Part 2 - Inland Revenue Department: Managing tax debt

2.1
The amount of outstanding tax debt is significant and growing. We carried out a performance audit to provide independent assurance to Parliament that the Inland Revenue Department (Inland Revenue) was effectively and efficiently managing tax debt. Tax debt as at 30 June 2008 was $4.036 billion.¹

The scope of our performance audit

2.2
Our audit examined whether Inland Revenue was:

• taking a strategic approach to managing tax debt;
• effectively identifying and recovering debt through automated actions and the work of its debt officers; and
• adequately monitoring and reporting its performance.

Our findings and recommendations

2.3
We found that tax debt was growing at a rate that was outpacing Inland Revenue's capacity to deal with it. Inland Revenue acknowledged this and estimated that total tax debt could more than double within five years unless it took a different approach to managing the debt.

2.4
When we conducted our audit in 2009, Inland Revenue was updating its debt strategy to control the growth of tax debt. We considered that to prepare an effective new strategy to manage the growth of tax debt, Inland Revenue would need better information about the effectiveness and efficiency of its debt collection techniques.

2.5
The five recommendations we made involved improving the information that Inland Revenue collects, uses, and reports.

2.6
Inland Revenue accepted all our recommendations, but our report noted that Inland Revenue told us that the capabilities of its debt management information system limited the extent to which Inland Revenue could achieve two of our recommendations.

Inland Revenue's response to our findings and recommendations

2.7
Inland Revenue has fully implemented one of the five recommendations and has made varying amounts of progress on all the others. We acknowledge that further progress to complete all recommendations depends on getting approval for, and then completing, large information technology projects that Inland Revenue is currently proposing.

Workloads of debt officers

2.8
We recommended that Inland Revenue collect and analyse information on the workloads of its debt officers. At the time of our audit, Inland Revenue told us that its systems could not collect this information and that manually collecting this information was not the best use of its limited resources. Inland Revenue now knows what its system requirements are and is currently preparing a business case to progress the first stage of implementation. Where Inland Revenue has carried out new debt collection activities, such as outbound calling,² we are pleased that it has been collecting information to assess the effectiveness of these new activities.

Increasing coverage of debtors

2.9
We recommended that Inland Revenue review the types of cases it assigns, and does not assign, to debt officers to make sure that all types of tax debt cases are subject to enforcement measures. Shortly after the release of our audit report, Inland Revenue changed how it assigns cases to debt officers. This has enabled greater coverage of tax debt cases that previously were less likely to be subject to enforcement measures.

2.10
Inland Revenue has begun to conduct outbound calling campaigns that target different types of debtors, including categories of debtors that we were concerned might have been missed previously. Inland Revenue is also creating a new customer segmentation model, which it expects will be fully operational by June 2011. When operational, this model should allow Inland Revenue to make risk-based decisions when considering which tax debt cases to assign to debt officers.

Improving reporting

2.11
We recommended that Inland Revenue improve external reporting and also recommended that Inland Revenue better align its internal and external reporting. We have noted that Inland Revenue has improved its external reporting in the ways that we recommended, and now uses its internal debt reporting information in external reporting to provide consistent information.

Improving collection and quality of information

2.12
We recommended that Inland Revenue improve the information it used to monitor the effectiveness and efficiency of its tax debt collection work. Inland Revenue has been collecting information on its outbound calling campaigns to better understand the effect of this new approach. Inland Revenue has also been working with the Australian Taxation Office to explore opportunities to benchmark its performance against an international standard. This is an example of good practice. We strongly support Inland Revenue's efforts to find relevant external standards to use as benchmarks to measure its own performance against.

2.13
Inland Revenue expects that it can make additional improvements to its monitoring when it is able to update its information systems. We encourage Inland Revenue to continue to collect information that will allow it to better monitor the effectiveness of its tax debt collection work.

Increasing capacity and improving systems to manage debtors

2.14
Our report noted that Inland Revenue had more debt cases than its staff were able to actively manage. The 2010 Budget provided Inland Revenue with additional funding to increase its audit and compliance activities in three areas – property speculation, addressing the hidden economy, and debt compliance. This funding amounted to about $120 million for an initial period of four years. The debt portion of this extra funding amounts to just under $60 million. Inland Revenue expects to increase its staff numbers by more than 100 to help with debt collection. The increased baseline funding for debt collection is expected to generate net additional cash collections of about $471 million over four years (after deducting the operating costs to generate this revenue). We expect Inland Revenue to provide regular public reporting on its progress in delivering a positive return to the Crown through its quarterly and annual reports to Parliament.

2.15
In its 2010 annual report and subsequent financial review, Inland Revenue noted that it expects it will take a number of years to transform its debt and tax return management activities. These transformations involve making contact with taxpayers who are in debt to try to change their behaviour, focusing on earlier intervention, adding credit and debit card payment functionality to make it easier to pay overdue debt, and more outbound calling. Inland Revenue has noted that, to fundamentally improve its debt management, it will need to upgrade its information technology systems. It plans to do this over several years.

2.16
We remain interested in Inland Revenue's management of tax debt³ and will be watching its progress.

1: As at 30 June 2010, tax debt totalled $4.588 billion.

2: Outbound calling is where call centre operators contact taxpayers (for example, to remind them about paying debts or submitting tax returns).

3: In July 2010, we published a report entitled Inland Revenue Department: Managing child support debt. In 2012, we will report on Inland Revenue's progress in implementing the recommendations in that report. In 2011, we will be publishing a report on Inland Revenue's approach to making it easy for taxpayers to comply with their tax obligations.