Closing the tax gap
The ATO is on the hunt for rogue practitioners contributing to the massive ‘tax gap’. To avoid getting caught in the middle, tax agents everywhere must improve their due diligence.
Debra Anderson’s clients are terrible at keeping records.
As she sits across from one client, who is donned in his work uniform, she helps him estimate how much he spent on laundry this year.
Ms Anderson knows the true value must sit around $300 to $400 a year. Still, without all of the records, she helps him claim $150.
This is how she used to work with her clients.
But today, that’s no longer the case. Ever since the Australian Taxation Office announced it would be increasing its compliance activities in an effort to drive down the tax gap, agents like Ms Anderson have become more stringent with their clients about what they can and cannot claim.
It follows after the ATO found that incorrect claiming on tax returns was more common in agent-prepared returns than in self-prepared returns.
The changes in agent behaviour is not because the agents are dishonest, but because their clients might be. Many tax agents rely heavily on pre-filled information and what is given to them by their clients.
Still, that hasn’t stopped the ATO and other regulators from smearing the tax agent’s role in public.
Earlier this year, ATO commissioner Chris Jordan unleashed a string of scathing comments that questioned whether tax agents should still be considered “guardians of the system”.
Since then, agents have had to defend their roles for fear that the public trust in their profession might dwindle. All the while, a crackdown on bad agents and taxpayers has already begun.
“There has been an effort to work with agents to get them back in line. We’re expecting more action by the regulator regarding de-registering agents,” says IPA general manager of technical policy Tony Greco.
“It’s happening as we speak. Visits are happening. Agents are being pulled up.”
It may feel like a tough time for the tax industry, but some believe positive change is soon to come. With the removal of rogue practitioners who use dodgy tactics to maximise returns, good agents will have an easier time ensuring all of their clients are adhering to the rules.
In the meantime, however, agents everywhere must do better to protect their clients and businesses.
“We’re telling our members it’s time to make sure you are diligent in the way you conduct your business,” Mr Greco says. “It’s going to come back and bite you if you’re not following the rules.”
The famous disparity
The tax gap is the difference between the amount of tax that should have been collected and what was actually collected. It is an estimated guess based on statistical analysis of a number of random samples.
For the 2014-15 financial year, the ATO estimated a net tax gap of 6.4 per cent, or $8.7 billion, for individuals not in business. This was larger than the $2.5 billion tax gap estimated for large corporates.
One of the drivers for this has been over-claiming on tax returns, which was found to be more common in agent-prepared returns than in self-prepared returns. As a result, the ATO has increased its focus on a number of areas in an effort to drive down the gap, which includes enhancing processes and services.
It is looking to provide better guidance and advice to both taxpayers and agents to clarify uncertainty. Finally, the ATO is focusing on finding and removing those tax agents who deliberately cheat the system.
This last initiative has ignited a sort of paranoia across the industry. Many tax agents are feeling unfairly targeted and that the regulators have painted all agents to be purposely lodging dodgy returns.
While in reality only a minority of tax agents are doing the wrong thing, all agents have to step up their game, says Mr Greco.
He says the tax gap issue has put a lot of pressure on all parties of the tax system, not just on agents.
“It has had a lot of implications for the revenue authority and what it has been doing; tax practitioners, why are they allowing individuals to claim more than they’re entitled to; and the self-lodgers,” Mr Greco says.
“It’s a big wake up call. Effectively, everyone is on notice. The revenue authority has been given a lot of money to clean it all up.”
Agent crackdown a positive thing
While increased surveillance may seem like a rough time for tax agents, it might actually lead to better outcomes, says Mr Greco.
The removal of ‘bad apple’ agents may, in time, alleviate the pressure on good agents to give their clients the largest possible tax refund.
For many years now, Australia has had a culture of tricking the tax system, Mr Greco says. Finding smart ways to avoid paying taxes has become a sport for both taxpayers and tax agents, he says.
“We have this mentality of, ‘How can we game the system and get the maximum refund?’.
There are a lot of agents out there who are promising large refunds because they’re not adhering to the law. Because it was left unchecked for such a long time, a lot of those rogue agents were putting pressure on good agents to bend the rules slightly,” he says.
