3.1 Data matching has been, and continues to be, a significant part of the ATO's annual compliance program.120 Notwithstanding this, details about the ATO's work and approach in this area are limited. On the ATO's updated website, the IGT was only able to locate general references to data matching, as follows:121
Matching data from many sources
Matching external data with our own helps us to ensure that people and businesses comply with income tax, superannuation, goods and services tax and fringe benefits tax obligations. It also helps us to detect fraud against the Commonwealth.
Our data-matching programs make it possible for us to:
- detect people and businesses operating outside the tax system
- ensure that people and businesses required to lodge returns do so
- check that income and capital gains are declared correctly
- check claims for GST and fuel tax credits
- recover debt.
Data matching allows information from a variety of sources to be brought together, compiled electronically, then used for a range of public policy purposes. Strong laws protect your privacy in these processes.
We compare externally sourced data with information we already hold, such as that provided in tax returns or business activity statements. For example, we check whether taxpayers have declared their bank interest in their returns. We also cross-reference Centrelink payments with tax returns.
If we check your information it does not mean we think you're dishonest in your tax affairs, it is simply part of our largely automated bulk checking processes.
We do expect to find discrepancies at times and when we do, we take follow-up action.
3.2 Other channels through which the ATO outlines its data matching activities, such as the ATO's annual Compliance Program (now Compliance in Focus),122 its newly published Annual Plan123 and notices published in the Government Notices Gazette, outline what the ATO intends to do but not how it proposes to do it. In particular, very little has been published on how the ATO engages with third party data providers to obtain and validate data before comparing them to taxpayer-provided information. This may be contributing to the perception of taxpayers and their advisors that the ATO does little to validate third party data as discussed earlier in Chapter 2.
3.3 Accordingly, the IGT considers that there is a benefit in the ATO providing public information about its data matching processes, including those steps taken to refine and validate third party data before comparing them with information contained in corresponding tax returns. This should provide greater community confidence in the ATO's data matching activities.
The IGT recommends that the ATO publicly release information on the processes involved in its data matching activities, particularly those relating to refining and validating of third party data before comparing them to taxpayer provided information.
Notifying the taxpayer of potential discrepancies
3.4 Where a discrepancy is identified between the validated third party data and that reported by the taxpayer, the ATO's system issues a discrepancy letter. The ATO's high level process for notification of a discrepancy is illustrated in Figure 4.
3.5 The discrepancy letter is the primary means through which the ATO initiates contact with taxpayers or their agents. Generally, these letters seek to inform the taxpayer that the ATO has identified a discrepancy between data it holds and information lodged by the taxpayer. The letter requests that the taxpayer contact the ATO within 28 days (or a longer period where the taxpayer is residing overseas or multiple years are subject of review) if they disagree with the potential discrepancy identified in the letter or take no action if they agree with the discrepancy identified. The letter advises that an amended notice of assessment will be issued to the taxpayer if the taxpayer does not contact the ATO.
3.6 Where contact occurs between the ATO and the taxpayer or their agent, the ATO officer reviews the discrepancy and may seek an explanation or further documentation from the taxpayer to address the discrepancy. If the taxpayer is able to substantiate the reported income, the case is finalised with no further action, otherwise, the ATO officer amends the taxpayer's notice of assessment to the extent that the discrepancy remains.
3.7 In submissions to the IGT, concerns were raised in relation to the tone and content of the letters used by the ATO which may be causing confusion for taxpayers. Moreover, in discussions with the ATO, issues relating to the rate of non-response by taxpayers were also raised. These issues are discussed below.
Figure 4: Discrepancy letter - High level business process
Source: adapted from ATO information
Tone and content of the ATO's discrepancy letters
3.8 Submissions to the IGT have suggested that the tone and content of the ATO's discrepancy letters may be inappropriate. The letters are said to appear accusatory and that the ATO has already formed an opinion regarding the taxpayer's affairs without considering other possible explanations for the perceived discrepancy.
3.9 Stakeholders are also of the view that the letters lack sufficient information to enable taxpayers to understand the ATO's concerns and to allow for comparison against their own records.
3.10 The ATO has provided to the IGT copies of the discrepancy letters used across a range of BAU data matching activities, as well as those used in the CGT and FSI data matching projects.
3.11 Whilst the specific wording of discrepancy letters vary depending on the items subject to audit, the general approach seems to be to:
- identify the matched item;
- note that a discrepancy has been detected; and
- seek the taxpayer's assistance in clarifying the correct amounts for these items.124
3.12 In addition, each of the discrepancy letters contains a schedule outlining payment details including the source, the payer and the amount of the payment reported to the ATO by the third party data provider. The ATO also includes details of relevant bank accounts to which the payments have been made and whether the accounts were individually or jointly held.125
3.13 Taxpayers are reasonably informed about any potential discrepancies where the letter contains data fields which enable taxpayers or their agents to directly compare what they have reported and what the ATO has identified. Where such information is not provided in the letter, submissions have indicated that it becomes more problematic for taxpayers to ascertain the ATO's concerns and may lead to perceptions that the ATO is being unnecessarily accusatory in its enquiries. This is exacerbated in cases where the ATO is making enquiries in relation to previous years where taxpayers may not have the relevant information readily at hand.
