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


In 2003, we examined how the Inland Revenue Department (IRD) carried out its taxpayer audits to ensure that taxpayers complied with appropriate taxation law and regulations. In our report Inland Revenue Department: Performance of Taxpayer Audit,1 we concluded that taxpayer audit was under-developed. Much of what was needed for taxpayer audit to play its full part in the Taxpayer Compliance Model was not in place. We concluded that the scale of change needed was substantial, and that the IRD required a significant programme to manage the change.

The scope of our follow-up audit

Our audit has been confined to examining the extent to which the IRD has implemented the recommendations we made in 2003.2 We have not carried out an audit of the new methodology that the IRD is developing.

In particular, the IRD has devised a method of operation that will funnel all potential audit candidates through a risk assessment process to prioritise the work before it is allocated to Investigators. Our follow-up audit did not include a detailed examination of this new methodology. However, we agree this appears to be a logical approach to targeting taxpayer audit resources effectively.

Our 2003 report recommended that the IRD identify its requirements for case management of taxpayer audit, and purchase or create the relevant tools. The IRD is currently working on an organisation-wide case management solution. During our 2006 follow-up audit, we carried out a limited review of the processes used to identify the requirements for case management and to purchase the relevant tools.

Our findings

The IRD has undertaken a programme of projects to implement its strategy for taxpayer audit and has implemented significant change in the three years since we published our 2003 report.

The IRD has allocated considerable resources to this change process. This has involved 20 full-time equivalent staff during the first year and 27 in the second; there are plans to allocate 15 in the third year. The budget for the three-year programme is $7.8 million. In July 2006, actual expenditure was in line with budget expectations at $6 million.

The changes the IRD has made include:

  • developing a clear strategy for taxpayer audit;
  • improving the sharing of information across the organisation;
  • identifying the requirements for case management of taxpayer audit, implementing an interim solution, and purchasing an organisation-wide tool for case management;
  • implementing a comprehensive induction process and training framework tailored to the needs of taxpayer audit staff;
  • improving the technology and audit tools available to help taxpayer audit staff in their work;
  • defining intelligence needs and developing a strategy to meet those needs;
  • increasing Compliance Risk Analyst staff resources and improving the technology available to provide risk analysis both across industries and tailored to specific individuals and entities;
  • issuing guidelines for classifying and reporting additional tax assessed;
  • enhancing the internal process to measure and maintain quality standards;
  • creating performance measures specific to taxpayer audit; and
  • establishing mechanisms to manage change across taxpayer audit.

Our conclusions

The IRD developed a clear set of long-term goals for taxpayer audit and has made considerable progress. These goals encompassed all the recommendations from our 2003 report. The IRD has so far achieved a substantial change in taxpayer audit operations through a range of short-term and medium-term actions. The change process is not complete yet. It is too early to assess the impact of the long-term actions, such as the organisation-wide solution for case management, and the new methodology for managing taxpayer audit priorities identified by a risk-based approach. However, we agree this appears to be a logical approach to targeting taxpayer audit resources effectively.

1: ISBN 0-478-18106-X, available from our website –

2: Our 2003 recommendations are set out in full in the Appendix to this report.

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