Part 3: Identifying and recovering tax debt

Inland Revenue Department: Managing tax debt.

In this Part, we set out our findings about how Inland Revenue:

Overall, Inland Revenue successfully collects about half of the total tax debt through automated actions such as reminder letters. When these actions do not achieve payment of tax debt, the next stage is to assign a case to a debt officer. In our view, once debt cases are assigned to a debt officer, Inland Revenue's management of tax debt is satisfactory. However, Inland Revenue has more tax debt cases than its staff can actively manage using its current approach. As a consequence, some lower-risk cases are unlikely to be assigned to a debt officer.

In our view, Inland Revenue needs to review how it assesses risk when selecting tax debt cases for further enforcement action, to ensure that all types of cases are treated fairly and consistently.

Inland Revenue can also improve the management information it collects to monitor the cost-effectiveness of the various techniques it uses to collect tax debt.

Inland Revenue wants to improve its tax debt system but does not know, with any certainty, what savings it might make or the additional revenue that it might collect by doing so. In our view, this information is important in any business case for a new computer system that Inland Revenue puts to the Government.

Debt identification

Inland Revenue's debt management system identifies debt appropriately.

Inland Revenue's debt management system recognises a debt:

  • when a return is filed but the payment was not made on time;
  • when an expected return is not filed (this can result in a default assessment being made, creating a tax debt); and
  • when a tax debt has been identified by an audit.

Sometimes, Inland Revenue may not be aware of a taxpayer's obligations because the taxpayer has not filed a return before. In this situation, the debt would have to be identified through an audit or an investigation, or by the taxpayer filing a tax return.

Although Inland Revenue's debt management system may identify that a tax debt exists, the amount identified may not be accurate. Additional information provided by a taxpayer or debt officer can change the amount of outstanding tax debt. During our audit, we saw how Inland Revenue updates its records when additional information becomes available.

Automated actions to collect debt

Automated actions account for about half of the tax debt collected by Inland Revenue.

Once a tax debt is identified, automated actions account for about half of the debt collected by Inland Revenue. These actions usually happen during the first 90 days after the debt becomes outstanding.

For all types of taxpayers, automated actions begin with a warning letter being sent.

There are additional actions that apply to salary and wage earners. For these taxpayers, if there is no response and the tax owed is below a predetermined threshold, a deduction order is issued to the employer.

After those actions and if the debt remains unpaid, tax debtors receive a regular statement of their account that shows their total debt (including any penalties and interest that have accrued). Further action occurs only if the case is assigned to a debt officer or if the taxpayer contacts Inland Revenue.

Inland Revenue's automated systems do not differentiate between taxpayers based on their payment history, current behaviour, or compliance risk. Inland Revenue has told us that a more flexible range of automated actions, based on a wider range of information about taxpayers, would help it better collect tax debt. Inland Revenue expects that a wider range of automated actions will be part of the functionality required from future information systems.

These views about automated recovery action as are in keeping with those of the OECD Forum on Tax Administration, which notes that some countries are creating and using automated risk-profiling techniques. Further, an OECD Forum paper1 says that predicative modelling (which is more widely used in the private sector) is helpful in establishing the best way to collect certain types of debt. Inland Revenue considers this modelling to have a potentially significant role in tax collection.

As automated risk-profiling by overseas tax agencies continues to be established and used, we encourage Inland Revenue to closely monitor whether such risk-profiling does lead to improved compliance with tax payment obligations.

Allocating cases to debt officers

Inland Revenue has more debt cases than its staff can actively manage, so it must prioritise which tax debts to pursue. It can improve the information it collects about the types of cases its debt officers are managing and how many cases are being actively pursued.

Inland Revenue does not have enough debt officers to actively manage all the debt cases it has. As at June 2008, of the 202,000 outstanding tax debt cases, about 70,000 were more that six months old and about 49,000 were more than one year old.

For the 2007/08 year, Inland Revenue had 428 staff doing tax debt work (and similar numbers for the two years before that). Debt officers are involved in both outbound work (when they are actively seeking to recover a debt) and inbound work (when they are responding to a taxpayer-initiated contact). Their role also includes pursuing taxpayers to file a return if the taxpayers have not yet done so.

Tax debtors paying debts on their own initiative will resolve some of the outstanding cases. Other tax debtors will contact Inland Revenue to resolve their debts. Unresolved cases need to be assigned to a debt officer. Because Inland Revenue can assign only a portion of its debt cases to officers at any one time, some debt cases will effectively be set aside (although penalties and interest continue to be incurred), until a taxpayer settles the debt or Inland Revenue is able to assign the case to a debt officer.

Inland Revenue was unable to provide us with information about how many debt cases were actively managed by debt officers and what proportion of debt officers' work was inbound or outbound. We expected Inland Revenue to have this information. This is because we consider it to be an important part of any informed discussions about staffing levels, and in helping Inland Revenue to allocate resources effectively and efficiently.

Recommendation 1
We recommend that the Inland Revenue Department collect and analyse information about how many cases debt officers are managing, and how much of their work is inbound contact (where first contact is from a taxpayer contacting Inland Revenue) and how much is outbound (where Inland Revenue debt officers make first contact).

Inland Revenue has told us that it understands the opportunity costs and benefits that it would gain from the type of information referred to in this recommendation. It has also told us that its current debt management system limits its ability to distinguish this information, and that manually assembling the information would not be the best use of the limited resources available to it.

Debt cases assigned to officers using a model based on risk

Depending on the nature and type of the tax debt, Inland Revenue has several processes for allocating to debt officers the cases that require manual intervention. Some cases are immediately assigned to debt officers, such as Audit Assessed Debt, which is debt identified by an investigation or audit. Cases involving large amounts of tax debt are usually allocated to the NCE group.

