Part 4: Strengthening capability

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

In this Part, we:

Strengthening capability in 2003

In our 2003 report, we concluded that the IRD was identifying the changes in capability that taxpayer audit staff would need, which would in turn require Investigators to acquire capabilities they did not then have. The IRD needed to prepare detailed plans to bridge the gap covering Investigator training, availability and use of technology, and collecting and using intelligence about taxpayer compliance behaviour.

We recommended that the IRD:

  • draw up a standard induction programme for new Investigators;
  • review its technology strategy;
  • urgently define the intelligence needs of taxpayer audit in the context of the Taxpayer Compliance Model, and initiate projects to meet these needs; and
  • clearly communicate the role of Compliance Risk Analysts (CRAs) to staff.

Our findings in 2006

Since our 2003 report, the IRD has:

  • introduced a standard induction process for new Investigators, and implemented a comprehensive national training framework for Investigators and CRAs;
  • reviewed and refined its technology strategy and its audit strategy, and made improvements in the technology and tools available to Investigators;
  • identified its intelligence needs and devised the final strategy, which it will implement in 2006-07; and
  • communicated the role of CRAs, and the support they can provide to other staff.

Staff induction and training

The IRD has introduced a comprehensive induction programme for new Investigators.

The IRD has established an Investigator Training Framework for new and existing staff. This is made up of discrete modules. Staff work on the modules relevant to their needs and expertise, and use a formal Training Needs Analysis created by the IRD to identify which modules they need to work on.

The IRD also undertakes an annual performance review with all staff. Training needs are identified as part of this process. They are monitored every six months, and revised every year.

The IRD is implementing a new structure for taxpayer audit, and this will link in with the Investigator Training Framework to give more opportunities for career progression.

Use of technology

At the time of the 2003 audit, the IRD’s technology strategy covered the period 2002 to 2005. The IRD reviewed this strategy in 2006 and produced an IT strategy for 2006 to 2011, which was approved by senior management in June 2006.

The taxpayer audit strategy in place in 2003 covered a range of projects including:

  • formulating a number of key audit principles that senior management approved in June 2003;
  • implementing an interim solution for case management within taxpayer audit; and
  • implementing a specific taxpayer audit technology project.

The IRD brought all the projects together into a formal programme of projects in August 2004.

The IRD completed the first taxpayer audit technology project ahead of schedule in December 2003, and started a further taxpayer audit technology project. The IRD formally terminated this second project in May 2004 when the drafting of the programme of projects began. Its objectives were included in the new programme. One of the core projects under this programme relates to defining intelligence needs and technology requirements. The project team managing this programme of projects has also produced the new methodology for taxpayer audit mentioned in paragraph 3.11.

The technology available to the taxpayer audit staff has improved since 2003. In 2004, the IRD introduced the interim solution for case management and started work on an organisation-wide solution. There is a comprehensive intranet and a range of computer-based tools that assist in the analysis of data gathered from taxpayers. The IRD has also made improvements to the efficiency of the main analytical database, allowing better interrogation of internal data.

Intelligence needs

The IRD initially defined the intelligence needs of taxpayer audit in a formal strategy document in May 2005. These needs were further refined during the development of the new taxpayer audit operating methodology drafted in December 2005, which will be gradually introduced during 2006-07. This methodology was approved by senior management in February 2006.

The IRD has made various improvements to the analytical database since our 2003 audit. All the relevant data has been loaded into the database, and a new server has been introduced to improve stability and speed. The IRD has upgraded the query reporting tool, and CRA staff are able to share common folders to access query tools more efficiently.

Technical changes have been made to the main analytical database. These allow taxpayer audit staff to access information more effectively and efficiently. This helps the IRD to meet the legislated timescales for processing GST refunds.

