Background

Tax practitioners are an integral part of the tax system in helping many taxpayers deal with their taxation responsibilities.¹ They are intermediaries between taxpayers and the ATO. In a speech delivered in April 2006, the Commissioner of Taxation stated that tax professionals play an essential role in maintaining the integrity and efficiency of the tax system, providing a key compliance leverage point to influence taxpayer behaviour.²

With self-assessment as the underpinning policy of tax administration³ and the changes in taxpayers' reporting obligations flowing from more recent tax reforms, tax agents have assumed an increased importance in the operation of the tax system. As at 30 January 2006, there were 26 169 tax agent registrations.⁴ Tax agents lodge about 74 per cent of the approximately 10 million individual tax returns and over 95 per cent of the approximately two million business tax returns.⁵

The relationship between the ATO and tax practitioners is multi dimensional, dynamic and evolving. ATO interactions with tax practitioners serve a number of different functions including client support, service support, regulatory support and active compliance. The ATO and tax practitioners often have different and sometimes divergent interests. These factors ensure the relationship will be complex and at times fractious, despite each party's recognition that the relationship is one of mutual dependency.

All of the ATO's business lines have an active interest in or dealings with tax agents. From 1 July 2006, the Tax Practitioner and Lodgement Strategy (TPaLS) business line assumed corporate responsibility for managing the relationship with tax practitioners.

TPaLS also provides a range of specific tax agent support, compliance and co ordination services. These include developing and delivering education, communication and technology products to tax agents, investigating tax agent compliance and integrity issues, providing secretarial support to the Tax Agent Boards (TABs), analysing and understanding the tax profession, and managing external liaison arrangements with tax, accounting and legal professional bodies.

TPaLS has a staffing level of 821 for 2006–07 and total funding of some $60 million.⁶ Of this, 312 staff and approximately $24 million are dedicated to the tax practitioner function. A diagram showing the structure and lines of reporting within the business line can be found at Appendix 2.

During 2002–03 the ANAO completed an audit of the ATO's management of its relationship with tax practitioners.⁷ At that time, the ANAO found that the relationship between the ATO and tax agents and the tax and accounting professional bodies could best be described as strained and tense. The audit acknowledged that managing the relationship well was an ongoing and challenging task and that the ATO had recognised the need to better manage and enhance the relationship. The ANAO concluded that the ATO needed to implement new initiatives to restore sound relationships with tax practitioners and ensure the effective operation of the tax system.

The 2002–03 report contained 10 recommendations directed at improving the ATO's management of its relationship with tax practitioners. The recommendations focused on three main areas:

• improved governance;
• enhanced services for agents; and
• improved stakeholder liaison.

In the May 2006 Budget, the government announced an initiative to provide $57.5 million over four years, commencing in 2006–07, for the implementation of a new Tax Practitioners' Legislative Framework.⁸ The new framework is designed to ensure nationally consistent, high quality and accessible tax practitioner services to the community. The new regime will:

• establish a national Tax Practitioner Board, to replace existing state TABs;
• create a code of practice to govern provision of tax practitioner services;
• allow a more flexible approach to regulating tax practitioners through a wider range of disciplinary sanctions; and
• provide for a safe harbour from tax shortfall penalties for false and misleading statements for taxpayers where they engage a registered tax agent to prepare their return and take reasonable care to provide that person with all the information necessary to complete it.

The new framework will also introduce registration for BAS service providers and enable registration for certain types of tax specialists.⁹

Over time the proposal is expected to provide benefits to the ATO's core activities in terms of more accurate returns from taxpayers, a reduction in general enquiries, a greater take up of electronic reporting options and scope to reduce audit activity.¹⁰

Audit objective

The objectives of this follow-up audit were to:

• examine the ATO's implementation of the ten recommendations in The Australian Taxation Office's Management of its Relationship with Tax Practitioners (Audit Report No.19, 2002–03), having regard to any changed circumstances, or new administrative issues, affecting implementation of those recommendations; and
• identify scope for improvement in the ATO's management of its relationship with tax practitioners.

Follow up audits are recognised as an important element of the accountability processes of Commonwealth administration. Parliament looks to the Auditor General to report, from time to time, on the extent to which Commonwealth agencies have implemented recommendations of previous audit reports. Follow up audits keep Parliament informed of progressive improvements and current challenges in areas of Commonwealth administration that have previously been subject to scrutiny through performance audits.

