The Inspector-General of Taxation's (IGT) review into the ATO's income tax refund integrity program (ITRIP) is one of three concurrent reviews examining aspects of the ATO's compliance approach to individual taxpayers. The ITRIP comprises a series of analytical models designed to detect instances of overclaimed deductions, offsets or other credits in income tax returns. The ATO stops these returns for manual review before any refunds are issued to the taxpayer.
The review arose out of taxpayer and tax agent concerns regarding extended ATO delays in processing income tax returns held for review under the ITRIP. Significant complaints were raised with the Commonwealth Ombudsman, the ATO's Complaints section and the IGT in 2011-12 when higher than expected numbers of tax returns were held (109,000 returns were held when only 33,000 had been expected) leading to extended delays in the processing of those returns. This was exacerbated by the inability of taxpayers or tax agents to ascertain specific reasons for such delays or to have their returns expedited. Moreover, it was contended that the ATO's communication led to the perception that the ATO considered these taxpayers to be dishonest or fraudulent.
Following the experience in 2011-12, the ATO embarked on a significant program of work to refine the ITRIP models and processes to stop fewer tax returns and reduce timeframes. This review confirms that through user-testing of its correspondence, the ATO has improved its communications to affected taxpayers by providing greater clarity of timeframes for release of their refunds. Moreover, through its public communications, the ATO has placed less emphasis on potential fraud as a reason for returns being held to allay taxpayer concerns and anxiety. In relation to concerns that the ITRIP only stopped and adjusted tax returns with small refund amounts, the IGT found that statistics over a three year period indicated that of the stopped returns 5.29 per cent in 2010-11, 1.85 per cent in 2011-12 and 2.87 per cent in 2012-13 contained refunds of $1,000 or less.
Stakeholder submissions to the review acknowledged the improved experience with ITRIP in the 2012-13 financial year. However, they have raised concerns regarding delays that have persisted, the inadequacy of the ATO's communication and the inability of taxpayers and their agents to intervene early and request their returns be expedited.
The IGT has identified a number of areas for improvement and has made a total of thirteen recommendations aimed at:
- continuously improving the time taken to review cases held under the ITRIP by increasing staff levels at appropriate times and exploring strategies to make use of third party data to verify taxpayer claims;
- adopting a differentiated approach to prioritising and expediting the processing of tax returns in appropriate cases;
- improving the specificity of reasons given for tax returns held and reasons for any adjustments made as a result of the ITRIP;
- continuing to engage with tax agents through site visits and other communications to alert tax agents to ITRIP processes and correspondence which may be sent to their clients;
- adopting behavioural economic concepts and utilising randomised controlled trials to test the effectiveness of correspondence used in the ITRIP;
- raising awareness of cost-effective and efficient dispute resolution strategies to address challenges to ITRIP decisions and monitoring the use of default assessments to limit instances of such assessments issuing to compliant taxpayers;
- maintaining robust and streamlined governance processes to avoid uncertainties, duplication and inefficiencies; and
- developing and maintaining comprehensive reporting systems to measure the effectiveness of fraud detection and treatment strategies.
The ATO has agreed in full to twelve recommendations and agreed in principle with one. In respect of the latter (Recommendation 5.2), the ATO has noted that implementation of the recommendation will require information technology systems and business process changes. Owing to the complexity of some of the proposed changes, the ATO has advised that this will be subject to prioritisation on its Enterprise Solutions and Technology Forward Program of Work.