Part 2: Design of the Industry Partnership programme

Inland Revenue Department: Effectiveness of the Industry Partnership programme.

In this Part, we outline:

  • the structure and resources of the programme;
  • our expectations of good programme design; and
  • our findings.

Structure and resources of the programme

Field teams

There were five field teams and a national office team working on the programme. The five field teams were located at IRD service centres throughout New Zealand.

From 1 July 2004, each field team comprised an encouragement team and an assurance team, generally located together at an IRD regional site.

Encouragement teams typically had 5-8 members. They provided education and services about all types of taxes. They also considered minor tax debt and return issues. More serious tax issues were referred to the assurance team when required.

Staff were seconded to the encouragement teams from the Child Support, Return and Debt Collection, and Services sections of IRD. While on secondment, staff received their pre-secondment salaries. Staff returned to their original sections with the implementation of IRD’s new operating structure in late 2006.

Assurance teams typically had 7-8 members. They managed tax compliance issues of people who did not want to comply, or were not complying, with their tax obligations. The assurance teams included specialist debt collection staff , intelligence officers (also known as “seekers”), and investigators.

The intelligence officers’ roles were to specifically seek evidence of tax evasion (that is, identify people outside the tax system). These roles were not originally part of the programme design. Intelligence, such as direct observation and third-party information, was also used to identify people outside the tax system.

Staff were seconded to the assurance teams from the Return and Debt Collection, and Audit sections of IRD. Staff returned to their original sections before, or with, the implementation of IRD’s new operating structure.

Seconded staff came into their new roles with a good knowledge of substantive tax issues, and received training to make them familiar with different tax types. They received limited training in generic skills such as relationship management, innovation, and strategic thinking relevant to the Industry Partnership way of working. Generic functional job descriptions and performance management arrangements were not amended to recognise the Industry Partnership work.

The wages and operating costs of staff seconded to field teams from other sections of IRD were paid through the sections from which they were seconded. IRD has estimated the costs of field teams at $1.575 million in 2003 and $1.750 million in 2004.

While new initiatives or programmes may at times have their own appropriations, this is not always the case. The Industry Partnership programme is one example. Entities need to ensure that initiatives or programmes are consistent with the purposes of the appropriations from which they are funded.

National office team

The national office team provided field teams with a range of support services, including:

  • design advice;
  • relationship management with partnered organisations;
  • research and issues gathering (a three-person research and issues gathering team was added in January 2004);
  • evaluation services; and
  • communication support.

The national office team also had a governance role, with responsibility for collating reports from field team leaders and overseeing the programme.

Staff from the national office team made contact with industry groups, explained the purpose of the programme, and represented IRD at national conferences. They remained the primary point of contact with industry associations, facilitating the provision of guidance and advice to industry members.

With the implementation of IRD’s new operating structure in late 2006, national office team staff moved to new functional teams, performing equivalent tasks to their Industry Partnership functions.

The funding budgeted for the project for the national office team is shown in Figure 2. For the three years from 2002/03 to 2004/05, $5.7 million was budgeted for Industry Partnership work (national office team only). IRD told us that, once the Industry Partnership initiative ceased to be a project and was absorbed into IRD’s mainstream business from July 2005, the national office team’s annual budget of about $1.6 million was absorbed into the budgets of other teams for the remaining life of the programme.

Figure 2
Industry Partnership project budget 2002/03 to 2004/05, for the national office team

Component Financial year
2002/03 2003/04 2004/05
Capital $403,955 $544,000 $0
Operating $1,265,691 $1,489,300 $2,000,000
Total $1,669,646 $2,033,300 $2,000,000

Field teams reported through a Service Centre management hierarchy to the Group Manager Field Delivery. The national office team also reported to the Group Manager Field Delivery. In effect, the programme had a matrix management structure.1

Our expectations

We expected IRD to have designed the programme so that it would support IRD achieving the objectives it set for the programme. We expected the programme to have:

  • a clearly defined problem to be addressed;
  • a common understanding of that defined problem;
  • clear objectives;
  • a risk-based and/or evidence-based approach to selecting industries to be covered by the programme; and
  • a design consistent with the objectives.

We also expected IRD to have ensured that important features of the design of the programme were preserved in the transition to the Customer Insight Group, and that any associated risks were well managed.

Summary of our findings

The programme was well grounded in IRD’s compliance model and strategic direction, and the rationale and objectives of the programme were well defined.

A key feature of the programme’s design was a deliberately unconstrained approach to the activities of field teams working on it. This flexibility was balanced by a national team structure which provided important direction, business support, and evaluation.

IRD could have given greater attention to bringing high-risk organisations and people not declaring cash income into the tax system, as part of the design of the programme.