Conclusion and key findings

Implementation of the recommendations of Audit Report No.19, 2002–03

In relation to the first part of the audit's objective, the ANAO concluded that the relationship between the ATO and tax agents, which had been strained and tense at the time of the previous audit, had improved significantly. This has been partly a result of the easing of pressures placed on practitioners and the ATO's operational systems by tax reforms such as Australia's New Tax System (ANTS). It also reflects the substantial progress made by the ATO in implementing the recommendations of Audit Report No.19, 2002–03.

The ATO had fully implemented four, substantially implemented four, and had partially implemented one other of the report's ten recommendations. Action on one recommendation hinged on the Government's new legislative initiative.

Surveys of tax agents show a marked improvement in the attitudes of tax agents towards the ATO since 2003. These surveys are carried out independently, but on behalf of, the ATO by the international social survey group, TNS Social Research. The surveys are conducted regularly throughout the year and for each year since 2003. They also track tax agents' attitudes to a range of experiences with the ATO.

The proportion of tax agents satisfied with the ATO's services increased from 39 per cent in 2003 to 70 per cent in 2005. The level of dissatisfaction dropped from 38 per cent to 14 per cent. The ANAO notes that since 2003 there has been a consistent upward trend in levels of satisfaction with the quality of ATO staff assistance, the ease of access to ATO services and the value of the Tax Agent Portal.¹¹

Whilst TPaLS has corporate responsibility across the whole of the ATO for managing the relationship with tax practitioners, all of the ATO's business lines and most of its service lines necessarily interact with tax practitioners as part of their day to day work. The nature and quality of this interaction can have a bearing on the quality of the ATO's relationship with tax practitioners.

A challenge for TPaLS is to co ordinate and support the multiplicity of the ATO's interactions with tax practitioners so as to maintain good and consistent relations. In addition, TPaLS has to ensure that the specific tax practitioner functions for which it has corporate responsibility are performed as efficiently and effectively as possible. A key responsibility is to provide the tax practitioner infrastructure and co ordination services at such a level that if the tax practitioner industry is stressed by systemic governmental and/or ATO initiatives, the ATO/tax practitioner relationship remains balanced and constructive.

Scope for further improvement in the ATO's relationship with tax agents

In relation to the second part of the audit's objective, to identify scope for improvement in the ATO's management of its relationship with tax practitioners, the ANAO found four key areas of administration that warranted further attention. These concerned:

1. the clarification of the role and functions of the Tax Agent Boards and the ATO;

2. scope for improvement in the performance of the Relationship Management function;

3. the ATO's level of knowledge about the tax agent population and ability to analyse details of tax agents and their associated registrations; and

4. the ATO's approach to various tax agent compliance matters, specifically:

• the adoption of a more strategic and corporate approach to the detection and management of serious integrity risks presented by a small proportion of practising tax agents;
• the detection and management of some additional risks associated with the structures and practices of some tax agents; and
• the potential for the ATO to address industry concerns about the incidence of unregistered tax return preparers.

In this report, the ANAO has made six recommendations to address these four areas. The key issues concerning these four areas are summarised in the following paragraphs.

Clarification of the roles of the Tax Agent Boards and the ATO

The ANAO noted that in the tax practitioner industry and some areas of the ATO there was a lack of clarity about the roles of the TABs and the ATO in relation to a range of administrative issues. These included such matters as the TAB's accountability to the Treasurer, the Minister Assisting, and the Commissioner of Taxation; the ownership and access arrangements for the files containing the records of TAB deliberations; and the requirements of procedural fairness. Two of the six recommendations of this report are intended to address these matters.

Improvements to the ATO's relationship management function

Through the ATO's Relationship Manager (RM) function, the ATO provides tax agents with a wide range of personalised services. These services have a number of benefits. For example, they can help agents manage their practices better by the more skilful use of IT systems and a better understanding of ATO requirements. The RM staff can help improve tax agents' compliance with tax law in their own affairs as well as in relation to the tax issues of their clients.

Since tax agents have such a pivotal role in the community in taxation matters generally, there are benefits to the Commonwealth from the improved across the board compliance facilitated by the RM function. An improvement in the RM function could yield significant benefits as a result of improved compliance by tax agents and their clients.

The ATO expects staff carrying out the RM function to report tax agents' concerns on a corporate, whole-of-ATO, level and to convey to tax agents the whole-of-ATO view of the business lines' concerns and priorities about tax agent activity. The ANAO considers that the function could be improved to better target the provision of services in relation to compliance risks and educational needs of agents, as well as to enhance the ATO's strategic learnings from RM activity.

One of the six recommendations of this report is intended to improve the performance of the RM function.

