Auditor-General's overview

Although most taxpayers pay their tax on time, the Inland Revenue Department (Inland Revenue) acknowledges that tax debt is growing at a rate that is outpacing Inland Revenue's capacity to deal with it. As at 30 June 2008, there were 202,000 cases of tax debt, totalling $4.036 billion.

Inland Revenue has estimated that total tax debt could more than double within five years unless it takes a different approach to managing the debt.

Inland Revenue is aware of the challenges it faces, and is updating its tax debt strategy to respond to these challenges. It is proposing to better understand taxpayers, provide taxpayers with improved online tools, and pilot new approaches designed to enhance its processes for collecting tax debt.

My staff looked at how Inland Revenue manages its tax debt collection role. They examined whether Inland Revenue was taking a strategic approach to debt management, effectively identifying and recovering debt, and adequately monitoring and reporting its performance in managing tax debt. Although Inland Revenue's management of tax debt was satisfactory once debt cases were assigned to its debt officers, I agree with Inland Revenue that its overall approach to tax debt management is insufficient to control the growth in tax debt.

Inland Revenue has a responsibility to maximise the amount of revenue collected while having regard to the resources available, maintaining the integrity of the tax system (promotion of tax compliance), and the costs to taxpayers. By integrity of the tax system, I mean that taxpayers are all treated – and are seen to be treated – in the same way, consistently and fairly. Maintaining confidence in the integrity of the system is essential for any area of regulation that depends on voluntary compliance.

Because Inland Revenue prioritises what its debt officers work on, some tax debt cases regarded by Inland Revenue as lower risk are unlikely to be assigned to a debt officer. Although these may be subject to ongoing automated actions, not assigning certain types of cases to a debt officer may pose a risk to the integrity of the tax system. In my view, Inland Revenue needs to review how it assesses risk when selecting tax debt cases for further enforcement action. This is in order to enforce all kinds of tax obligations and to maintain public confidence that non-compliance is effectively deterred for all types of taxpayer.

Inland Revenue has limited information to monitor the effectiveness and efficiency of its tax debt collection work. Inland Revenue was aware of how many tax debt cases it needs to manage, but it was not able to tell my staff how many tax debt cases it was actively managing. In my view, such information is fundamental to Inland Revenue effectively and efficiently deploying its debt collection resources, demonstrating its performance in collecting tax debt, and having informed discussions with the Government about options for collecting tax debt.

For Inland Revenue to produce a new strategy, to manage the growth of tax debt in a timely, effective, and efficient way, it will need better information about the effectiveness and efficiency of its debt collection techniques. The five recommendations I have made involve Inland Revenue improving the information that it collects, uses, and reports.

Inland Revenue has told me that the capabilities of its debt management information system limit the extent to which it can achieve two of my recommendations. My staff have not carried out a detailed assessment of this issue because they did not perform a detailed information systems audit. I am of the view that the information referred to in my recommendations is fundamental to the effective and efficient management of tax debt.

It is important that Inland Revenue is effectively and efficiently managing tax debt at any time – but even more so given the current economic climate and the pressure that the Crown faces with forecast deficits. It is also important that Inland Revenue moves quickly to implement its proposed new tax debt strategy to make best use of its available resources.

I thank the staff of Inland Revenue and others for providing my Office with a high level of assistance and co-operation during the performance audit.

K B Brady
Controller and Auditor-General

16 June 2009