3.14 In relation to the discrepancy letters used in CGT and FSI cases, the ATO has received some feedback from members of professional bodies on the content and details contained in these letters. In relation to CGT letters issued, feedback to the ATO has indicated that:126
... the ATO is making certain assumptions about CGT disposals and acting quickly to inform taxpayers they are aware of the disposals or what is believed to be the CGT liability without fully informing themselves, with information available to the ATO, about the proper circumstances of the sale.
3.15 Other feedback has been provided to the ATO that on occasions, the ATO's correspondence has been contradictory and has created confusion for taxpayers. The example provided relates to FSI letters in which the ATO was advised that:127
Some members have received letters from the ATO stating at the first instance that the ATO has received information from AUSTRAC that money has been transferred from a foreign country bank account to the client's bank account. The letter requests clients check to see if all foreign income has been properly declared and if so, no further action is required.
Clients duly check, and in the cases reported by members, either the money was not assessable income (for example, reimbursement for expenses incurred, a gift or inheritance) or was properly declared. Accordingly, no further action is taken by the client.
A subsequent letter is then received stating no response has been received and therefore the money transferred will be regarded as 'assessable income' and the client's income tax return will be amended accordingly.
3.16 The ATO notes that this experience most likely related to its following up of the OVDI in which letters were originally sent to the taxpayers to afford them an opportunity to self-assess their FSI reporting. While the letters required no action at the time, the ATO subsequently undertook data matching activities with respect to these taxpayers' records to identify possible instances of unreported FSI and contacted taxpayers again to outline the identified discrepancy.
Rate of taxpayer response to ATO discrepancy letters
3.17 In discussions with the IGT, the ATO has indicated that about 50 per cent of taxpayers do not respond to the ATO's initial discrepancy letters. In the 2012-13 financial year, the ATO has noted that the overall taxpayer response rate has declined to about 37 per cent. This rate varies when considering specific legislative and non-legislative projects. In relation to interest and employee share scheme cases, the ATO notes a response rate of 33 per cent compared with 81 and 82 per cent for CGT and FSI cases, respectively.128
3.18 It is curious that such a large proportion of taxpayers do not respond to the ATO's enquiries. As discussed earlier, a consequence of not responding to the initial discrepancy letter is that the taxpayer's tax return is adjusted and a notice of amended assessment issued.
3.19 The ATO, however, has suggested that this may be indicative of taxpayers agreeing with the ATO's data matched figures and, hence, they do not dispute the proposed adjustments.129 While taxpayer agreement with the ATO's data matched figures may be one reason for the low response rate, there may be other reasons. For example, taxpayers may have considered that the time and cost associated with contacting the ATO was not proportionate to the proposed adjustment, they may not have received the discrepancy letter or not clearly understood what the letter was requesting of them. If a significant portion of such taxpayers do not respond for those latter reasons, there is clearly cause for concern.
3.20 The ATO's discrepancy letter is the first contact between the ATO and taxpayers in data matching cases. Accordingly it sets the tone for the taxpayer/ATO relationship and future interactions.
3.21 Where the discrepancy letters include relevant data fields which enable taxpayers to easily understand the data matching information and to compare these against their own records, the taxpayer is likely to appreciate the ATO's concerns and the basis for any proposed adjustments. Moreover, it may also increase confidence in the ATO's data matching activities. However, it is not always possible for the ATO to present all such information, for example, in the real property CGT letters, the ATO can only estimate the cost base of the disposed property.130 In such circumstances, the ATO may be using the discrepancy letters to elicit further clarifying details from the taxpayer.
3.22 In some cases, although the ATO's discrepancy letters attempt to present the information on which it relies, it may give the appearance that the ATO has already formed a view regarding the nature of the transaction and the tax effect on the taxpayer. By way of example, the ATO's CGT letter notes:131
We are writing because information reported to us by State and Territory property authorities indicates you disposed of a property in the <year> financial year.
3.23 Such a statement may convey a sense of finality to the taxpayer. This is especially so when it is coupled with the schedule attached to the discrepancy containing a table purporting to be the adjustment to the taxpayer's tax return.132
3.24 Moreover, the IGT notes that in some letters, the ATO outlines the possibility that amended assessments may issue notwithstanding that the taxpayer tried to provide more information. Specifically, these note:133
If you write to us or fax us within 28 days, our policy is to contact you before we issue an amended assessment. If you receive an amended assessment before we have contacted you, we will review the amended assessment against the information you provided in your original response. Where appropriate, we will contact you before making any further adjustments to your tax return.
3.25 The IGT has been advised that the intent behind this statement is to alert taxpayers to the fact that on occasions, information may not be received by the ATO at the time that assessments are due to be issued and any amendments made would be reviewed in light of new information received.
