Richard PhilpNew ZealandInland Revenue Department

Session No. 7Conclusions for tax policy and revenue administration from compliance studies, perception surveys and micro and small business complaints about the administrative burden of taxation

PERCEPTIONS OFTAX AGENTS & SME BUSINESSESFOLLOWING AN AUDIT

MEASURING OUR EFFECTIVENESS

TAX AGENTS: To obtain their views of the audit experience to assist Inland

Revenue [IR] in making business planning decisions and areas where we can improve performance of the audit function.

provide IR with information to respond to stakeholder and media questions and commentary about the process of audit.

SMALL AND MEDIUM BUSINESS The primary objectives are to measure:

– businesses’ understanding and expectations of audits– overall perceptions of the audit experience– perceptions of specific elements of the audit process– businesses’ suggestions for improvement– likely effect of the audit on future behaviour.

TAX AGENTS SURVEY

First survey of tax agents TWO PHASED APPROACH:

1. QUALITATIVE exploratory In Depth interviews with 15 tax agents to explore a range of perspectives where they believe the audit process could be improved.

2. QUANTITATIVE survey of 300 tax agents using a structured questionnaire from the Qualitative interviews.

70% members of NZICA Margin of error +/- 5.7%

SME SURVEY

6TH Survey300 interviews conducted

by telephone in June 2009Margin of error +/- 5.6%

KEY FINDINGSTAX AGENTS SURVEY

Tax Agents generally have divided opinions about (a) their perceptions of the audit process and (b) IR’s overall performance.

The results point to some tensions in tax agents’ views between seeing their role as helping to reduce clients’ tax and increase their wealth, and assisting clients to become more tax compliant.

OVERALL PERCEPTIONS OF THE AUDIT PROCESS (TAX AGENTS)

Audits are perceived differently depending on their perceived focus

More aware of what the issue is

Know the scope of the audit

Can provide records quickly

Audit is concluded in a timely manner

Targeted focus

Not aware of what the issue is

Don’t know the scope of the audit

Have to give all records over

Audit takes longer and is more intimidating/encompassing

Broad focus

Overall perceptions of the audit process

18

13

6

6

2

32

29

22

25

19

26

22

36

29

37

14

23

20

25

25

9

14

13

14

11

2

5

0% 20% 40% 60% 80% 100%

Strongly agree (5) 4 3 2 Strongly disagree (1) Don't know

MeanScore

3.4

3.0

2.9

2.8

2.8IR targets the right types of taxpayers to audit

Audit process reassures you that you have done things correctly

IR does their best to ensure audit process is not stressful and intimidating for your client

IR takes a constructive, open approach to audits

Audit process helps you educate clients how to be tax compliant

Source: Q3aBase: All respondents (n=300)

Inland Revenue’s overall performance during audit

6 36 30 20 8

0% 20% 40% 60% 80% 100%

Excellent (5) 4 3 2 Very poor (1) Don't know

MeanScore

3.1

Source: Q10Base: All respondents (n=300)

COMPLIANCE AND PENALTIESPerceptions of shortfall penalties applied

25

14

7

17

19

38

24

18

16

24

20

15

14

11

18

25

12

12

9

23

14

1

22

2

0% 20% 40% 60% 80% 100%

Strongly agree (5) 4 3 2 Strongly disagree (1) Don't know

MeanScore

3.4

3.3

3.0

2.8Fair & reasonable for the type of error involved

Communicated to client within a reasonable timeframe

Disputed by client but paid as it was cheaper than cost of disputing

Consistent with shortfall penalties applied to others for a similar error

Source: Q5bBase: Respondents whose clients had shortfall penalties applied (n=88)

COMPLIANCE AND PENALTIESPerceptions of compliance costs incurred during the audit

25

10

7

26

22

7

23

22

6

10

21

13

11

24

60

4

2

7

0% 20% 40% 60% 80% 100%

Strongly agree (5) 4 3 2 Strongly disagree (1) Don't know

MeanScore

3.5

2.7

1.8

The compliance costs were reasonable given the issues involved

in the audit

The costs were reasonable given the length of time the audit took to

complete

Source: Q8Base: All respondents (n=300)

You did not pass all your audit related costs to the client as you felt

partially responsible for the audit

IN SUMMARY TAX AGENTS ARE;GENERALLY POSITIVE ABOUT GENERALLY NEGATIVE ABOUTInvestigators taking a pragmatic approach throughout the audit Investigators recognising the implications of any delays in the audit for tax agents’ clientsTax agents’ queries and requests for information during the audit being answered in a timely mannerKeeping tax agents informed about whether they have provided Inland Revenue with all the information they requiredThroughout the audit keeping tax agents well informed of any tax issues foundGiving sufficient explanation of the reasons for the audit outcomes.