Tax agent compliance matters

(a) Tax agents presenting serious risks

ATO research shows that a small proportion of tax agents present a serious risk to the integrity of the tax system and to the welfare of their clients.¹² The ATO has taken action against a number of these persons, ameliorating some serious risks. The ANAO noted several major and complex investigations relevant to this matter were underway at the time of the audit.

The ANAO considers that the ATO could take a more corporate, or whole of ATO, and strategic approach to the detection and management of the serious integrity risks presented by these persons. The ATO has a range of whole of ATO methodologies which have been used elsewhere in the ATO in relation to persons presenting serious compliance risks. The adaptation of these to the detection and management of the serious integrity risks presented by the small proportion of tax agents, who present a serious risk to the integrity of the tax system and to the welfare of their clients, could be useful.

Tax agents' involvement in preparing tax returns necessarily means that they have access to their client's personal information and accounts. Their access to the Tax Agent Portal gives tax agents ready access to clients' funds paid to the ATO and in certain circumstances, ATO refunds due to clients. Recent incidents of fraud show that tax agents who are most likely to engage in the more serious forms of non compliance activity can use the Tax Agent Portal to defraud the Commonwealth. These considerations highlight the importance of rapid detection and prevention of the more serious forms of tax agent integrity risk. ATO research suggests that it is necessary for the ATO to adopt a whole of ATO view in relation to the activities of tax agents who are most likely to engage in the more serious forms of non compliance activity. In some cases, a multi agency view may be required to deal with the range and severity of the integrity risks.

The ANAO has made one recommendation to address the need for the ATO to adopt a more corporate, strategic approach to the serious integrity risks presented by a small proportion of tax agents.

(b) Additional risks related to some tax agent practices and structures

The ANAO noted that business structures being used by some tax agents may breach some sections of the ITAA. In some cases this may be a technical breach in that the tax agent has arranged their affairs unwittingly in breach of some provisions.

A breach of sections 251L, 251N and/or 251O, which relate to tax agents charging fees for their services, preparing returns and advertising their services, respectively, may arise if a tax agent traded through an entity other than the entity registered with the State based TAB. For example, a tax agent may be registered as a natural person but is trading through a private company.

In addition, there may be breaches of s.251N(1) of the ITAA arising from the use of service trust arrangements in tax agent practices. Service trust arrangements in the tax profession typically involve a tax agent using the services of a person engaged through a service trust to prepare and lodge income tax returns. The Australian Government Solicitor has advised the ATO that s.251N(1) of the ITAA prohibits a registered tax agent from conducting a business of preparing income tax returns, or dealing with other income tax matters, otherwise than through:

• an employee;
• another registered tax agent; or
• in the case of a partnership agent, a member of that partnership.

The ANAO notes that under current legislation, a registered tax agent could structure internal arrangements so that staff, who prepare tax returns and use the Tax Agent Portal, are not physically collocated in Australia with the tax agent. There have been media reports about specific instances of tax agent practices that may engage staff resident in overseas locations. There is a potential risk therefore that fraudulent access gained from abroad by means of the less secure PIN/Password entry to the Tax Agent Portal may result in activity that is beyond the ATO's capacity for timely and remedial action.

One of the six recommendations of this report is intended to address these additional risks associated with the structures and practices of some tax agents.

(c) Unregistered tax return preparers

The ANAO was informed of serious concerns in the tax practitioner professions about the number of unregistered tax return preparers still operating in the community. The ANAO found that the ATO has a series of initiatives underway to improve the efficiency and effectiveness of its activities directed at unregistered tax return preparers. These include encouraging the industry to inform the ATO of persons who may be unregistered tax return preparers and the use of profiles to identify tax returns that have been prepared by unregistered tax return preparers. The ANAO considered that the ATO could improve the use of profiles and other analytic techniques to better identify unregistered tax return preparers at the earliest opportunity.

One of the six recommendations of this report is intended to improve activity in this area.

ATO's knowledge of the tax agent population

The ANAO found that because of the quality of relevant tax agent information available to the ATO, it is unable to evaluate the full extent of the compliance risks in the preceding paragraphs. The ATO has not been able to provide an accurate measure of the number of tax agents who, as natural persons, practice full time and employ more than one staff member. The ATO cannot compile accurate and reliable measures of the numbers of tax agents or tax agent practices with key characteristics such as size and type of practice, or number of employees. More than 25 000 tax agent files are maintained as paper files in each State. There is no central or national registry for these files. The files for each tax agent registered in a State are maintained by the TAB secretariate for that State.