3.26 Notwithstanding this intent, it is possible that the statement could create some confusion for taxpayers who may be led to believe that the amendments will issue regardless of whether information is provided or not. Such an interpretation may impact on the taxpayer's willingness to engage with the ATO and may lead to perceptions of the ATO having already reached a conclusion.
3.27 The IGT is of the view that, to the extent possible, the ATO should seek to ensure that it conveys its position in a concise and clear manner which does not appear to construe guilt or finality as to the taxpayer's position. One way of facilitating this is for the ATO to more effectively user test proposed correspondence before implementing it for general use.
3.28 The ATO also acknowledges the need for its correspondence to clearly and concisely convey to taxpayers any discrepancies identified through data matching and impact on their tax returns. To this end and in response to the IGT's current review, the ATO has adopted an ongoing program to user-test all of its data matching correspondence, beginning with those used in CGT, FSI and interest data matching cases.134
3.29 In conducting this user-testing, the ATO utilises a simulation centre to assess the usability and comprehensiveness of a range of its correspondence by presenting it to a range of taxpayers and tax agents for comment. The simulation centre then collates the feedback and makes recommendations for improving the documents used by the ATO. The IGT notes, however, that not all correspondence have been subject to this testing.
3.30 In the review into the ATO's Income Tax Refund Integrity Program,135 which operates within the same market segment, the IGT noted the recent observations made by the Commonwealth Ombudsman regarding the ATO's communication with individual taxpayers and the opportunities which exist for the ATO to enhance its understanding of the 'behavioural' responses to its communications.136
3.31 The IGT also noted 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:137
... 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.
3.32 Accordingly, the Behavioural Insights Team's research notes that:138
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.
3.33 Given the ATO's ongoing program to user-test data matching correspondence, the IGT considers that there may be significant benefit in the ATO having regard to the above applied behavioural insights research. Such a process should specifically consider whether the proposed letters will generate the intended taxpayer response by reference to matters including the level of content, detail and direction to taxpayers. It should also seek to minimise compliance costs arising for taxpayers, tax agents and the ATO by reducing unnecessary action.
3.34 The IGT considers that the above proposed action would also be beneficial to better understand the reason for taxpayers not responding to ATO discrepancy letters and taking appropriate action to remedy the situation.
ATO officer research
3.35 A concern related to the tone and content of initial discrepancy letters which has emerged from the submissions, is the view that the ATO does not appear to be undertaking additional research of its own systems to understand the reason for the discrepancy prior to contacting taxpayers. This is so, even where stakeholders perceive that often information available to the ATO on its own systems may be sufficient to answer its queries. For example, the ATO may be able to verify whether a property was the taxpayer's main residence prior to its disposal or whether the discrepancy identified had been the subject of audit in prior years. The ATO has also received similar feedback through its ATO Tax Practitioner Forum.139
3.36 The perception is likely a result of taxpayers believing that the ATO manually reviews all discrepancies prior to issuing discrepancy letters. This is not the case. As outlined in Chapter 2, the ATO matches potential discrepancy cases against its corporate data holdings to exclude any cases verified through this process from audit. This process is automated with the exception of complex discrepancy matters as well as CGT and FSI cases discussed earlier.
3.37 As such, most 'research' which is undertaken prior to discrepancy letters issuing is done automatically through ATO systems. In relation to discrepancies which are manually reviewed, for example real property CGT, an ATO officer may compare the details of the property identified as having been disposed against taxpayer's past addresses on the ATO's system to determine whether a main residence exemption may apply.
3.38 The IGT's review of the ATO's discrepancy letters indicates that prior research is presented in one of three ways. Firstly, in some discrepancy letters, the ATO alerts taxpayers that this automated verification has been undertaken prior to the discrepancy letter issuing to the taxpayer. This is most notable in the letters regarding CGT and the disposal of real property, which state:140
When disposing of a capital gains tax asset such as property, you need to consider your capital gains tax obligations. Generally, your main residence is exempt from capital gains tax. This exemption is called the main residence exemption. For your information, included is a fact sheet about the main residence exemption.
We have been unable to confirm that the property disposed of was your main residence. Therefore you do not appear to be entitled to the main residence exemption. [emphasis added]
3.39 Secondly, some discrepancy letters do not make reference to any additional research or verification the ATO may have undertaken. Instead, these letters note that the identified discrepancy may have occurred for a number of reasons and inviting taxpayers to assist the ATO in clarifying this.141
The attached schedule shows amounts from the disposal of shares acquired through an employee share scheme that we have matched against your 2008 tax return. As the total amount matched appears to exceed the amount shown at item 18 Capital gains on your tax return, we seek your assistance to resolve this discrepancy.
There might be several reasons for the apparent discrepancy. We ask that you review the information in the schedule against your records to help us clarify your correct capital gains tax obligations.
3.40 A number of other letters do not make any reference to additional research or checks and only point out that a discrepancy has been detected and taxpayers need to check their records. By way of example, the FSI letter notes:
We are writing to you about foreign source income for the <year> financial year. We have received information from foreign revenue authorities and Australian Transaction Reports and Analysis Centre which indicates you may not have included all of your foreign source income in your year tax return.
