The Commissioner has stated that the integrity checks have identified over 64,000 potential cases of fraud or overstated refunds. The dollars involved are significant – some $269 million thus far. The ATO states that last year’s program was highly successful, with over 70% of refunds stopped for checking resulting in an adjustment to the amount of the refund. It is understandable that the ATO is trying to stop this kind of tax leakage.
The issue for tax agents is that some of their clients who have lodged legitimate refund claims may be unwittingly caught up in the delays. It is realistic to expect that the ATO’s computer system will sometimes take cases offline for investigation that turn out to be perfectly lawful. After all, this is an investigation tool, and sometimes the result of a check is a “tick and release”. The key is to ensure that legitimate refunds are not unduly delayed, and that impacted taxpayers and agents are not unfairly burdened with compliance difficulties.
I think returns stopped for refund integrity checks fall into three broad baskets:
- Returns that include something unusual, but which turns out to be legitimate/lawful: for example, an unusually high level of PAYG credits, multiple payment summaries, a higher than average claim for work related expenses etc. Though outside the norm, the return is lodged in accordance with the law.
- Returns that include something unusual, which turns out to be an unintended error: for example, a taxpayer who claims some self-education expenses in the false belief they were entitled to do so. Often these cases are due to a misunderstanding of how the technical tax law operates.
- Returns that are lodged with fraudulent details or deliberate overstatements of deductions: this would include deliberate evasion by altering payment summaries to increase the PAYG credits, claiming work related expenses that were knowingly not incurred, claiming a spouse rebate even though the taxpayer does not have a spouse etc. Often the actions are reckless and in complete disregard of the law.
For agents with returns that appear to be caught up in the first category, I would recommend checking your client’s return and gathering the substantiation that the ATO may need to see prior to releasing the refund. Having this material on hand, ready for the ATO enquiry, will ultimately speed up the investigation process and get the refund into the hands of your client quicker. The ATO will send you a letter outlining their concerns – this will include a dedicated call centre for you to call should you have any further queries about the reason for the review.
The second category is an unfortunate one. Most agents would hope that their own review processes should have stopped such a claim; however, mistakes happen, and the best course of action is to estimate the outstanding tax liability and settle it as soon as possible. This should avoid further interest on underpaid tax penalties.
Tax agents need to be wary of clients who may fall into the third category. The ATO has released a list of indicators of suspicious behaviour on their website (scroll to the bottom of the page for the complete list). A combination of the indicators should arouse the suspicions of agents, who should then deeply consider whether to act for the client. Tax agents are bound by a Code of Professional Conduct, which includes an obligation to act lawfully in the best interests of their clients. To knowingly lodge a tax return that contains fraudulent or blatantly false details is likely to constitute a breach of the code.
The ATO has confirmed they are investigating agents who have a high number of the clients that having been subject to adjustments following refund integrity checks. I personally think this is a good idea. Honest agents should not have their business compromised by the “dodgy agent down the road” who promises large tax refunds, but fails to examine the veracity of his/her clients' details or deductions.
The Tax Institute is keeping a close watch on how the refund integrity check program progresses, and we are interested to hear your experiences. There will be opportunities to assist the ATO to refine their integrity model and processes, and your feedback will help us in this process.
Tax Counsel, The Tax Institute