Part 1: Introduction

Inland Revenue Department: Performance of Taxpayer Audit.

Purpose of Our Audit

The assessment and collection of tax revenue is an important function that the Government requires to fund its many programmes and policies – for 2002-03 the IRD expected to collect $41,569 million in gross tax revenue3. Detecting and deterring non-compliance through taxpayer audit is one important means of fulfilling the responsibility for maintaining the integrity of the tax system.

The purpose of our audit was to examine and provide information to Parliament and the public on how the IRD carries out its taxpayer audits to ensure that taxpayers have complied with the various Taxation Acts.

The authority for our audit is section 16(1)(a) of the Public Audit Act 2001, which enables the Auditor-General to examine the extent to which a public entity is carrying out its activities effectively and efficiently.

What We Did

We interviewed:

  • senior IRD managers and other staff – such as planning, finance, personnel, and information technology staff – in the National Office;
  • staff – senior managers, area managers, team leaders, and investigators – in the five service centres and in the Corporates Division; and
  • IRD lawyers, systems design staff, and those involved in quality assurance projects.

In order to hear a range of views from audit staff we held a series of focus group sessions. A number of these sessions were with senior investigators, while others were with more junior staff.

We also reviewed a large number of IRD documents, such as:

  • annual reports, departmental forecast reports, and the new Statement of Intent;
  • business plans;
  • planning documents;
  • internal monthly and other performance reports;
  • documents related to taxpayer audit strategies and projects;
  • specific audit files; and
  • reports from the Quality Measurement System.

During our visits to the IRD’s service centres we arranged meetings with local tax practitioners to hear their views on the performance of the taxpayer audit function.

We met with people from law and chartered accountancy firms and from local tax liaison committees. We also held discussions with the Institute of Chartered Accountants of New Zealand, the New Zealand Institute of Economic Research, and a Professor of Law who specialises in tax law.

At the initial meeting with the IRD in which we indicated our intention to conduct this audit, the Commissioner nominated a service centre manager to act as a liaison person between the IRD and our auditors. This manager led a team of two National Office staff who were dedicated to helping us with our audit, and provided documents and information to help us understand the IRD.

During the planning stage we had several discussions with the liaison team about its role. We emphasised, and the IRD agreed with, the need for our audit to be independent. Members of the liaison team attended interviews only when we invited them to do so.

The liaison team provided valuable assistance to us. Its members collated information, organised meetings, proposed who in the IRD we needed to speak to on certain matters, and ensured that we had access to the people that we indicated we wanted to interview.

Expert Advice and Guidance

We contracted external expertise. Kevin Fox, a recently retired audit partner from a large accountancy firm, assisted us in preparing the audit proposal, conducting the field work, and drafting the final report. Kevin has extensive experience as an auditor over the last 23 years.

We also obtained helpful guidance from John Waugh. John is a Chartered Accountant who, prior to his recent retirement from public practice, was a specialist tax practitioner. A past chairman of the Institute of Chartered Accountants National Tax Committee, he was also chairman of the government-appointed Consultative Committee on Tax Simplification, and a member of its Committee of Experts on Tax Compliance. In the private sector, John undertook a wide range of client assignments, including representing taxpayers in their dealings with (and investigations and audits by) the IRD.

What Our Audit Did Not Cover

Taxpayer audit interacts closely with many other parts of the IRD. We have referred to these other parts where they directly affect taxpayer audit, but we have not examined their role in any detail. These include the:

  • Technical Standards Group;
  • Technical Development Unit;
  • Technical and Legal Support Group;
  • Litigation Management Group;
  • Internal Audit Group;
  • Policy Advice Division; and
  • National Research Unit.

Owing to time and resource constraints, and the fact that the IRD was itself reviewing them at the time of our audit, we did not review the disputes process and compliance penalties regime, notwithstanding that they are a feature of taxpayer audit.

Nor did we analyse in detail all of the many systems and processes (such as the staff appraisal system) that the IRD uses to manage its taxpayer audit function.

Time and resource constraints also prevented us from benchmarking IRD’s taxpayer audit activity with other tax jurisdictions around the world. While this would have been an interesting and potentially useful exercise, the complexity of tax departments and the different legislation they operate under would have made meaningful benchmarking time-consuming and expensive.

We did not examine the compliance costs incurred by taxpayers audited by the IRD.

3: Estimated actual, before refunds. Estimates of Appropriations, 2003-04, parliamentary paper B.5 Vol. II, page 1130.

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