As an Australian resident, you are taxed on your worldwide income. This means you need to declare all assessable and exempt income you receive from foreign sources in your tax return. Assessable foreign income includes most pensions and annuities, including income such as interest, dividends, royalties, rent, capital gains and personal services income.142
3.41 As discussed above, the ATO's initial discrepancy letter may in some cases lead taxpayers to the view that the ATO has reached a final conclusion in relation to their tax liability. This sense of finality may be exacerbated where the ATO's discrepancy letters do not sufficiently outline the nature of any research undertaken by the ATO prior to it contacting taxpayers.
3.42 While some of the discrepancy letters do make general reference to additional automated research, the majority of letters are silent on the point. The IGT appreciates that not all areas of the tax law have statutory exemptions which may require further research on the part of the ATO officer beyond what is detected in the data matching. However, where the ATO does not make any comment on further research or checks it has taken, or reasons why additional research has not been undertaken, taxpayers and their agents may assume that the ATO has chosen not to, rather than there not being any further internal checks the ATO can undertake.
3.43 Moreover, in relation to those letters which do make a statement in relation to additional research or verification steps taken by the ATO, it may not always be enough to merely state that some research or cross-checking had been undertaken. There is a benefit in the ATO expanding upon and illustrating the nature of checks which have been undertaken prior to the issuing of discrepancy letters. This would not only increase confidence of taxpayers in the system, but would also better enable taxpayers or their agents to direct the ATO as to areas which may be explored to address the ATO's concerns.
The IGT recommends that the ATO:
- improve the effectiveness of data matching correspondence to generate the intended behavioural response by, for example, conveying more details regarding any research that it has undertaken to resolve the discrepancies before contacting the taxpayer; and
- use randomised controlled trials to evaluate the effectiveness of such correspondence.
The ATO will continue to explore opportunities to improve our letters through the use of behavioural economic principles in our correspondence.
Further engagement with taxpayers and their advisers
3.44 Some stakeholders have noted that, following the receipt of the discrepancy letter, the engagement with the ATO has been successful with the ATO accepting appropriate explanations and managing the case in a timely manner. In other instances, submissions have expressed concern including the number of different ATO officers dealing with the matter, the officers being unaware of their circumstances and the absence of opportunities to meet with the ATO officers to discuss the issues.
3.45 In relation to the first issue, IGT understands that in areas of high volume and low value cases, it may be desirable to not allocate cases to specific officers. This design seeks to enable taxpayers and their agents to contact the ATO at any time convenient to them and to be able to discuss their case with the ATO officer who answers the call. However, such a structure necessarily requires that all ATO officers dealing with these matters to be wholly aware of the history of the case so that interactions between the taxpayer, their agent and the ATO progress smoothly.
3.46 The primary means through which ATO officers apprise themselves of the history of discussions between taxpayers and the ATO is through reviewing relevant file notes. The quality and consistency of the ATO's file noting system is therefore critical. Continuous conversations between the taxpayer and multiple ATO officers must be file noted clearly and with sufficient detail to enable any other ATO officer to appreciate the history and developments of a case and what action is required to finalise it.
3.47 The ATO internal instructions to its staff require that ATO officers record the following details in its file notes:143
All notes must be detailed, including specific information about:
- the topic of the phone call or correspondence
- the full name of any third party contact (that is, tax agent or authorised contact)
- any specific information provided in relation to the taxpayer including
- any research or steps taken to verify information provided
- who you have sort advice from (TTA, TL etc) and what that advice was [sic]
- what systems you used to establish your decision or researched data
- your response to the query detailing the reasons for that response
- any escalations made to technical advisors
- Siebel activity ID of inbound correspondence or phone call
- the date the correspondence was received or date and time of the phone call
- if a letter is sent for approval, the Siebel activity ID
- record only the last four digits of bank account numbers.
3.48 The ATO's internal IQF evaluation of a sample of data matching cases for the 201112 financial year indicates a portion of these cases failed to adhere to existing processes for appropriate file notes. Specifically, the ATO identified insufficient file noting in six per cent of closed cases and nine per cent of open cases.144 While the percentages of these cases appear to be generally low, when extrapolated to the numbers of data matching cases, the quantity of affected taxpayers may be significant.
3.49 Following the release of the IQF evaluation, the ATO issued a suite of facilitator-led training materials focusing on quality file-noting in compliance activities. The training reinforces the need for ATO officers to maintain file notes of all transactions with taxpayers and their representatives, in a form suitable to be made public if required.145 The ATO has advised the IGT that this training was mandatory for all active compliance staff within the ATO.146
3.50 In a subsequent IQF evaluation of data matching cases, the ATO noted that it did not encounter some of the issues which commonly arose in the past, such as inadequate notes. The report states that file notes in the cases examined were of a generally high standard, suggesting that learnings and trainings arising out of earlier evaluations had effectively flowed through to current case management.147
3.51 In respect of opportunities for face to face meetings with appropriate ATO officers, the IGT appreciates that in high volume, low value work areas, it is not always possible to accommodate face to face meetings or extended ongoing discussions to address specific data matching matters as this may result in unnecessary delays.
