Part 5: Measuring and reporting on performance

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

5.1
In this Part, we:

Measuring and reporting on performance in 2003

5.2
In our 2003 report, we concluded that the performance measures being reported could be having unintended effects, as Investigators could select cases that would easily achieve the targets rather than improve taxpayer compliance.

5.3
We recommended that the IRD:

  • distinguish between the different types of discrepancies identified by taxpayer audit, to provide a more transparent view of the value of additional tax assessed when reporting to Parliament;
  • complete the review of its quality management system; and
  • explore ways of assessing the impact of audits on taxpayer compliance.

Our findings in 2006

5.4
Since our 2003 report, the IRD has:

  • introduced clear guidance to classify and report errors identified through taxpayer audit activity, which is reflected in the detail of the annual report;
  • completed the review of the quality measurement system, and implemented all of that review’s recommendations; and
  • introduced a number of measures to assess the impact of taxpayer audits on taxpayer compliance.

Reporting

5.5
The IRD introduced a best practice statement in July 2005 to detail how it should report additional amounts of tax assessed. Management promoted the statement during visits to IRD offices, and made it available on the intranet. Investigators regularly refer to the statement during audits. The IRD measures compliance with the statement’s requirements through its internal quality measurement process.

5.6
The IRD’s Annual Report for 2005 highlights the amounts of additional tax assessed in graphical format showing:

  • comparisons between actual and budget figures;
  • amounts due following self-corrections by taxpayers;
  • amounts refunded;
  • reports of the IRD’s progress in challenging tax avoidance schemes; and
  • underpayments of tax due to tax evasion and fraud.

Review of the quality measurement process

5.7
The IRD operates an internal quality measurement process whereby nominated IRD staff review a sample of completed taxpayer audit files and mark them against a checklist to ensure that the files comply with internal quality standards.

5.8
The IRD completed the review of the quality measurement process in August 2003. Senior management approved recommendations from the review at a meeting in September 2003.

5.9
The quality measurement process is now an integrated part of the IRD’s internal review system. The list of areas checked by the review is available on the intranet, and staff are given prompt feedback after a review of their completed taxpayer audits. Training is provided to those staff who undertake the reviews, and there is an extensive moderating system to ensure that there is a consistent approach across the country.

5.10
In June 2005, the implementation of the review’s recommendations was audited by the IRD’s Internal Audit team. This noted that many issues from the review had been adequately addressed, but some actions were overdue. The Internal Audit team has recently followed up the outstanding actions, and all have now been cleared.

Assessing the impact of taxpayer audit

5.11
The IRD has devised a range of measures to assess the performance of taxpayer audit. In July 2005, the IRD published details of these performance measures internally in a booklet. The booklet defines a range of indicators to monitor the effectiveness of taxpayer audit activities in maintaining and improving compliance. These measures include surveying taxpayers, reviewing previous non-compliance, and assessing the level of self-correction made by taxpayers following a prompt from the IRD.

5.12
The IRD introduced a taxpayer survey in 2003-04. An external organisation carries out the survey annually, by contacting a sample of taxpayers who had been recently subject to an audit to request feedback. The external organisation collates this feedback to share with the IRD staff to improve how the IRD conducts taxpayer audits.

5.13
The IRD monitors previous non-compliance by selecting a sample of taxpayers who made underpayments of tax in the preceding 1-2 years. These taxpayers are then subject to a further audit to indicate whether their behaviour has changed and they are now compliant. This annual process was introduced in 2004-05. Once sufficient data is available, the IRD will be able to measure the impact of its taxpayer audit function by monitoring indicators of changes in taxpayer compliance.

5.14
The IRD also analyses taxpayer data to identify areas where there may be underpayments of tax. In some instances, the IRD contacts the taxpayer by letter and invites them to make the relevant corrections. The IRD monitors the responses received from taxpayers and carries out further audit activity where necessary. By monitoring taxpayer response, the IRD can measure changes in compliance behaviour.

5.15
When the IRD implements the organisation-wide case management system and adopts the new methodology for taxpayer audit, candidates for audits will be initially subject to risk assessment by risk and intelligence staff before being passed to Investigation Team Leaders for further assessment and potential audit action. This will ensure that taxpayer audit staff align their audits to key risk areas and to the IRD’s aims to target particular industries or types of taxpayer.

Our conclusions

5.16
The IRD has introduced clear guidance to classify and report errors identified through taxpayer audit activity, and this is reflected in the detail of the annual report. In our view, the IRD has implemented our recommendation in full.

5.17
The IRD completed the review of the quality measurement process soon after we published our 2003 report. A recent review by the IRD Internal Audit team found that the IRD has now implemented all the recommendations. In our view, the IRD has implemented our recommendation in full.

5.18
The IRD has introduced a number of mechanisms to assess the impact of taxpayer audits on taxpayer compliance. In our view, the IRD has taken steps to implement our recommendation. However, it is too early to assess the effectiveness of these new measures, as some have not yet been implemented fully, and others have been operational for only a year.

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