Tax agents under the microscope
The Black Economy Taskforce report and Tax Gap figures recently released, have provided the government with enough ammunition to put the spotlight on our tax practitioner community.
The Australian Taxation Office (ATO) and the Tax Practitioner Board (TPB), the two key regulators of the tax profession, have been given extra funding to weed out rogue tax agents and encourage other tax agents identified as high risk to improve their business practices.
The assurance work being undertaken by the ATO on tax agents exhibiting risk factors, is part of the government's overall effort to tackle both the Black Economy and reduce the tax gaps in the individual and small business sectors. Tax practitioners influence client behaviours and therefore play a critical role in addressing these issues.
Tax gap for individuals not in business was 6.4 per cent or $8.4 billion with work related expenses (WRE) the biggest driver of the gap.
The random enquiry program highlighted high rates of adjustments in personal tax returns with agent prepared return adjusted 78 per cent compared to 57 per cent for self-preparers.
The tax gap for small business was 12.5 per cent or $11.5 billion with the biggest contributor being, black economy behaviour.
The ATO has been provided with extra funding to increase its efforts to address the behaviour of higher risk agents and work with those agents who are at risk of becoming a concern in the future.
The ATO is well and truly embarked on this journey having already done hundreds of practice reviews of agents exhibiting high risk profiles. The ATO have labelled this project “Intermediaries Assurance Strategy” and expects over the coming years to have undertaken over 2,000 such reviews.
The ATO will be sharing its findings with the TPB, so agents who have proven to have exhibited less than satisfactory behaviour can expect some further attention from the TPB.
Recommended actions for tax practitioners
Tax practitioners selected for a visit should not panic and we recommend that the individuals impacted cooperate with the ATO.
We have had members who have had a visit and have come through with flying colours. In these cases, the tax agents client base exhibited some red flags (clients with above average WRE claims, cash economy participants etc.) and once the ATO had a first-hand visit and saw that the practice was doing all the things it expected, it confirmed that the practice was not in fact, high risk.
Just because a practice is visited, does not infer that the tax agent is doing anything wrong. Sometimes a touch and feel approach is needed to properly assess an agent’s risk profile. The factors that the ATO use to risk assess a practice may not be truly indicative of what is happening on the ground.
The ATO have a number of filters to assess an agent’s risk profile. Factors that can increase a tax agents risk profile whilst not exhaustive can include some of the following:
- Significant number of amendments to returns/activity statements
- Significant number of nil returns and activity statements
- Clients receiving higher than average refunds or a higher refund than the previous tax agent
- Number of pre-issue auto amendments for pre-fill discrepancies
- Low portal usage and/or low use of pre-fill information
- Paper lodgements
- Number of returns with no ANZSIC code
- Significant level of objections and reviews disallowed
- Large number of practitioner hotline calls
- Poor compliance with own tax affairs
- Clients showing
- Above average WRE’s
- High rental expenses
- Cash economy risk
- Lifestyle model
Some of the things the ATO would like to see evidence of when they are performing site visits:
- Membership of a professional body and CPD training to maintain skills and knowledge
- Use of an engagement letter
- Working papers/checklist to ascertain clients state of affairs and exercising reasonable care, appropriate for the assignment
- Have sufficient processes in place to verify the identity of new clients
- Discuss with clients the rules surrounding work related expenses
- Have measures in place to substantiate clients’ work-related expense
- Encourage clients to review their records to ensure they have correctly recorded and reported all income and deductions for their business, especially cash transactions
- Have effective measures in place to correctly report clients’ cash income
The reviews should be a two-way street and the ATO should be educating the client about the resources that are available to support the practitioner.
Tax gap statistics do indicate that we have a problem and the assurance work should help by removing the outliers in the tax agent community that are damaging the reputation of the profession. Whilst these agents exist, they are competing with good agents creating an unequal playing field. The upside to the assurance program will be that clients will not be able to shop around in search of rogue practitioners prepared to operate outside the rules and then brag about how much they received as a refund to their friends which creates unrealistic community expectations.
Tony Greco FIPA, general manager of technical policy, IPA