The ATO maintains a simple IT database, the Tax Agent Registration System, which has limited functionality. Data matching or analysis for compliance purposes, is not as efficient or accurate as it could be had the tax agent files been computerised. The ANAO understands that the ATO has plans to computerise tax agent files as part of the implementation of the new Tax Practitioners' Legislative Framework.

Summary of ATO Response

The Tax Office welcomes the ANAO follow up report into its management of its relationship with Tax Practitioners, and the conclusion that there has been significant improvement in the relationship between the Tax Office and tax practitioners since the previous audit.

It is important to note that the original report's findings primarily related to registered tax agents. We regard this as our most significant intermediary relationship in our tax system. However, as the ANAO's original report noted the landscape for the tax industry continues to evolve and we are continuing to develop our relationship with other key groups such as bookkeepers, legal professionals and software developers.

The Tax Office accepts the six recommendations as contained in the current section 19 report, and has already made progress towards their implementation. There are, however, two areas that require clarification:

Firstly, our response to the content and recommendations relating to the Tax Agent Boards has been considered in the context of the statutory independence of those Boards. We will need to work with the Tax Agent Board Chairs (part time members and generally from the legal profession) to give effect to relevant recommendations.

Secondly, and as the ANAO's report notes, the Government last year announced the intention of implementing a new legislative regime for tax practitioners that would fundamentally reshape the administrative processes underpinning the current regulatory framework. In accepting the recommendations of the report, the Tax Office will need to reconsider the appropriateness and priority of planned implementation activities in the context of implementing a new administrative regime. In this context any investment in current, but potentially outdated, business systems and processes is unlikely to proceed.

The ATO's full response is at Appendix 1.

Footnotes

1 Tax practitioners play important roles as intermediaries between the Australian Taxation Office (ATO) and taxpayers because they variously interpret the law, advise and ‘educate' taxpayers in tax law matters, and submit information to the ATO on behalf of their clients. In this audit we use the term ‘tax practitioner' to mean tax agents and the wider group of professionals working on taxation matters for clients. The main focus of this follow-up audit, however, will be on the ATO's management of its relationship with tax agents. Tax agents are the core element of the tax practitioner grouping and their role is fundamental to the efficient and effective operation of the tax system.

2 Commissioner of Taxation, A new relationship with the tax profession, April 2006 at <http://www.ato.gov.au/corporate/content.asp?doc=/content/71870.htm&gt;. As noted in the Commissioner's speech, the majority of tax agents have multiple registrations; in particular, the majority of tax agents with a client base of less than 100 are linked to more than one registration. As a result the number of tax agent registrations exceeds the number of tax agents.

3 Self assessment, introduced in the mid 1980s, requires taxpayers to interpret the tax law correctly and to calculate their taxable income. Previously, taxpayers submitted required documentation with their returns and the ATO calculated tax payable.

4 Commissioner of Taxation, A new relationship with the tax profession, April 2006 at http://www. ato. gov.au/corporate/content.asp?doc=/content/71870.htm

5 ibid.

6 This amount does not include $8.569 million allocated for the new Tax Practitioner Legislative Framework.

7 Auditor General Report No. 19 2002–2003 Performance Audit. The Australian Taxation Office's Management of its Relationship with Tax Practitioners. Tabled in the Commonwealth Parliament on 2 December 2002.

8 The Hon. Peter Dutton MP, Minister for Revenue and Assistant Treasurer, New Tax Practitioners Regime, May 2006 at http://assistant.treasurer.gov.au/pcd/content/pressreleases/2006/016.asp

9 The need for a new legislative framework was first identified in a report published by the Commonwealth of Australia in 1994 titled ‘Tax Services for the Public: The Report of the National Review of Standards for the Tax Profession'.

10 Budget Paper No. 2 Budget Measures 2006–07, Tax Practitioner Legislative Framework – Implementation,
May 2006, at <http://www.budget.gov.au/2006-07/bp2/html/bp2_expense-17.htm&gt;.

11 The operation of the ATO's tax agent and business portals was the subject of a recent performance audit. The report of this audit is Tax Agent and Business Portals Australian Taxation Office Audit Report No. 4 2006–2007. This report was tabled in the Parliament on 12 September 2006.

12 Tax agents as a category may present two types of compliance risks. One relates to their personal responsibilities under tax law; the other to their professional role as a tax agent. Personal responsibilities of tax agents include their compliance with lodgement and tax debt payment obligations, all other tax law obligations as individuals, as well as in relation to any roles they may have in respect of companies, trusts, partnerships or superannuation funds. The professional responsibilities of tax agents introduce a wider range of compliance risks associated with the tax returns of their clients, the security of their clients' tax files and their access to the ATO's tax agent portal.