Part 3: Improving case selection and conduct of audits

Inland Revenue Department: Performance of taxpayer audit – follow-up audit.

In this Part, we:

Improving case selection and conduct of audits in 2003

In our 2003 report, we concluded that the management of taxpayer audit was highly devolved. Taxpayer audit staff had substantial discretion over selecting individual audits and the techniques they use. There was no standard practice to bind Investigators to proven methods of case selection, and practices varied widely. Audit manuals were out of date and not used consistently.

We recommended that the IRD:

  • implement best practice by routinely sharing all good ideas, and improve the availability of information across the organisation; and
  • identify the case management requirements of taxpayer audit, and purchase and/or create the tools to meet those requirements.

Our findings in 2006

Since our 2003 report, the IRD has:

  • implemented best practice across taxpayer audit, including introducing risk analysis to target audit resources;
  • implemented a number of improvements to the availability and sharing of information; and
  • taken steps to identify and address its case management requirements, and has implemented an interim solution for taxpayer audit.

Implementation of best practice

The IRD has implemented a number of improvements to the taxpayer audit procedures since our 2003 audit. Our 2006 follow-up audit examined a number of the examples of best practice specifically identified in our 2003 report.

All taxpayer audits now include a formal analysis of risk. Compliance Risk Analysts analyse risk at a national level across industry and tax type. They further refine this analysis to identify individual taxpayers and organisations before passing their analysis to Investigators for their input. This sharing of information results in a completed Risk Analysis Template, which is included on taxpayer audit files.

Taxpayer audit files are clearly indexed, and many working papers are now electronic. Since our audit in 2003, the IRD has made significant progress in improving the structure and content of the taxpayer audit files and the quality of record-keeping. We reviewed a small sample of files that included files where activity spanned a number of years. These showed improvements in the content and layout of the taxpayer audit files.

In addition, there is a standard process for signing off technical matters that involves a group of tax technicians set up by the Technical Legal Support Group (TLSG). This process is familiar to all taxpayer audit staff, and is detailed in the TLSG pages on the intranet.

The IRD aims to use the taxpayer audit resource efficiently by allocating 65% of its taxpayer audit resources to national risks and 35% to local emerging risks. Each year, a working party of experts, drawn from across the taxpayer audit sites, identifies a range of national audit risks. The IRD conducted a specific audit risk identification exercise in 2003-04, and has continued to refine this process. The national risks are supplemented by local risks, which are identified by the IRD’s local offices.

The IRD monitors taxpayer audit activity on a monthly basis, and produces six-monthly risk analysis reports that have limited commentary to interpret the data. Our analysis of the data for the period July 2004 to December 2005 indicated that the IRD spends about 75% of taxpayer audit time on national risks and 15% on local risks. Taxpayer audit staff spend the remaining 10% on “other” risks, which should be classified as national or local risks.

Information sharing

As part of the programme of projects to develop taxpayer audit, the IRD has reviewed the availability of and requirements for information, and devised a new taxpayer audit methodology, that was formally approved by senior management in February 2006. This methodology defines how information will be gathered, analysed, and shared with taxpayer audit staff to target their resources to address priority risk areas.

There will be a gradual transition to the new methodology during 2006-07. This will involve the IRD restructuring taxpayer audit functions to bring together those Investigators who currently deal with large corporate taxpayers and those who deal with small and medium-sized enterprises and individuals. The importance of sharing information is included in taxpayer audit staff’s new draft job descriptions.

The IRD holds a significant amount of information on its intranet. Investigators, Compliance Risk Analysts, and the TLSG have their own sections, which include pages for taxpayer audit manuals, best practice material, meeting minutes, details of current issues (such as recent rulings and new developments), and standard practice statements. Taxpayer audit staff regularly use the intranet resources in their work.

The IRD has improved its communication systems, and has an effective communication structure to ensure that all staff are informed about the changes taking place. This structure includes specific interest forums, formal presentations and workshops for all taxpayer audit staff, a comprehensive intranet, regular staff meetings at a local and national level, and regular newsletters. This has helped taxpayer audit staff across the country to understand and implement the operational changes to taxpayer audit activity.

As part of the new methodology for taxpayer audit, the team managing the programme of projects has recently released about 100 guidance documents on the intranet. These replace or supplement existing taxpayer audit manuals and support the new taxpayer audit methodology due to be implemented in 2006-07. This will give taxpayer audit staff time to become familiar with the content of the guidance documents and give some feedback before the IRD fully implements the new methodology.

Taxpayer audit staff participate in a number of forums that focus on high priority risk areas, including the National Compliance Risk Analyst Forum, Tax Evasion Forum, and Aggressive Tax Issues Forum. The IRD staff can access the summary notes from the forum meetings on the intranet. This provides a useful mechanism for sharing ideas and promoting a consistent approach to taxpayer audits across the IRD offices.

Case management

The Team Leaders currently monitor the progress of audits during regular meetings with Investigators. The Team Leaders access milestone reports that identify all current audits and the number of hours spent on each audit, and discuss any matters of concern that might cause delays, so they can be resolved.

In July 2004, the IRD implemented an interim case management system for taxpayer audit. This encouraged a more structured approach to investigative work, and promoted a change in working practices to encourage Investigators to focus on prioritised areas of risk.

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