Compliance Risk Analyst role

The CRA role is now a key part of taxpayer audit. The CRA staff have formal job descriptions, and the IRD has created a training framework tailored to their needs. At the time of our audit in 2003, there were two CRA staff at each of the five Service Centre locations. There are now 28 CRA staff across the organisation.

There is a CRA section on the intranet, which is accessible to all taxpayer audit staff. This holds details of the CRA role and a variety of reference material. There is a CRA National Forum, which meets quarterly and is attended by CRA representatives from each of the five Service Centre locations. The summary notes from these meetings are also available on the intranet.

CRA representatives also participate in other national forums, and have liaison responsibilities with other taxpayer audit teams at each of the five Service Centre locations. These include attending team meetings and being a point of contact for queries.

There is a National Portfolio Holder for CRA staff, whose responsibilities include promoting the CRA role and ensuring that their skills are employed effectively. The CRA staff are involved in a number of projects across the country (including PAYE Evasion, Manipulation of Personal Income, and Industry Monitoring), which has helped to raise their profile with Investigators and increase understanding of the resources they offer.

The IRD has introduced a system whereby CRAs run reports from taxpayer data and identify instances where the data suggests that a taxpayer is not complying with tax law. In some instances, the IRD sends letters to taxpayers to invite them to comply and submit the relevant documentation. The IRD monitors the responses, and considers those taxpayers who fail to respond for further audit activity. This is a means to focus activity on specific areas of concern, and to encourage compliance without undertaking formal taxpayer audits, which is a more efficient use of resources.

When the IRD introduces the new methodology for taxpayer audit in 2006-07, the risk and intelligence staff (including CRAs) will have a major role in completing initial risk analysis to identify higher risk of non-compliance with tax law. These staff will give their assessments to Investigation Team Leaders for further assessment before final selection and distribution to Investigators.

We reviewed the six-monthly risk analysis reports, which analyse how Investigators spend their time. These show the changes in how Investigators use their resources and the amount of additional tax assessed due to audits resulting from CRA risk analysis activity. (CRA risk analysis focuses taxpayer audit resources on areas where there is high risk of taxpayer non-compliance.)

Our analysis of the figures in these reports indicated there were differences between the IRD offices in the level of additional tax due, which has been highlighted as a result of the CRA risk analysis. Our work indicated that some IRD offices generated better returns than others. There was no commentary in the risk analysis reports that we reviewed to explain these variations, so it was difficult for us to assess the effectiveness of the CRA analysis.

The IRD needs a better mechanism to measure the effectiveness of CRAs when it monitors and reports the levels of additional tax assessed from taxpayer audit hours spent across all IRD offices. It should be in a position to give attention to this once the new methodology is integrated into regular practice. This would make it easier to assess the effectiveness of the new methodology.

Our conclusions

The IRD has implemented our recommendation and a tailored induction process is now in place for new Investigators, and the IRD has implemented a national training framework for new and existing Investigators and CRAs.

The IRD has reviewed and refined all the project and strategy documents mentioned in the recommendation in the period since 2003. In our view, the IRD has taken steps to implement our recommendation, and there have been improvements in the technology and tools available to Investigators. However, the longer-term effect of these changes and developments is unlikely to be measurable until the new methodology for taxpayer audit is integrated into business operations in 2006-07.

In the three years since we published our report, the IRD has identified its intelligence needs and has devised the final strategy for implementation in 2006-07. The main analytical database is now an integrated part of the taxpayer audit process. It is an important tool for more than 150 users, including the CRAs who use it to interrogate data to identify potential areas of non-compliance with tax law. In our view, the IRD has made significant progress towards implementing our recommendation, but there is still work to do to implement the final strategy.

In our view, the IRD has implemented our recommendation, and has communicated the CRA role and the support CRAs can provide to other staff. As a result, the volume of risk analysis undertaken by the CRA staff has increased. This is expected to increase further as the new methodology for taxpayer audit becomes integrated into business operations, when CRA staff will provide risk analysis for all audits to more than 800 Investigators.

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