3.52 In his review into the ATO's use of early and alternative dispute resolution (the ADR review) the IGT noted:148
… that the ATO and taxpayers should work towards building and maintaining a kind of engagement which minimises the occurrence of disputes by developing a clear understanding of each other's position on the facts, evidence and findings of fact. An outcome of such a process may be the development of clear points of agreement or disagreement (as the case may be) and, in the latter case, an understanding of the reasons for such disagreement.
3.53 In the same report, the IGT also recognised the difficulties faced by the ATO in relation to high volume cases, including those arising out of data matching. While it is not possible for the ATO to engage in face to face meetings and extended ongoing discussions with every taxpayer involved in these cases, it is also important to recognise that not all taxpayers will request that the ATO do so.
3.54 Moreover, where face to face meetings cannot be accommodated, the ATO's processes and correspondence encourage engagement and dialogue through telephone, written correspondence and facsimile. The IGT considers that effective engagement through these channels on the part of both the ATO and the taxpayer would do much to assist in resolving matters of concern. As technology evolves, it may be that other channels may also provide more effective pathways for dialogue and issues resolution.
Requesting taxpayer information
3.55 The ATO's data matching systems only identify possible discrepancies needing to be verified by ATO officers. As such, it relies on explanations and information from taxpayers to address the concerns. All versions of the ATO's initial discrepancy letters outline this process, as illustrated in the extract below from a CGT letter:149
If you believe you are entitled to the main residence exemption and we should not amend your tax return or you do not accept the information in the schedule, you need to contact us within 28 days from the date of this letter. We will then let you know if you need to provide any supporting information.
3.56 Accordingly, the letter contemplates the possibility of 'contact' with ATO officers to discuss the reasons for the potential discrepancy and provide an opportunity for the ATO to request additional information. Such a discussion is helpful to ensure that taxpayers do not engage in information-gathering where it may not be necessary. However, the language of the letter may be confusing for some taxpayers.
3.57 In submissions stakeholders raised concerns regarding the ways in which the ATO requests taxpayer information in data matching cases. The main concerns were that:
- the information request is not sufficiently clear and reasons are not provided for the relevance of such information;
- there are limited opportunities to engage with the ATO on information requests; and
- in some cases the ATO is refusing to reduce its information requests to writing despite the taxpayer asking them to do so.
3.58 Each of these points is considered below.
Ensuring taxpayers understand what is sought and why
3.59 In the ADR review, the IGT made a number of observations in relation to the importance of providing the appropriate information to address the ATO's concerns and the need for the ATO to ensure that taxpayers understood the reasons why the information is requested.150
3.60 The IGT notes that the ATO's preference for telephone contact in relation to data matching should enable a dialogue to commence between the ATO and the taxpayer. Such dialogue provides an opportunity for the ATO to convey the nature of the discrepancy detected and what information the taxpayer could provide to address these concerns.151
3.61 The IGT's examination of the ATO's procedures, in relation to CGT and FSI data matching, suggests that staff are instructed to address taxpayer queries regarding the nature and extent of the discrepancy and the reasons for the ATO inquiry. Outlined below is an extract of instructions and details provided to staff in responding to certain FSI queries.152
Request further details on the transactions
The taxpayer or tax agent may request further information to assist with the identification of the source of the foreign income ...
The additional information is limited to what is displayed in Austrac and the information each relevant revenue authority provided to us under the double taxation agreement (DTA).
It should be noted that DTA countries report income in terms of their own fiscal years some of which are different to Australian this may in some instances cause income declaration in an incorrect financial year.
If necessary, the taxpayer or tax agent should contact the payer for verification and/or provide a copy of the tax return lodged with that revenue authority. This may involve them requesting an extension of time to respond as they may have to seek information and/or evidence from overseas.
3.62 The instructions also outline other possible explanations for discrepancies and the type of information which may be used to substantiate the discrepancy. For example, in relation to the overseas transfer into Australia of the taxpayer's own money, the instructions outline the following:153
Transfer of savings
It is usually quite straight forward where the taxpayer has transferred funds from an overseas bank account to an Australian bank account. In this case usually the taxpayer has worked/lived in the foreign country, built-up savings and then migrated to Australia.
Confirm using AUSTRAC information the money was transferred from an overseas account in the taxpayer's name.
If you are unsure whether the funds transferred are genuine savings you can request available documentation such as:
- bank statements showing the money was in the account for the full financial year
- copies of a visa
- employment contracts
- citizenship documentation.
The overseas bank statements for the full financial year should confirm the bank account number reported in AUSTRAC. Also, the following information may help with interpreting the statements:
- If the amount shown on the bank statement is less than what was in the account at the start of the financial year, this could be due to everyday expenses.
- If the amount is slightly higher than the original amount shown it could be due to receiving interest which should be returned in their ITR if earned while an Australian resident.