The structure of the Customer Insight Group, which took over responsibility for aspects of the programme, should enable IRD to better identify tax evasion by people outside the system.

Problem definition and objectives

The programme focused on the tax risks associated with the cash economy, while also seeking to improve taxpayers’ long-term voluntary compliance with tax obligations. The particular aspect of the cash economy targeted by the programme was cash income undeclared for tax purposes.

The purpose of the programme was:

... using the compliance model develop, test and implement a relationship-based approach to working with small and medium enterprises within selected cash economy industries to encourage and enable voluntary compliance.2

The programme was intended to translate IRD’s compliance approach into practice. The compliance approach drives all of IRD’s business.

IRD’s approach to compliance recognises that taxpayers have a wide variety of attitudes towards paying tax and that there are a number of factors that influence taxpayers’ tax decisions and behaviour.

For those who are willing to meet their tax obligations, IRD tries to make it as easy as possible. This requires IRD to apply a low level of pressure to get those taxpayers to comply. For those who have deliberately decided not to meet their tax obligations, IRD may apply much more pressure to get those taxpayers to comply. IRD is trying to move taxpayers from requiring a high level of pressure to requiring a low level of pressure (see Figure 3).

The design of the programme was consistent with IRD’s compliance pyramid and its strategic direction.

The former programme staff we interviewed for our audit had a common understanding of what the programme was and its purpose. This was consistent with the documentary evidence provided to us by IRD.

Risk and evidence base

While the size of the hidden economy is difficult to measure, IRD had previously commissioned external advice on the size of the hidden economy to help inform IRD’s activities. IRD assumed that, within the hidden economy, the cash economy "was of sufficient scale to present a loss of revenue by evasion of enough significance to warrant action".3

Figure 3
Inland Revenue Department’s compliance pyramid

Figure 3: Inland Revenue Department's compliance pyramid

Source: Inland Revenue Department.

The programme’s design relied heavily on information already held by IRD. This meant that, as a deliberate design feature, there was limited targeting of people outside the tax system. More attention could have been given to how third-party and IRD’s own information on people outside the tax system could be more systematically obtained and used as part of the programme.

More attention in the design of the programme to people outside the tax system may have aligned the programme more closely with one of its key objectives - directing audit resources toward the highest risk cases within selected industries.

Structure and objectives

There were relatively few controls on the regional and national teams carrying out programme work. This relatively unconstrained approach was also a deliberate design feature, reflecting the uncertainties about the size of the hidden economy and the initiatives that might work in addressing it. It was an understandable approach, given these uncertainties at the time about the sustainability of allocating resources for the programme.

An important feature of the design, particularly at the field team level, was having teams made up of people from different sections within IRD. Assurance teams became part of the programme’s field teams after the programme started. This was a design adjustment during the programme. IRD has advised us that, given the relationship management focus and approach to the programme, a “dedicated enforcement function was not necessary at the front end of the process but was introduced later as increased cases were identified and needed specific audit interventions”.4

Greater emphasis on assurance activity earlier in the programme would have been consistent with programme objectives to increase voluntary compliance and target resources at the highest risk cases within selected industries.

The national team structure was important because it provided direction, supported monitoring and evaluation, and facilitated a whole-of-industry approach for those industries targeted by the programme. It was the major control on the programme.

Customer Insight Group

The crucial feature of the programme (the relationship-based approach) and an important lesson learned (the need for more attention on people outside the tax system) have been reflected in the design of the Customer Insight Group. A relationship management function is an important part of the Customer Insight Group’s design, and is reflected at a structural level as a separate team. A defined role has been created within the Customer Insight Group - the CCA role - with the specific purpose of identifying people outside the tax system. IRD has also told us that its Risk and Intelligence section has a specific focus on people outside the tax system.

Specific transitional risks have been recognised by IRD, including the loss of the national office team.

As we noted earlier, the national office team was a very important control on the programme. This control does not exist in the Customer Insight Group because Industry Partnership responsibilities have been distributed throughout a number of sections. Some are within the Customer Insight Group and others are elsewhere within IRD. The loss of this control is being offset, to some extent, by having a Small and Medium Enterprise (SME) section within the Customer Insight Group responsible for understanding SMEs. The programme previously targeted small- to medium-sized businesses.

During 2008/09, we will be asking IRD to report on its progress in ensuring that lessons learned from the Industry Partnership programme are sufficiently recorded and reflected in specific operational guidance and support resources for IRD staff. This is particularly important for those staff focusing on the people operating partly or completely outside the tax system.

1: A matrix management structure is one where an employee reports to two or more managers.

2: Inland Revenue Department document, 2004.

3: Inland Revenue Department document, 2002.

4: Inland Revenue Department correspondence, November 2007.

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