Each year, the Australian Taxation Office (ATO) receives approximately 12.4 million income tax lodgements from individual taxpayers. The ATO takes the approach that it is neither possible nor realistic to expect that all returns be manually reviewed for potentially incorrect claims. Data matching is one of the tools which the ATO uses to assist in its verification of returns lodged by individual taxpayers. It consists of automated processes and analytics which are supplemented by manual intervention.1
The ATO's data matching processes compare individuals' tax return data with third party data obtained from a range of sources including state revenue authorities, financial institutions, state land title registries and other federal government agencies. Broadly, the ATO processes seek to identify 'mismatches' between the tax return data and the third party data. These mismatches form the subject of ATO enquiries, which may lead to audits or other compliance activities.
Concerns have been raised with the Inspector-General of Taxation (IGT) about the ATO's use of data matching, associated communications between the ATO and taxpayers and the consequential impacts on taxpayers and their advisers. These concerns can be summarised as follows:
- the accuracy, reliability and currency of the third party data relied upon by the ATO;
- the appropriateness of ATO actions resulting from identified mismatches including the perception that the ATO takes direct action based upon raw data rather than engaging with taxpayers to better understand the reasons for mismatches;
- the clarity and adequacy of ATO communications, including the identification of the third party data used and any actions the taxpayer may take to ensure the ATO has the most accurate information; and
- additional costs and time in understanding the ATO's concerns and resolving disputes.
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 of the ATO's income tax refund integrity program and the review of the ATO's administration of the excess contributions tax.
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 use of data matching in its compliance activities involving individual taxpayers with a specific focus on:
The accuracy, reliability and currency of the ATO's data matching processes including:
- the processes and procedures for identifying sources and selection of third party data; and
- the adequacy of processes to verify and refine data obtained from third parties (including investigating reasons for any mismatches with information provided in taxpayers' returns) before making contact with taxpayers.
The proportionality of the cost of conducting the data matching and associated activities to the resulting adjustments.
The nature and appropriateness of ATO action taken as a result of data matching, including:
- whether the communication to taxpayers was timely and sufficiently clear to enable them to fully understand the ATO's concerns;
- whether taxpayers were given an opportunity to respond and provide further information;
- the clarity and appropriateness of any information requests to taxpayers and tax practitioners and the reasons for such information requests; and
- the transparency and robustness of the ATO's processes for considering taxpayer responses.
The adverse impacts that the ATO's data matching processes can have on taxpayers and tax practitioners and the ATO's support to minimise these impacts.
The IGT invites you to provide written submissions to assist with this review. The IGT envisages that your submission will be divided into two parts:
- your experience in dealing with the ATO on compliance activities involving data matching; and
- opportunities for improvement.
Your experience in dealing with the ATO
It is important to provide detailed accounts of your experience 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 engaging a tax practitioner to assist in these dealings. Separately tax practitioners may wish to comment on and 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 issue at hand and resulted in increased costs and impacted on your personal or business affairs. The IGT also seeks examples of positive factors in the ATO's use of data matching.
The following questions are designed to assist you in setting out your experiences.
Questions for consideration - your experience
Q1. How and when did the ATO first alert you to its concerns that the information reported by you, or on behalf of your clients, may not be correct?
Q2. How did the ATO's initial communication enable you to understand:
- the source of third party data used by the ATO;
- the ATO's concerns or investigation;
- the proposed ATO action regarding your tax return; and
- what action you could take, such as providing further information or evidence to address the matter.
Please provide a copy of any correspondence.
Q3. What action did you take after the ATO's initial communication? If you contacted the ATO, what was the ATO's response? Did you consider that the ATO's response addressed your queries?
Q4. Did you check the accuracy of the information upon which the ATO relied? Did you consider that the ATO was correct? Did you feel that the ATO fully considered your information and position before arriving at its final decision? Did the ATO explain to you why its position had remained the same or changed?
Q5. Was the action taken by the ATO appropriate in your circumstance? If not, why was it not appropriate?
Q6. If your matter was resolved with the ATO, how was it achieved? How long did it take?
Q7. 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 these costs. How could these have been minimised?
Q8. If your matter was resolved with the ATO, how was it achieved? How long did it take?
Q9. 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 these costs. How could these have been minimised?
Q10. 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 support provided by the ATO?
Opportunities for improvement
The IGT invites you to identify opportunities to improve the ATO's use of data matching and its dealings with individual taxpayers and tax practitioners in this area.
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 should the ATO verify the accuracy of information that individuals report in their tax returns?
Q2. Do you support the ATO's use of data matching? What aspects of data matching do you consider desirable for both the ATO and taxpayers? Would there be situations where data matching was inappropriate?
Q3. How can the ATO assist taxpayers and their advisers to better understand its data matching processes and data sources?
Q4. What could the ATO do to ensure third party data used in data matching activities is more accurate, reliable and current without placing an undue burden on third party information providers?
Q5. How could the ATO's communications with taxpayers or tax practitioners be improved? Specific examples or suggestions are particularly helpful.
Q6. What could the ATO do to improve its approach to amending individual taxpayers' tax returns based on data matching? What information should be provided to taxpayers and what opportunities should be afforded to taxpayers to address any mismatches? What circumstances would justify the ATO not providing such opportunities? Please explain your views.
Q7. What ATO data matching processes are good examples or models and which are not? What are the characteristics which distinguish the two?
Q8. Are there any 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, Compliance Program 2012-13 (2012) pp 19-20.