- If the amount shown is significantly more than the money transferred it is probably not the same funds.
3.63 Similar instructions and guidance are available on the ATO's intranet in relation to other data matching projects, both legislative and non-legislative.154
3.64 The IGT considers that the above guidance should provide ATO officers with a basis for meaningful dialogue. However, the guidance should only be considered to be a starting point for discussions between the ATO and taxpayers and not a definitive set of scripting to which ATO officers are bound.
3.65 When communicating with taxpayers on data matching cases, ATO officers need to be mindful of the varying degrees of tax technical proficiency possessed by individual taxpayers. They should clearly and concisely communicate the reasons for any information requested and why it is relevant to the audit. Instructions to this effect need to be included in the ATO's internal guidelines and be periodically reinforced in communication to relevant staff.
3.66 It should also be noted that, currently, the internal ATO case actioning instructions to staff make no mention of ATO officers considering information other than those in the taxpayer's possession or otherwise obtainable by the taxpayer. For example, while the instructions direct ATO officers to consider requesting certain documents (such as copies of visas, employment contracts and citizenship certificates) to confirm a taxpayer's overseas residency, these instructions do not allude to the existence of information maintained by the Department of Immigration and Citizenship (DIAC) which may be available to the ATO upon request.
3.67 As discussed earlier, during the current review, the ATO implemented a manual checking process for FSI and CGT cases before selecting them for audit. As part of the ATO's FSI manual checking, instructions have been put in place for officers to consider DIAC information to determine the residency status of taxpayers.155 In addition, the ATO has advised the IGT that during data matching audits, ATO officers are able to request information from other government agencies, such as DIAC, on a case-by-case basis. However, the instances in which such a request would be appropriate and how to make the request are not presently contained in case actioning instructions.
3.68 The efficient use of data held by other government agencies may be facilitated by the ATO instructing its staff as to the appropriate circumstances in which such data may be used and how the information may be requested.
The IGT recommends that the ATO update its internal instructions to staff involved in data matching activities to:
- reinforce that ATO officers should ensure taxpayers understand the information being sought and how that information is relevant to the investigation;
- identify potential sources of data held by other government agencies (such as DIAC) which may assist the ATO in its data matching audit activities; and
- outline the circumstances in which it would be appropriate to make information requests from other government agencies and the procedures that should be followed in making such requests.
Opportunities to engage with the ATO
3.69 The text of the ATO's discrepancy letter invites the taxpayer to contact the ATO for a discussion of the potential discrepancies. The telephone discussions can be a less formal, time efficient and useful way of ensuring that taxpayers understand the ATO's concerns and any actions required on their part to finalise the matter.
3.70 However, in some instances, telephone contact alone may not be sufficient to enable taxpayers to understand the ATO's request and to provide appropriate information. It may also be helpful to supplement the telephone discussion with a meeting in certain cases. It is difficult to be prescriptive about when a meeting would be necessary as each case turns on its particular circumstances. However, the ATO should be open to such an option in appropriate cases and when requested by the taxpayer.
3.71 It should also be noted that when engaging with taxpayers, the ATO should ensure that its officers appreciate the difficulties that some taxpayers may have in providing the information requested as the latter may be held in overseas jurisdictions or the passage of time or the complexity of the information presents a major challenge. Furthermore, some taxpayers may need to provide an explanation or otherwise elaborate upon the information provided. Sufficient opportunity to engage in these types of discussions would ensure that the ATO receives appropriate information to address its concerns.
Confirming information requests in writing
3.72 Submissions to the IGT have indicated that in some cases, ATO officers have not agreed to taxpayer requests for matters to be put in writing. The ATO has advised that while it prefers informal telephone engagement in these cases, it is not the ATO's policy to refuse to reduce matters to writing in appropriate cases and where requested by the taxpayer.156
3.73 Notwithstanding that this may be the ATO's policy, the IGT notes the internal ATO procedures reviewed by the IGT do not make any reference to requesting information in writing. The IGT notes that not all taxpayers will require written requests and that the absence of specific instruction does not necessarily mean that ATO officers will refuse to do so.
3.74 To ensure that the ATO's policy on written information requests is understood, the IGT considers that it would be appropriate for the ATO to communicate to its staff that information requests may be provided in writing in appropriate cases, such as where the request is lengthy or complex or where requested by taxpayers or tax agents.
The IGT recommends that the ATO update its current data matching procedures to emphasise that ATO officers may make information requests in writing where:
- specifically requested to do so by taxpayers or their agents; or
- the information is lengthy or complex.
The ATO will update our procedures and internal instructions to staff involved in data matching activities.
Considering taxpayer-provided information and communicating adjustment decisions to taxpayers
3.75 The ATO's current data matching process only issues finalisation letters where cases selected for audit result in no further action. An example of a CGT finalisation letter in which no further action was required is outlined below:157
We have completed our audit of capital gains on shares you may have sold during the year ended 30 June <year>. Based on the information you/your tax agent provided regarding your shares, we will not be taking any further action on this matter.
