Part 2: Strategy for managing tax debt

2.1
In this Part, we set out our findings about Inland Revenue's:

• national tax compliance strategy;
• encouragement of prompt payment of taxes;
• devising of new tax debt collection techniques; and
• updating of its tax debt strategy.

2.2
Overall, Inland Revenue has a sensible tax compliance strategy in place, and its compliance model clearly drives that strategy. Inland Revenue is well aware of the challenges it faces, and is addressing those challenges by updating its tax debt strategy.

National tax compliance strategy

Inland Revenue has a comprehensive national compliance strategy guiding its approach to managing tax debt.

2.3
Inland Revenue's compliance strategy is based on voluntary compliance. Inland Revenue begins by trying to make it easy for people to comply, by informing taxpayers of their obligations, and providing a mix of services to support payment. When a taxpayer does not meet their tax obligations, Inland Revenue can encourage and enforce compliance by a range of measures.

2.4
Inland Revenue's compliance model shows how taxpayer attitudes about compliance relate to the actions Inland Revenue uses to encourage or enforce compliance (see Figure 2). Figure 2 shows, for example, that Inland Revenue tries to make it easy for taxpayers who are "Willing to do the right thing".

2.5
The actions taken by Inland Revenue to collect tax debt clearly align with its compliance model. It uses both automated and manual methods to encourage compliance. Automated actions begin with a warning letter. All types of taxpayers receive these letters. If there is no response, and the tax owed is below a predetermined threshold, a deduction order is issued to the employer. If ongoing automated actions fail to secure payment, the case needs to be assigned to a debt officer for further action.

2.6
Inland Revenue takes a nationwide approach, allocating tax debt cases to debt officers based on the type of debt or the risk of the debt (not the geographic location of the debtor). The exception to this is when legal action is likely to require a court appearance; these cases are allocated to an Inland Revenue office close to the Court.

Figure 2
Inland Revenue's compliance model for collecting tax

Source: Inland Revenue, Annual Report 2007, page 32.

2.7
Inland Revenue's organisational structure (see the Appendix) aligns broadly with the compliance model:

• At the "Make it easy" stage (see Figure 2), a group within Inland Revenue assists with the design of systems to encourage taxpayer compliance.
• The "Assist to comply" stage of the model relates to the automated actions of Inland Revenue's computer systems, and handling of incoming calls when a taxpayer needs assistance.
• Of those taxpayers in the "Don't want to comply" and "Have decided not to comply" stages, some cases are assigned to a debt officer in either the Receivables group or the National Collections Enforcement (NCE) group for further action. (Further information about these two groups, including how they fit into Inland Revenue's organisation structure, is in the Appendix).

Encouraging prompt payment of taxes

Inland Revenue's approach is to encourage voluntary and prompt payment of taxes. It seeks to do this by understanding what influences compliance.

2.8
Encouraging taxpayers to comply voluntarily is an important part of Inland Revenue's compliance model. In 2007, 86% of taxpayers met their obligations on time. The proportion of taxpayers paying on time has remained largely the same during the past five years. Promoting and supporting compliance is seen as an increasingly important part of Inland Revenue's tax compliance strategy.

2.9
Some staff and external organisations consulted have pointed out that the compounding nature of penalties and interest can act as a disincentive to pay current or future taxes if the tax debtor believes that they cannot ever catch up. Inland Revenue is aware of this issue and is planning to better understand the point at which penalties and interest influence compliance.

2.10
We encourage Inland Revenue to continue refining its systems for encouraging taxpayers to promptly pay taxes, and to better understand the effect that penalties and interest may have on compliance. Inland Revenue has told us that it agrees this is an activity that should be encouraged.

Devising new tax debt collection techniques

Inland Revenue is devising new tax debt collection techniques to encourage compliance and improve its effectiveness at collecting debt.

2.11
Inland Revenue is devising new ways to detect taxpayers who are not complying with their obligations. Inland Revenue is also looking at best practice from overseas agencies, as a way of refining its own debt collection techniques.

2.12
Inland Revenue has teams of experienced staff who manage complex debt (complex debt teams). One of their roles is to devise new recovery techniques. If these techniques prove to be effective in collecting tax debt or promoting compliance, they are adopted by the wider organisation. Complex debt teams also deal with the more difficult debt cases, often involving taxpayers who have decided not to comply.

2.13
Introducing any new debt collection techniques requires a balancing of costs and benefits, including protection of the integrity of the tax system.¹ Inland Revenue is aware that, for some new techniques, the costs (such as legal costs) may exceed the tax collected, at least initially. Inland Revenue considers costs, benefits, and protecting the integrity of the tax system when deciding whether to proceed with an action. If Inland Revenue does go ahead with an action that costs more than the amount recovered, it will have determined that the cost is offset by the new knowledge that can lead to new collection approaches. Or it will have determined that the cost is outweighed by the need to protect the integrity of the tax system.

2.14
Inland Revenue is aware that overseas best practice could be useful in New Zealand. For example, Inland Revenue staff and documents note a need to have more sophisticated tools to assess the risk associated with individual taxpayers, and to increase the number of calls made to tax debtors to discuss their debt (outbound calling). These proposals align with best practice material produced by the Organisation for Economic Co-operation and Development (OECD), which emphasises early intervention and outbound calling.²

2.15
In our view, outbound calling and improved risk assessment can potentially generate a good return on investment, and we encourage Inland Revenue to acquire a good understanding of the likely costs and benefits of adopting these changes. Inland Revenue has told us that it agrees with this comment.

Updating tax debt strategy

Inland Revenue is responding to debt growth by updating its national approach to tax debt collection.

2.16
Inland Revenue is updating its national approach to debt collection, as a part of preparing a new tax debt strategy.

2.17
Inland Revenue's new tax debt strategy identifies challenges posed by an increasing number of tax debtors, systems that do not support the type of work it wants to do, and taxpayers who are less concerned about being in debt.

2.18
To address these challenges, Inland Revenue is proposing to better understand taxpayers, provide taxpayers with improved online tools, and pilot new tools designed to enhance tax debt collection processes.

2.19
The approach Inland Revenue is taking with its new tax debt strategy aligns well with many of our observations and findings. We encourage Inland Revenue to continue refining its new tax debt strategy and pilot the new debt collection approaches mentioned in that strategy.

1: By integrity of the tax system, we mean that taxpayers are all treated – and are seen to be treated – in the same way, consistently and fairly. The term also means that a failure to comply with their tax obligations will be perceived by taxpayers as having consequences.

2: Organisation for Economic Co-operation and Development – Forum on Tax Administration (2006), Report on the Survey of Country Practices in Debt Collection and Overdue Returns Enforcement, an unpublished paper.