6.25 Stakeholders had raised concerns that the risk models used in the ITRIP were not accurately detecting cases of incorrect or fraudulent returns. As part of his IGT ITRIP Review, the IGT has analysed the strike rates to determine the rate at which returns stopped and held for investigation were the subject of adjustments.
6.26 Furthermore, the IGT has also examined the average adjustment amounts to assist in determining the actual risk posed by returns stopped via the ITRIP models. However, the use of strike rates and average adjustments as a means to assess the accuracy of risk tools used in ITRIP is limited if there are no benchmarks against which the results can be judged.
6.27 For example, a random sampling of the risk population may indicate a certain strike rate if the returns were stopped at random. Ideally, risk assessment tools would yield strike rates above this benchmark. Chapter 8 further discusses the use of strike rates and random sampling.
6.28 Any changes in the strike rate and average adjustments may be attributable to changes in other variables, such as general community compliance levels and the behaviour of the risk population, rather than directly being attributable to the risk models themselves.
6.29 With respect to data-matching, the ATO receives data from a variety of sources. Each data-set has a different level of quality and usefulness. For example, legislative data, such as interest payment information received from financial institutions, is generally of a high quality since the type of information and its format is mandated by law. For example, the type and format of information is designed to
334 Inspector-General of Taxation, Review into the Australian Taxation Office’s Compliance Approach to Individual
Taxpayers – Income Tax Refund Integrity Program.
allow the ATO to readily match the identity of the account holder with the identity of the taxpayer.
6.30 Other data sources, known as non-legislative data, may have a low quality and may not be a reliable source of information for the ATO. For example, some state-based property disposal data does not have sufficient identifiers to enable the ATO to match the vendor’s identity with that of the taxpayer. This is because state-based property disposal data is mostly focussed on the identity of the purchaser, as they are usually the party liable for stamp duty.
6.31 When data cannot be relied upon with a high level of confidence, the ATO needs to take care in any subsequent compliance activity which is based on that information. The ATO notes that for pre-filling electronic tax returns, the ATO will only use information that has a high confidence level. Medium and low level confidence level data is disregarded.
6.32 The IGT also notes that the government has included additional funding in the 2013-14 Budget to enhance the quality of data provided to the ATO. This includes data in relation to real property. Such measures should increase the quality of data, and the level of confidence with which the ATO can rely on it.
Proportionality
6.33 In relation to data matching, concerns regarding proportionality differ according to the specific data matching program. For example, adjustments of low amounts of income may be reasonable for one taxpayer in their circumstances but for other taxpayers with lower incomes, such amounts and associated compliance costs may represent a much higher proportion of their income. Therefore, the actual adjustment amounts, the associated compliance costs as well as the circumstances of the target population, are important factors in understanding proportionality.
6.34 In relation to ITRIP, stakeholders have raised concerns that the ATO compliance approach with respect to refunds was not proportionate to the risk posed. An important element of risk is the distinction between fraudulent claims (fraud) and incorrect claims resulting from errors and mistakes (over-claiming).
6.35 The ATO regards fraud as a higher risk compared to over-claiming. This distinction is consistent with the ATO’s Compliance Model in Figure 3 in Chapter 2. It is important, therefore, that the ATO’s compliance approach is sufficiently differentiated so that those taxpayers who over-claim due to mistakes are not subjected to ATO activity more appropriate for fraud cases.
6.36 In the IGT’s ITRIP Review336, it has been observed that the ATO often bundled fraud and over-claiming concerns in the same communication. For example, reason codes given to tax agents to explain why their clients’ tax returns were being held included ‘Reason code 1: Potentially fraudulent and/or overstated claims’.
6.37 Furthermore, since the ITRIP stopped refunds as part of pre-issue compliance activity, stakeholders raised the question of whether cases of potentially limited over-claiming that are not fraud are more appropriately addressed as a post-issue activity, that is, after the refund is issued, to reflect the lower level of risk.
6.38 Lack of differentiation of different risk such as the one in the ITRIP example above, may increase taxpayer and tax agent perceptions of unfairness in the way the ATO is treating taxpayers and may negatively affect levels of voluntary compliance. 6.39 As indicated in the ATO Compliance Model, the ATO attempts to distinguish between taxpayer attitudes to compliance, ranging from ‘willing to do the right thing’ through to those who have decided not to comply. The model also indicates, that in light of different taxpayer attitudes, the ATO should also respond in such a way as to positively influence taxpayer behaviour.337 This distinction is reinforced elsewhere in ATO publications. For example, in the ATO’s Second Report of the Cash Economy Taskforce, it is asserted:
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.338
6.40 The extract above highlights the importance of taxpayer perceptions of fairness. In the context of the ITRIP, this means the ATO action should also be proportionate to the risk posed by the taxpayer. The ATO Compliance Model needs to be viewed in its historical context. It was originally a model for guiding ATO decision making in relation to sanctions for confirmed non-compliance. The approach in more recent times requires a more holistic consideration of the taxpayer experience and relationship.
337 Australian Taxation Office, Introduction to the Compliance Model (25 March 2009) <http://www.ato.gov.au>. 338 ATO, above n 52, p 58.