Please note that completion of this audit does not prevent us from initiating further action if warranted.
3.76 Where a data matching audit results in an adjustment being made to the taxpayer's return, the ATO has advised that no finalisation letter issues to the taxpayer. In these cases, the ATO notes that notification of the adjustment is reflected in the taxpayer's amended notice of assessment.158 The ATO expects that, prior to any adjustment being made, its staff have communicated with taxpayers and their agents about the proposed adjustments and how any information provided by the taxpayer has impacted the proposed adjustment.159 Similarly, the ATO's case actioning procedures require its staff to communicate the outcome of the case to taxpayers and their agents and 'provide appropriate education to ensure the mistake does not reoccur.'160 An ad hoc finalisation letter may be provided if requested by the taxpayer.161
3.77 The ATO believes that where there has been engagement and dialogue between taxpayers, their agents and the ATO throughout the audit process, the taxpayer is likely to be in a better position to understand the ATO's concerns and reasons for the decision thereby removing the need for additional correspondence.
3.78 However, as the data matching process is generally automated, amended assessments may issue directly to taxpayers where there has been no contact with the ATO. In these cases, taxpayers will receive a notice of amended assessment without any accompanying letter to explain the amendment.
3.79 In addition to the potential for creating confusion for taxpayers regarding reasons why adjustments may have been made, the absence of a finalisation letter may also give the appearance that ATO officers are not considering taxpayer-provided information or other information the ATO may have considered in arriving at its final position. Such concerns align with similar submissions made in relation to the IGT's review of the ATO's income tax refund integrity program, another area which deals with 'high volume, low value' cases.
3.80 The IGT notes that ATO officers are required to consider all information, both internally held by the ATO and that provided by taxpayers, to determine whether an adjustment is required to the taxpayer's return.162
3.81 The IGT considers that it is important for ATO officers to communicate to taxpayers how information which they have provided is being considered and its likely impact on any proposed adjustments. This level of understanding is critical in enabling taxpayers to understand whether there is any further information which the taxpayer may provide to assist the ATO in its inquiry or to determine whether in the taxpayer's view, the ATO officer has erred in their decision. As acknowledged by the ATO, it is also a useful way of seeking to ensure that the taxpayer does not make a similar mistake in the future.
3.82 In some instances, taxpayers may not understand the ATO's position and the reasons why any adjustments have been made to their return. They may therefore seek to engage professional advisers to assist them. The absence of written reasons for decisions may make it difficult for these taxpayers to effectively to instruct their advisers.
3.83 As stated earlier, there are some circumstances where amended assessments may issue without any verbal communication between the ATO and taxpayers. The ATO considers that, in such cases, the information contained in its initial discrepancy letter when read together with the amended notice of assessment should enable taxpayers and their agents to appreciate what adjustments have been made and the reasons for those adjustments. However, this may not be possible where taxpayers do not receive or understand the discrepancy letter or where they are unrepresented or do not possess sufficient tax knowledge.
3.84 Ideally, the IGT considers that where the ATO makes a decision which varies a taxpayer's liability, the ATO should provide a finalisation letter with reasons for its decision to accompany the notice of amended assessment. The issuing of such a letter with reasons for decisions would serve a number of important purposes including:
- enabling taxpayers to understand the reasons for an adjustment, forming a view as to the correctness of the decision and determining whether to challenge the decision;
- improving confidence in the system and maintaining a good relationship with taxpayers; and
- minimise the risk of similar mistakes occurring in future.
3.85 The ATO has advised that the requirement to issue finalisation letters for all cases where adjustments are made would require a significant increase in workload. The ATO considers that these additional resources, together with current limitations on its information technology systems, would create inefficiencies within the data matching program without a significant corresponding benefit to the community.
3.86 The IGT appreciates the ATO's concerns relating to increase workload not being commensurate to the benefits flowing to taxpayers. However, pursuant to the principle of natural justice, taxpayers are entitled to a full explanation regarding any adverse decision which affects their rights and liabilities. Furthermore, there may be costs savings in the longer term as appropriate finalisation letters may result in better informed taxpayers who may not make reoccurring mistakes in subsequent years.
3.87 In balancing the administrative costs for the ATO and taxpayers' rights, the IGT is of the view that the ATO should at the very least ensure that taxpayers are aware that they can request a full written explanation for any adverse data matching adjustments made.
The IGT recommends that the ATO widely communicate to the public, through such channels as its website, the initial discrepancy letter to taxpayers and tax agents and its consultative forums, that taxpayers may request a full written explanation regarding any adverse adjustments made to taxpayers' liabilities at the conclusion of data matching activities.
Action undertaken by the ATO from data matching
3.88 The discrepancy letters generally allow taxpayers a period of 28 days in which to reply to the ATO. However, stakeholders have expressed concern that 28 days is not sufficient time in many cases163 and have particularly voiced their dissatisfaction at amended assessments issuing prematurely.