Investigators showing greater consideration and understanding of clients business environment and impact of delaysReducing uncertainties, frustrations and anxieties created by being audited Being more informative about the processes involved Improving the timeliness of communication with respect to progress of the audit Reducing the time involved in being audited Conveying positive aspects associated with being audited by advising clients about ways in which they can improve their future tax compliance Demonstrating the fairness, reasonableness and consistency in application of penalties and compliance costs.

KEY FINDINGSSME SURVEY

OVERALL PERCEPTIONS

– 70% of respondents view the audit experience favourably in the 2009 survey, similar to 2008.

– 72% of respondents agree the audit was ‘handled well’ by Inland Revenue, compared to 71% in 2008

– 75% agree the audit was ‘conducted in a reasonable manner’ compared to 80% in 2008.

– Small decline in perception the audit experience helped SME’s become more tax compliant.

SME RATINGSAREAS WHERE RATINGS IMPROVED AREAS WHERE RATINGS DECLINED

Investigators; - being courteous- was easy to contact- did things when they said they would- clear and easy to understand communication Communication and timeliness; - written communication clear and easy tounderstand- audit scope and process clearly explained- given sufficient explanation of reasons foraudit outcomes- those businesses who had more tax to pay had IR’s expectations around payment explained.

Length of audit was reasonableInformed about the disputes processAudit ‘handled well’ by IR, and ‘conducted in a reasonable manner’ significantly less strongly agree.Was helpful in meeting future tax obligations.Kept well informed on audit progress and tax issues.

RESULT OF THE AUDITSME SURVEY

73% of businesses said the Investigator explained IR’s expectation around payment of additional tax which is similar to last year.

53% of businesses received a written explanation of the proposed tax adjustment whilst 12% did not. 32% said no adjustment was made.

51% of businesses who received a proposed tax adjustment said they were informed about the disputes process if they disagreed.

THEMES IDENTIFIED FROM BOTH SURVEY’S

POSITIVES NEGATIVES

Investigators did well in; - being courteous- was easy to contact- did things when they said they would- clear and easy to understand communication Communication and timeliness; - written communication clear and easy tounderstand- audit scope and process clearly explained- kept well informed on audit progress and taxissues.- given sufficient explanation of reasons foraudit outcomesHelpful in meeting future tax obligations;- audit helps to educate in tax obligations. (Tax Agents survey only)

Investigators could improve in;- being well prepared for meetings- make them feel they know what they are talking about- Commercial awareness – need to improve onTax Agents expectations.- had authority to make decisionsCommunication and timeliness; - audit gave greater understanding of tax obligations- kept well informed about when the audit wouldbe completed.- Audit completed in reasonable timeframe- IR takes a constructive open approach to auditsHelpful in meeting future tax obligations;- audit gave greater understanding of tax obligations(SME survey only)

INITIATIVES TO ADDRESS THE FINDINGS: Clear communication and discussion of the key findings of these surveys with

Investigations managers, especially team leaders and investigators plus associated business areas who contribute to the audit process.

Reinforcing the responsibilities and accountabilities expected of investigations at all levels.

Increased monitoring of audit timeliness and use of a Case Director role for selected cases where independent guidance and resolution is required.

Review relevant best practice statements to increase certainty for customers and ensuring practice integrity. Key examples include: customer contact and relationship practices; increased transparency with the customer around risks identified that lead to an audit; and the timeliness of referrals between investigations and other internal units who support the audit process, eg Legal & Technical Services.

Deploy use of e-mail as a communication channel [previously not an option] especially with tax agents [as well as taxpayers] during an audit - support this with clear operating practices.

Continue to improve the “commercial awareness” of investigators via:– knowledge sharing forums– use recently appointed staff with specialist/extensive external commercial experience to share

insights and knowledge on topical issues.

CONCLUSION