The ATO reports on tax agent compliance while preparing tax returns
What does our(ATO) compliance activities tell about agents who prepare returns for individuals?
- First, there is a group of agents who get it right. These are the agents who go by the book – they ask the right questions of their clients, help their clients understand what can be claimed in their particular circumstances, and do not allow their clients to claim deductions which are invalid, unjustified or unsubstantiated. These agents are exemplars of the tax profession.
- Next, there is a group of agents – by far the largest – who make avoidable errors. At times, these agents claim deductions that:
- have an insufficient connection to income;
- cannot be substantiated;
- relate to claims for private expenses;
- are calculated on the basis of an incorrect apportionment of costs between private and work use;
- use exceptions to substantiation rules as a ‘standard’ deduction, regardless of whether the client has actually spent the money.
ATO enquiries show there are a number of factors that contribute to this misreporting. These include a lack of care taken to prepare the return, time pressures, outdated knowledge and pressure to accommodate their clients' inflated or unrealistic expectations of a refund.
- Finally, there is a relatively small proportion of agents who deliberately overstate claims for deductions to gain an unfair advantage and by doing so, seek to increase their market share. These are the agents the ATO considers higher-risk. This minority display unacceptable behaviours such as:
- intentional and sustained misreporting;
- taking positions contrary to established law;
- exaggerating deduction claims;
- falsifying deduction claims; and
- in some instances, committing fraud against the Commonwealth or their clients.
While perhaps unexpected, the findings from the release of the tax gap estimate for individuals not-in-business need to be addressed. If not, misreporting – whether it be avoidable or deliberate – will continue to undermine the integrity of the tax system and the tax profession, particularly for those who are doing the right thing.
Following the release of the individuals not-in-business tax gap estimate, the ATO has been made aware of some questions being asked by professional associations and tax practitioners about the methodology and the reliability of the sample size used to estimate the gap.
This document draws together relevant information from our web content to provide answers to questions related to the methodology we used to estimate the gap, the design of our random enquiry program (REP), and our confidence in the tax gap estimate figure.
- An independent expert panel had input to and endorsed the ATO's methodology, including the reliability of the ATO's gap estimate.
- The independent expert panel consists of:
- Professor Neil Warren (Professor of Taxation at the University of New South Wales)
- Mr Richard Highfield (Adjunct Professor with the School of Taxation and Business at the University of New South Wales and former advisor to the Organisation for Economic Co-operation and Development)
- Mr Saul Eslake (independent economist and Vice Chancellor’s fellow at the University of Tasmania).
- A former Deputy President of the Administrative Appeals Tribunal, Stephen Frost, conducted an independent review of a sample of completed random enquiries. The results of the review were presented to the ATO and independent expert panel and confirmed the thoroughness and technical accuracy of the completed audits.
- The reliability of the gap estimate for individuals not-in-business has been assessed by the panel as medium with reference to a reliability assessment framework that is based on guidance provided by the International Monetary Fund approach to gap estimation.
Tax gap methodology
- The methodology adopted for developing the gap estimate for ‘individuals not-in-business’ is consistent with that of tax bodies in other advanced economies.
- The individuals not-in-business tax gap estimate has been calculated using a range of evidence sources, including operational data and the results of our REP, which is applied to the broader population. For example, the ATO drew on operational data for specific compliance risk areas such as failure by employers to withhold, non lodgment of tax returns and non-payment of debts. This was then combined with findings from the REP.
- The conduct of a stratified REP combined with operational data is considered best practice methodology for preparing income tax gap estimates given the size and make-up of the population. The program followed a specially designed audit preparation and execution methodology that was reviewed and accepted as sufficiently robust by the independent expert panel.
- The REP sample was stratified based on income, and the proportion of agent-prepared returns was representative of the total individuals not-in-business population. The independent expert panel endorsed the sample size (858) as being sufficient to provide an adequate representation of the population and to produce statistically reliable results, especially given the largely homogeneous nature of the individuals not-in-business population.
- It should be noted that all published tax gaps are estimates and generally fall within a range. For more information, refer to our web content. While not yet completed, the results of the REP for individuals not-in-business taxpayers for the 2016 financial year are generally in line with those of the previous two years, giving the independent expert panel further confidence that the tax gap estimate is statistically reliable.
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More information is available here: Individuals not in business income tax gap methodology