Part 1: Introduction

1.1
In this Part, we describe:

• the cash economy;
• the Industry Partnership programme; and
• why and how we undertook our performance audit.

The cash economy

1.2
Transactions outside the tax system are described as the hidden economy. When these transactions are in cash, they are described as the cash economy.

1.3
If people are not meeting their tax obligations, tax revenue is reduced. The Government has less to spend on goods, services, and payments to or on behalf of New Zealanders. The tax burden is not spread as intended across taxpayers, and some organisations may obtain unfair commercial advantages.

1.4
Potential tax evasion includes:

• informal and unstructured transactions between people (that may or may not involve cash); and
• income that is undeclared for tax purposes (including transactions involving payment by cash, cheque, EFTPOS, or credit card).

1.5
Examples of cash transactions that may fall outside the tax system include people doing cash jobs as part of a business, or paying wages "under the table" in cash.

The Industry Partnership programme

1.6
The Industry Partnership programme (the programme) within the Inland Revenue Department (IRD) sought to reduce the level of undeclared cash income within selected industries. In the long term, IRD hoped that practices within those industries would support a sustainable tax system.

1.7
The objectives of the programme were to:

• increase voluntary compliance levels within selected industries;
• increase IRD's presence in the community;
• improve the community's perception of IRD as a professional organisation; and
• direct audit resources toward the highest risk cases within selected industries.

When did the programme operate?

1.8
Industry Partnership was launched as a project by IRD in February 2002. It continued as a project until the end of June 2005. From 1 July 2005, the project was incorporated into IRD's mainstream tax collection operation, but with separate Industry Partnership teams (at both a national and regional level) as part of the arrangement.

1.9
From November 2006, Industry Partnership ceased to exist as a specific project or as part of mainstream business resourced with separate Industry Partnership teams. Some of the Industry Partnership programme functions were taken over by IRD's Customer Insight Group. At the time of our audit the Customer Insight Group was newly established.

How did the programme operate?

1.10
For about the first year of the programme, IRD had relationships with two industries: electrical services, and painting and decorating services. More industries were added to the programme in the following years. The industries covered by the programme, the dates from which they were covered by the programme, and the type of relationship IRD had with each industry, are shown in Figure 1.

1.11
Between 2002 and 2004, IRD started 20 specific relationships with industries as part of the programme. Thirteen of the 20 relationships were classified as an industry partnership, six were classified as an industry alliance, and one was classified as an industry strategic partnership. These terms are explained in the notes below Figure 1.

Selecting the industries

The industries covered by the programme were selected using criteria based on information in IRD's information systems. The criteria were the:

• average tax returns outstanding;
• average tax debt outstanding; and
• likelihood of a taxpayer having tax discrepancies.

1.13
The criteria were calculated for each industry class in IRD's information system. Medium-sized industries were selected from this list, and a subset of 15 industries was chosen for industry partnerships. Medium-sized industries were defined as having between 2500 and 10,000 tax entities recorded in IRD's information system.

1.14
IRD told us that industries' concerns about unfair competition and safety issues also influenced the selection of industries.

Figure 1
Timeline of when relationships were formed as part of the Industry Partnership programme

Notes:

An industry partnership is a relationship formed with an association or body directly representing industry members.

An industry alliance is a relationship formed with a sector body, or organisation that is representative of, or connected to, members of an industry.

An industry strategic partnership is a relationship formed with a quasi-governmental agency or Crown entity that represents, regulates, or funds an industry or sector with which IRD's Industry Partnership programme is working.

Transition to the Customer Insight Group

1.15
In October 2006, IRD announced to its staff that there would be changes to the way Industry Partnership teams operated. In effect, the changes meant that the Industry Partnership initiative ceased to exist as a specific project or as part of mainstream business resourced with separate Industry Partnership teams.

1.16
IRD told its staff that one of the reasons for the change was a "more complex and diverse customer base" requiring IRD to "become more agile in the way it meets customers' increasing service expectations". The advice to staff also indicated that the Customer Insight Group (a new operating group) would be "actively promoting Industry Partnerships". The new operating structure took effect in November 2006.

1.17
The Customer Insight Group was part of this new structure. The Customer Insight Group is responsible for helping IRD to improve tax compliance through understanding what influences different customer¹ groups and those outside the tax system. The Customer Insight Group is responsible for ensuring that IRD has this information so the wider organisation can design systems and processes that work for its customers. While the programme included aspects of this approach, it applied to only a small group of industries.

1.18
The Customer Insight Group has about 200 staff. It sits within IRD’s Service Delivery Group, and receives funding through the resources IRD allocates to the Service Delivery Group.

1.19
The Customer Insight Group is structured around four customer groups, and there is a manager for each team looking after a customer group. There are also a Community Relationships team and manager responsible for managing relationships across the four customer groups. These five teams report to a Group Manager.

Industry Partnership responsibilities

1.20
Industry Partnership responsibilities are mainly managed by the Customer Insight Group or others within its parent Service Delivery Group. The manager of the Small/Medium Enterprises team within the Customer Insight Group is responsible for existing and future national industry relationships. The manager of the Community Relationships team within the Customer Insight Group is responsible for managing local industry relationships. Day-to-day interactions with existing Industry Partnership customers are handled through IRD’s normal business processes within the wider Service Delivery Group. Risk, intelligence, and assurance work related to Industry Partnership customers is managed through IRD’s normal business processes within the wider Service Delivery Group. The functions previously provided by the national office team are provided by IRD’s relevant support areas outside the Service Delivery Group.

1.21
Within the Community Relationships team, different positions are responsible for relationships with different groups. One of these positions is that of Community Compliance Advisor (CCA, but initially called a Community Relationships Advisor). The CCA is responsible for bringing people outside the tax system into the tax system. At the time of the fieldwork for our audit, the role was relatively well established but yet to be finalised. There were 20 CCA positions, staffed through secondments.

Why and how we carried out our audit

Why we carried out our audit

1.22
Why we carried out our audit We carried out a performance audit of the programme to see whether it was effective in meeting its objectives. Although the programme was no longer operating, we wanted to test IRD's reported successes of the programme, given the ongoing incorporation of aspects of the programme within IRD's mainstream operations.

How we carried out our audit

1.23
We examined the programme and related strategy, planning, evaluation, monitoring, reporting, and accountability documents. We also examined IRD's information on prosecutions taken as part of the programme, and the number of calls to the Industry Partnership's 0800 telephone number.

1.24
We examined reports from the Australian Tax Office, HM Revenue and Customs (the United Kingdom's revenue authority), and the Canadian Revenue Authority.

1.25
We met with IRD staff and representatives of four industries included in the programme.

1.26
We identified 39 specific audit questions relating to 15 higher level expectations about what constitutes effective programme design, operation, and evaluation. We used these to guide our fieldwork. IRD's performance against our expectations is outlined in Parts 2-5.

Outside the scope of our audit

1.27
We did not:

• quantify, in dollar terms, the effect of the programme on the Government's tax revenue;
• attempt to quantify the size of the cash economy or the size of the hidden economy; or
• repeat IRD's analysis of the raw data on taxpayers covered by the programme.

1: For ease of reading in this report, we have retained the Inland Revenue Department's term "customers" to describe the range of people and organisations it deals with (individual taxpayers, entities that pay taxes, student loan borrowers, child support custodians, parents paying child support, recipients of Working For Families tax credits, and recipients of parental leave payments).