Summary

If people are not meeting their tax obligations, the revenue from taxes 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.

In 2002, the Inland Revenue Department (IRD) began testing an Industry Partnership programme (the programme) to try to reduce the incidence of undeclared income from cash transactions in selected industries. The programme operated from February 2002 to November 2006.

More recently, aspects of the programme have been incorporated within the work of IRD’s new Customer Insight Group. The Customer Insight Group is responsible for helping IRD to improve tax compliance through understanding what influences different groups of people. 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 taxpayers.

The programme involved IRD developing relationships with selected industry organisations. The objectives of the programme were to:

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

We carried out an audit of the programme. Overall, we found that the programme had some positive benefits for IRD and taxpayers. It has helped to inform the attention the Customer Insight Group pays to people and organisations operating partly or completely outside the tax system (the hidden economy).

Design of 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 the industries to be covered by the programme; and
• a design consistent with the objectives.

Our findings

The programme was in keeping with 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 the programme, balanced by a national team structure.

However, IRD could have given greater attention to bringing high-risk people and organisations (those not recorded within IRD’s systems) into the tax system. Capturing more of these people and organisations within IRD’s systems might have led to the collection of more tax revenue.

The structure of the Customer Insight Group should enable IRD to better identify tax evasion by people outside, or partly outside, the tax system.

Operation of the programme

We expected the programme to have:

• policies and procedures to guide staff ;
• effective relationships with industry partners;
• produced effective information for industry partners;
• sufficient capacity, including resources; and
• effective planning and performance management systems.

Our findings

The diverse tax backgrounds of the programme’s field team members enabled Industry Partnership clients to have a single point of contact within IRD. The diversity also enabled staff to draw on a wide range of knowledge and select from a range of compliance approaches.

Flexible performance management arrangements for staff and the absence of standardised processes or guidance gave field teams the flexibility to try fresh approaches to compliance.

Staffing arrangements for the programme created conflicting accountabilities for seconded staff and their managers. The programme also lacked a single, cohesive planning framework to ensure that it was consistently implemented.

Aspects of the programme are now being implemented in the Customer Insight Group. Some of the necessary support infrastructure for an effective transition to the Customer Insight Group was not fully in place at the time of our audit fieldwork. IRD needs to ensure that lessons learned from the programme are recorded and reflected in the operational guidance and support resources for staff , particularly the staff working with people and organisations operating partly or completely outside the tax system.

Evaluation of the programme

We expected the programme to be effectively evaluated. In short, this requires the results of the programme to be measured and acted on.

Our findings

The monitoring and evaluation of results were strengths of the programme.

However, IRD carried out less monitoring and evaluation of Industry Partnership activities across field teams at the sub-programme level. This limited IRD’s ability to develop specific tools and approaches for dealing with transactions outside the tax system (the “hidden economy”).

Monitoring and evaluation showed positive results in terms of tax collected, tax compliance, and taxpayers’ perception of IRD. In the early stages of the programme, external specialists estimated, on IRD’s behalf, the tax dollar effects of raised filing rates and lowered tax debt in five industries covered by the programme. The external experts estimated that tax payable increased by $5.2 million in 2002/03 and by $4.5 million in 2003/04 because of the programme.

However, attributing changes in tax revenue and compliance directly to the programme was difficult. In some instances, IRD could have better qualified the programme’s reported results. IRD needed to present more clearly the results that were directly attributable to the programme.

In some cases, the review of aspects of the programme by IRD’s Risk and Assurance section had more positive findings than the evaluation work of programme staff. IRD may want to examine the reasons for this so that any lessons arising from the differences can be used to inform future monitoring, evaluation, and review activities.

Achieving the programme’s objectives

We expected that IRD would meet the objectives it set for the programme.

Our findings

In general, IRD’s programme objectives were achieved. The exception was directing audit resources toward the highest risk cases within selected industries, which was only partly achieved. This was because cases were identified largely from IRD’s existing information on taxpayers – people who were already in the tax system. Existing taxpayers are not necessarily the highest risk cases.

The high-level objectives set by IRD for the programme did not have definitive targets. The IRD could therefore assess a positive trend in the measure/s for a given objective as achieving the objective.

In our view, as the programme evolved during its five-year life, IRD needed to set measurable targets and assess its progress against specific programme objectives. This would have informed IRD’s consideration of the structural and resource options for applying the programme’s approach throughout the organisation.

Our recommendations

We recommend that the Inland Revenue Department:

• record and reflect the lessons learned from the Industry Partnership programme in specific operational guidance and support resources for staff focusing on the hidden economy; and
• identify, as part of reporting on the results of a specific programme or initiative that may be affected by a range of variables, those factors contributing to the results that are not attributable solely to the programme or initiative.