“Eliminate the rogues out there and put less pressure on good agents. Good agents will have to up their game in relation to making sure they do their job diligently and clients have to amend their expectations about the quantum of the refund.”
Ms Anderson knows what that pressure feels like.
The director at Anderson Tax & Consulting says she has lost clients in the past for refusing to make certain claims. But for agents who cannot afford to lose a client, they might have acted differently.
“It’s almost a sport to avoid tax. That really impacts each and every one of us. We are judged by their returns. I see people on social media say, ‘Can anyone recommend a good accountant? Mine didn’t get me a good refund’. The size of your return has nothing to do with your accountant,” she says.
“I’m not prepared to risk my integrity or my licence, but there are agents who absolutely appear to turn a blind eye to everything and anything. Maybe they’ve just gotten to the point where they’ve just lost seven big clients in two months. Maybe they are in a more desperate situation.”
While some tax agents feel unfairly targeted, public accountant Sam Naidu, principal of Sam Naidu & Associates, says he cannot blame the ATO.
“I think there are agents who don’t follow the rules and just try to please the client by overclaiming their expenses,” he says.
“There is a minority of tax agents who may not be doing the right things, which is impacting all the tax agents. But I think most tax agents are well-qualified and doing the right thing.”
Getting tougher with clients
While it might take time to remove rogue practitioners and change client expectations, there are some ways that tax agents can influence behaviour now while protecting their businesses.
Mr Greco says one of the reasons why errors might be more common in agent-prepared returns is because some clients are not being truthful, and agents are accepting their word.
“At the end of the day, given the amount of money they charge for the service, they can’t audit all the information that the client provides,” he says.
“If they’re not truthful, the agent, by default, will be lodging a return that’s built on a house of cards. It comes out as an agent-prepared return that was wrong.
“But if you peel back the layers, it was the client that was providing false assertions.”
But this doesn’t mean that agents have no fault. They must become more diligent in their questioning.
“Ask them, ‘Can you substantiate? Can your employer back your assertions that you are using your car for business purposes?’ Agents have to up their game, too,” Mr Greco says.
“Agents can ask for documentation. If they went overseas for a conference and said it was business related, is there a letter from the employer? Agents can start to ask a few more diligent questions rather than accepting everything at face value. If something seems excessive, ask questions.
“If a client says no, then the answer is that you just can’t claim. Don’t be prepared to put in a claim that is investigated. Go to the next level.
“Agents understand the law better than the client, and there are obligations under the law to be able to prove that you incurred [the expense]. If you can substantiate it, then you can get reimbursed.”
Ms Anderson admits that it is not always simple to know when a client is being untruthful, but she doesn’t believe the ATO is after the average tax agent who has relationships with their clients.
“We’re fit and proper people. We wouldn’t deliberately lie, but some of our clients may be lying to us. I do think that when they are talking about agent-prepared returns that they are talking about bulk-lodgers, not people like myself,” she says.
“I get to know my clients. I sit across from them, unlike the ones that lodge 800,000 individual returns every year. I’ve seen some of the training material and hired a couple of their ex-people. They’re all told to claim $10 in donations.
“The thing about agents is that we have to take what we’re told. If a client says I’ve done this, who am I to tell them that they haven’t?
“We can check so much of their stuff but there are some things we can’t do. But I do think we can do things better.”
Ms Anderson says the tax gap issue has already influenced her processes and has made her more mindful when doing returns. She is also using resources from the ATO to educate her clients on claiming as well as encourage them to practice better record‑keeping.
“I’m trying to get people to do logbooks. I’m actually enjoying some of the social media that’s coming out of the Tax Office because I’m able to then say to my clients, ‘Hey, look. They’re looking at this’,” Ms Anderson says.
“One of the other positive things that’s come out of the tax gap is that the ATO has put together a whole bunch of resources for us this year. The Tax Time Toolkit, there’s one or two pages that we can either print out or email [to our clients].
“I’ve been using them in social media campaigns to build awareness on what you can and can’t claim.”
Mr Greco says the cultural shift in the tax system has already started, with the regulator having de-registered a number of agents.
Tax agents should remain diligent while the clean-up is in process.
“If it all turns out the way it should, behavioural changes will flow through the system,” he says. “It’s certainly a wake-up call.”