Apart from some minor exceptions, the rest of Inland Revenue's case allocation processes rely on a risk-modelling system. The risk model uses a range of information about a taxpayer. The information is used to assign a score to the debt case. The greater the score, the more likely it is that a case will be assigned to a debt officer. Cases with lower-risk scores are less likely to be assigned to debt officers.

However, Inland Revenue does not ignore cases with low scores. All taxpayers are subject to the automated actions discussed in paragraphs 3.9-3.11. A taxpayer will continue to receive statements showing the total debt including any penalties and interest. This alone can be enough to encourage some taxpayers to resolve the debt. Also, because the risk score grows as the debt grows, the probability of a case being assigned to a debt officer increases with time.

Although Inland Revenue has a risk-based system for allocating cases to debt officers, it keeps limited records of the cases it allocates. This makes it difficult to review the overall characteristics of the types of cases that Inland Revenue is pursuing, and those that it is not.

Government agencies have a responsibility to enforce the whole of the area of law they are administering, although they can prioritise their efforts. In our view, collecting and analysing information on the types of cases that Inland Revenue is pursuing (and those it is choosing not to actively pursue) would help it ensure that it is not leaving some types of tax debt unenforced.

As we discuss later, better information about the cases that are being actively pursued - and those that are not - would also help Inland Revenue to assess the likely costs and benefits of any proposed changes to its tax debt strategy and processes. Inland Revenue has told us that its debt management system limits its ability to obtain the information that we have identified as being important.

Inland Revenue needs to balance maintaining the integrity of the tax system against the collection of revenue. Inland Revenue needs to ensure that the public remains confident that taxpayers are treated consistently and that all types of debt may be assigned to a debt officer.

In our view, Inland Revenue's approach raises a risk that certain types of tax debt cases are unlikely to be assigned to a debt officer for further action. Not actively targeting certain types of tax debt can lead to a perception of unequal treatment and jeopardise public confidence in, and compliance with, the tax system.

Recommendation 2
We recommend that the Inland Revenue Department review how it selects the types of cases it does – and does not – allocate to debt officers, to ensure that it is:
  • taking reasonable steps to enforce taxpayers' obligations; and
  • considering the potential effect on voluntary compliance if some types of cases are unlikely to be assigned to a debt officer.

Inland Revenue has told us that it supports this recommendation. It has noted that it has activities under way as part of its ongoing debt management improvement work that will enable it to act on the recommendation.

Debt officer training and development

Debt officer training and development is well structured and supports the work of debt officers.

Debt case management requires the debt officer to exercise considerable judgement. In particular, applying the financial relief and hardship provisions in The Taxation (Relief, Refunds and Miscellaneous Provisions) Act 2002 requires debt officers to exercise discretion but do so in a consistent way.

Inland Revenue uses a mix of formal training and mentoring to ensure that its debt officers are supported in their work. Inland Revenue has a framework setting out the nature and timing of training needed by all debt officers. A debt officer's training starts at induction, and continues throughout their time at Inland Revenue. For some, this may lead to specialising in complex debt work.

The framework links the completion of formal Acquisition of Skills Programme for Inland Revenue Employees (ASPIRE) training packages to increasing levels of competency. Completing ASPIRE packages requires the debt officer to demonstrate their knowledge and understanding of the training, and for this to be confirmed by their team leader.

The NCE group is expanding its formal training through its Advancing the Collection of Returns and Debt (ACORD) programme. This includes training in advanced debt management techniques.

Debt officers we spoke to were aware of, and spoke positively about, training and development opportunities. As well as training packages requiring staff to carry out formal training and then demonstrate those skills, Inland Revenue has online reference materials to guide debt officers through a range of debt collection actions. Inland Revenue uses project work as opportunities for staff to diversify their skills.

We consider that Inland Revenue's framework for staff training and development is appropriate and adequate.

Collection techniques supporting debt officers

Debt officers have access to an escalating range of collection techniques.

Inland Revenue's debt manual offers an escalating range of collection techniques that debt officers can use to collect a debt. Techniques include, but are not limited to:

  • issuing a deduction notice against a taxpayer's bank accounts;
  • calling the taxpayer to establish an arrangement;
  • writing off the debt in part or in full; and
  • legal remedies, such as liquidation.

None of the debt cases we examined during our review had stalled because existing collection techniques were in some way inadequate. Debt officers we spoke with did not raise any shortcomings with the collection techniques they have available to them.

Overall, we are of the view that the collection techniques available are able to support debt officers' work, and escalate in line with Inland Revenue's compliance model.

Information systems supporting debt officers

Debt officers have a debt management system to help them manage cases. However, the system could better support staff.

Inland Revenue has a debt management system that allows debt officers to access account details, contact information, and a history of actions taken for individual taxpayers. Debt officers and team leaders use a separate tool to monitor the timeliness of their casework.

We observed demonstrations of Inland Revenue's debt management system that showed the range of a taxpayer's information that is available to debt officers. We also saw parts of Inland Revenue's debt management system that could be improved to provide staff with better support.

Two examples where improved system capabilities could better support staff are:

  • monitoring of instalment arrangements to ensure that prompt follow-up occurs if these arrangements are defaulted on (currently, a debt officer has to do this manually); and
  • electronically storing and managing correspondence (currently, debt officers must manually enter correspondence into the debt management system).

Also, Inland Revenue told us that significant transaction costs can arise from using the existing systems to carry out collection actions, such as calculating and sending a statement to a taxpayer. We have not audited these transaction costs, and Inland Revenue has not quantified them.

Inland Revenue has begun putting together a business case for a new computer system. As part of this business case, Inland Revenue will need to accurately assess any efficiency and capability gains of a new system against its purchase and set-up costs. We consider this assessment to be an important part of any sound business case presented to the Government.

1: 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.

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