3.89 The ATO has advised that extensions of time for the provision of information may be granted at the taxpayer's request. However, submissions to this review have recounted circumstances in which the ATO has issued amended assessments before the expiry of the extension periods. The ATO notes that such situations may occur as a result of extensions of time not being properly entered on its WinCAS system.
3.90 Similar concerns were also raised in relation to amended assessments issuing in instances where taxpayers were actively engaging with the ATO to resolve issues. In one case, the taxpayer noted that despite being subject of ATO data matching activities on the same issue over two years and engaging with the ATO to address the matter in each year, an amended assessment issued prematurely which took many months to reverse.
3.91 The circumstances in which amended assessments issue prematurely should be minimised. It potentially creates confusion and stress for taxpayers who feel that they have done the right thing but the ATO has disregarded their efforts and the information which they have provided.
3.92 Moreover, where taxpayers are concerned about the nature of the assessment, they may progress matters through an adviser for the purposes of an objection or challenge against the amendment. Such a course of action is undesirable and results in unnecessary time and cost being expended.
3.93 The ATO should seek to understand the underlying causes for amended assessments issuing prematurely and prevent their occurrence. One way in which the ATO could prevent this is to require ATO staff to contact taxpayers, with whom previous contact has been made, and verify whether information has been, or will be, sent in response to the ATO's request. To avoid circumstances where cases may become protracted, ATO officers may also use this conversation to emphasise the urgency of the information requested and the need to finalise matters such that further contact and extensions may not be possible.
The IGT recommends that the ATO identify the causes of amended assessments issuing prematurely and to prevent the occurrence of such events by, for example:
- clearly communicating the channels through which taxpayers should direct their responses to ATO enquiries;
- where prior communication has been established, instructing staff to contact taxpayers to verify whether the taxpayer has sent or is sending the required information before cases are finalised; and
- developing systems-based rules to ensure that taxpayer correspondence records are checked before amended assessments are issued.
The ATO will update internal instructions to staff involved in data matching activities to reinforce existing processes.
120 ATO, Compliance in Focus 2013-14, pp. 11, 16, 19 and 27; ATO, Annual Plan 2013-14, pp. 6, 10 and 11.
122 ATO, Compliance in Focus, above n. 120.
123 ATO, Annual Plan, above n. 120.
124 ATO, Interest advisory letter.
126 Above n. 37.
127 Above n. 37, Item 6.
128 Above n. 22; ATO, communication with the IGT, 27 August 2013.
129 Above n. 16.
130 ATO, CGT Revised Letter Template, 2013.
131 ATO, CGT Disposal of Property Letter.
133 ATO, FSI Mislabel Single Year.
134 ATO, Usability Testing Report - foreign source income and capital gains tax letters, Micro Enterprises and Individuals, 25 June 2013, p. 3.
135 Above n. 4.
136 Joint Parliamentary Committee of Public Accounts and Audit, Ninth Biannual Hearing with the Commissioner of Taxation, Official Committee, Hansard, 23 September 2011, p. 15.
137 UK Cabinet Office Behavioural Insights Team, Applying behavioural insights to reduce fraud, error and debt, p. 21.
139 Above n. 15
140 Above n. 131.
141 ATO, CGT Employee Share Scheme letter.
142 ATO, FSI DTA AUSTRAC letter.
143 ATO, CGT Case Actioning Procedures, internal ATO document; ATO, FSI Case Actioning Procedures, internal ATO document.
144 ATO, Micro Enterprises and Individuals Data Matching and Compliance Strategies Integrated Quality Framework May-June Report, August 2012, p. 8.
145 ATO, Quality Notes for Compliance Learner Workbook, September 2012, internal ATO document.
146 ATO, communication with the IGT on 26 August 2013.
147 ATO, Micro Enterprises and Individuals Data Matching and Compliance Strategies Integrated Quality Framework May-June Report, August 2012, p. 8.
148 IGT, Review into the Australian Taxation Office's use of early and Alternative Dispute Resolution, July 2012, p. 25.
149 Above n. 131.
150 Above n. 148, pp. 28-32.
151 Above n. 143.
152 ATO, FSI Case Actioning Procedures, above n. 143.
154 Above n. 15.
155 ATO, Case selection process overview, July 2012, internal ATO document, p. 1; ATO, FSI AUSTRAC case selection process, July 2012, internal ATO document, p. 3; FSI case selections fully discrepent DTA case pool, July 2012, internal ATO document, p. 1.
156 ATO/IGT meeting, 24 January 2013; Above n. 16.
157 ATO, CGT No Further Action letter.
158 Above n. 16.
159 See for example, ATO, CGT (Property) case actioning procedures, above n. 143, telephone enquiry, item 5.
160 See for example: ATO Above n. 143, actioning correspondence, item 5.
161 See for example: section 28 of the Administrative Appeals Tribunal Act 1975.
162 Above n. 15; ATO, FSI case actioning procedures, Above n. 143.
163 Tax practitioner submission to ATO South East Queensland Regional Tax Practitioner Working Group, July 2012, p. 4.