concerns before dealing with the ATO in relation to the concern itself.
5.73 The ATO is also aware of this feedback from tax agent participants through its simulation centre.195
A majority of tax professional participants want to receive all letters before their client receives them
This request was made to allow the tax professional time to read the letter and make initial preparations prior to communicating with their client. In some cases, the tax professional would actively contact their client before the client receives the letter to let the client know what has happened and what the next steps will be. This allows the tax professional to communicate with the client before they are in 'panic-mode' from receiving the letter.
Not providing the tax professional with the letter before their client can result in the client calling the tax professional and ask questions the tax professional is unable to answer as they have not read the letter. The tax professional then needs to get the client to either tell them what the letter is about — which can be error prone as the client may miss important details; or send them a copy of the letter, which has time delays involved. Providing the tax professional with the letter before the client allows the tax professional to be better prepared when communicating with their client and allows for higher-value tax professional-client communications.
Some tax agents expressed frustration with the fact that the letters were sent directly to taxpayers, even where the tax agent was listed as the authorised contact. Tax agents submitted that they received phone calls from clients regarding benchmarking letters which the tax agent knew nothing about. Tax agents felt this 'put them on the back foot', and expressed concern that it made them look unprofessional and undermined their relationship with their client. One representative body expressed the view that if the tax agent is the authorised contact, then all communication should go to them first, and it is their prerogative rather than the ATO's, to determine how to approach the client. Nevertheless, some tax agents also expressed the view that they did not mind having the ATO contact their clients directly for these types of matters, as long as the tax agent was given the choice or at least informed first.
5.75 The IGT acknowledges the ATO's past efforts to consult with tax agents on the most appropriate points of contact to receive tax-related correspondence. The IGT also acknowledges that different taxpayers and tax agents will have different preferences on the receipt of correspondence and contact by the ATO. Much of this is generated by varying working dynamics and relationships between the tax agent and their client, and between them and the ATO. It may not be possible for the ATO to accommodate every permutation of this relationship.
5.76 The ATO's system allows some election for preferred addresses and contact points for tax matters. Taxpayers and tax agents can elect different contacts for different tax matters. The ATO advises that in relation to all income tax matters, the primary contact address which it uses is the address that is reported on the taxpayer's most recently lodged income tax return, unless either the taxpayer or the tax agent specifically requests another address to be used.
5.77 The IGT recognises that there may also be instances in which the ATO may need to contact taxpayers directly. In such cases, it is important to appreciate that some taxpayers may require the assistance of their tax agent to respond to the ATO. It is therefore beneficial to ensure that where the ATO intends to write directly to taxpayers that it identifies a means through which it can inform tax agents so that they may better prepare themselves for client interactions.
5.78 The IGT also recognises that there are certain circumstances in which it would not be desirable for the ATO to give notice of direct contact with taxpayers. For example, where the ATO is investigating cases concerning unregistered preparers or identity crime. However, such circumstances should be rare and should not form a part of the ATO's general ITRIP correspondence.
The IGT recommends that the ATO consult with the tax profession to identify and implement strategies to:
- ensure that specific ITRIP audit correspondence and enquiries are directed to the person designated by the taxpayer; and
- inform tax agents of ITRIP correspondence which the ATO proposes to use during Tax Time and on which their clients may seek advice and assistance.
159 Above n 76.
162 Above n 127, p. 11.
163 Above n 61, pp. 56-58.
164 Above n 76.
167 Above n 61, p. 24.
168 Joint Parliamentary Committee of Public Accounts and Audit, Ninth Biannual Hearing with the Commissioner of Taxation, Official Committee, Hansard, 23 September 2011, p. 15.
169 UK Cabinet Office Behavioural Insights Team, Applying behavioural insights to reduce fraud, error and debt (February 2012), p. 21.
171 A complete list of the codes and associated reasons are accessible here.
173 Above n 57.
174 See for example, ATO, Compliance Program 2012-13, above n 2, p. 17.
175 ATO, Improving Tax Compliance in the Cash Economy (April 1998), pp. 57 and 58.
176 Above n 57.
177 Kathleen M Carley et. al., 'Predicting Intentional and Inadvertent Non-compliance,' paper delivered at IRS Research Conference, Washington DC, June 29 - 30, 2010.
178 Above n 13, pp. 4 and 5.
179 ATO, 'Pre Issue Compliance Business Procedures', internal ATO document, task 6.
181 IGT, Review into the Australian Taxation Office's use of early and Alternative Dispute Resolution, 31 July 2012, pp. 28-30.
182 Ibid, p. 32.
184 Above n 92.
185 Above n 179, task 6.
186 Above n 179, task 6.
187 Above n 76.
188 Above n 179.
189 Above n 92.
190 ATO, 'COG RFD Enhancements Spreadsheet', internal ATO document.
191 Above n 190.
192 Above n 70; Above n 14.
193 Above n 179.
194 Above n 70; Above n 14.
195 Above n 127, p. 10.
196 Above n 61, p. 62
197 Ibid, p. 57.