18 Feb 2021 This week in tax
Senior Advocate’s Report
This week, taking a fresh approach to our preamble, our Senior Advocate, Robyn Jacobson, CTA, discusses data-matched amended assessments and some other issues with Hoa Wood, Deputy Commissioner, Individuals and Intermediaries, ATO.
An interview with the ATO
Some of our members have provided feedback that amended assessments are being issued without notice to include additional assessable income. The amended assessments seem to have arisen from data-matching activities undertaken by the ATO. This prompted us to think about the circumstances in which amended assessments are issued by the ATO, as a surprise tax bill tends to sour one’s day.
Hoa Wood, Deputy Commissioner, Individuals and Intermediaries, at the ATO generously agreed to be interviewed for this preamble, so we put some questions to her. Her responses are insightful.
Robyn: Is it possible to receive amended assessments without prior notification or being accompanied by an explanation?
Hoa: We are committed to engaging with clients and their tax professionals to resolve issues as early as possible in the process.
Unfortunately, in early January this year, a system error resulted in a number of amendments being made to clients’ returns without a notification letter issuing beforehand. The notice of assessment which issued after the adjustment contained details of why the return had been amended. We put steps in place to ensure that anyone who queried this amendment was provided with support to answer their queries, or to correct the return where appropriate.
I apologise to anyone who was impacted by this issue, and we have taken steps to prevent it occurring again.
Our goal is to always notify clients of any information we have which has highlighted a discrepancy in their return or assessment. We seek to engage with the client or their tax professional early to resolve the issue with the minimum of disruption and distress.
What can you tell us about the ATO’s Individuals data-matching program?
A guiding principle in our data-matching program is to help clients and their advisers get their tax return right the first time.
Most of our clients will be familiar with our use of this data through our pre-fill service when taxpayers lodge their returns. We also use the data as part of our compliance programs, for example, in risk-assessing returns and correcting errors prior to processing. Our sophisticated data analytics flag taxpayer claims that stand out from their peers in the same industry and at the same income level.
In these pre-issue cases, where we are very confident there has been an error or mistake, we will automatically correct the return and issue the assessment with an explanation of the changes we have made. This isn’t an amended assessment but rather ensures the assessment is correct the first time, thereby avoiding that unwanted tax bill later. Taxpayers can always contact the ATO if they have any queries or concerns about the adjustment.
Although we have a high level of confidence in the data we use, there are rare circumstances where this data doesn’t tell the full story, such as where income has been returned in a trust or another entity by the client but that information doesn’t match what the provider has on record.
Of course if a discrepancy is detected and the reasons for this aren’t apparent from the data, i.e. where there could be a reasonable explanation for the omission, the return will be held. An ATO officer will then contact the client or agent to understand the discrepancy. We look to resolve these issues as early as possible in the lodgment process.
Each year, the ATO contacts around two million people about their tax returns. The vast majority are resolved early without referral to our audit teams.
In our more traditional data-matching program, the client or their tax professional will receive a letter after the original return was processed advising that we intend to amend the return. This could be, for example, where income is omitted or the amount of an offset claimed is adjusted due to ineligibility.
Where does the ATO obtain the data from?
The ATO collects around 650 million pieces of data each year from banks and financial institutions, employers, government agencies, the sharing economy, rental property managers, cryptocurrency exchanges and share registries.
What is the ATO trying to achieve and what are the benefits for the system?
Our use of data means that in most cases the income reported in tax returns is correct at lodgment.
However, our experience is that there is still a place for a focused data-matching compliance program. There will always be instances of careless tax return preparation, failure to use the pre-fill service, or even deliberate attempts to gain an illegitimate tax advantage. We see these behaviours whether or not a tax professional has been engaged.
Our compliance activities support the integrity of the tax system and help ensure that everyone is paying their fair share of tax. What we do know is that a small amount of over-claiming by a large number of people adds up to around $8 billion less each year for essential services.
In what circumstances does the ATO issue amended assessments under the automated data matching program?
Amended assessments are issued only if errors or omissions are identified after the client’s original notice of assessment has been processed and issued.
Although the ATO attempts to correct simple errors and omissions prior to the issue of the client’s original assessment, this is not always possible, particularly when tax returns are lodged before the third-party data is provided to us. Waiting until the start of August ensures that employers have had the opportunity to finalise their employees’ income statements (formerly known as PAYG payment summaries).
Waiting to lodge until this time also allows the ATO to collect and pre-fill other information from banks, private health funds and government agencies. We strongly encourage taxpayers and their agents to wait a few weeks following the end of an income year before lodging tax returns.
Unfortunately, where returns are lodged and processed before pre-fill data is available or before all income has been matched, not all corrections can be completed at the time of the original assessment. Any discrepancy is then dealt with by amending the original assessment.
Before a client receives an amended assessment, they can expect to receive a letter outlining what we plan on amending and why. Generally speaking, this gives the client or their agent 28 days to engage with us to provide additional information to support any claims that we have questioned, amend their return to correct any errors, or remove any unsubstantiated claims.
If the client doesn’t contact us within the timeframe indicated on the letter, we will process the amendment and issue the notice of assessment. Included in this will be any applicable Shortfall Interest Charge that is payable and the total amount owing.
We do want to work with our clients, so contacting us early when your client receives such a letter helps us resolve the issues quickly and avoid what might otherwise be an unnecessary objection.
Do you have any advice on how taxpayers can avoid being caught up in this program?
There are three simple things clients and their agents can do to avoid a data-matching audit:
- Don’t lodge the tax return too early. Most returns that get delayed are from clients or agents who lodge the return before all pre-fill information is available, leading to simple errors and omissions being made in some instances. Most pre-fill information will be available for your clients by 1 August.
- Use the pre-fill service and ensure all income is correctly reported. Unfortunately, we see some agents who don’t access pre-fill either through their software or Online Services for Agents for their clients. This is a common reason why income is underreported or omitted. Pre-fill will contain most of the income for your clients, although it is important to verify with your client that all their income has been reported, as all their information may not be available at the time of lodgment.
- Remind your clients to keep their details updated with their financial institutions, and private health funds etc. This is important to ensure the data can be correctly matched and pre-filled. Clients also need to ensure that if they are opening bank accounts for children, or on behalf of another entity or person, they provide the correct details for the bank account and not their own.
If taxpayers have concerns, what are their options?
As mentioned above, anyone with concerns should contact the ATO. Taxpayers always have the opportunity to provide further information if they think the data we have about them is incorrect.
The sort of information we may need from a taxpayer or their agent will vary depending upon individual circumstances. Often, we are just looking for an explanation of the amounts left off the return or for documentation to support a claim.
The best way to ensure a smooth review process is to engage with us early and have accurate records. Using the ATO’s myDeductions tool in the ATO app is an easy and convenient way for your clients to keep their records in one place and provide them to you in a legible format.
When you call us, we can provide further information for the client on the adjustments made and what data we hold.
In the small number of cases where the data we have used to correct a return or process an amended assessment is incorrect, we act quickly to reverse our decision and ensure the taxpayer has not been disadvantaged.
Final comment from the ATO
We also receive information from members of the Tax Practitioners Stewardship Group about how the system is operating in practice. Our engagement with the professional bodies who are committed to improving the tax system has been very productive and The Tax Institute regularly contributes to this discussion in an open and respectful manner, ensuring their members’ views are well represented and the engagement is meaningful. We value the collaborative relationship we have with The Tax Institute and welcome the opportunity to provide insights into the work we do. Thank you!
Final comment from us
Hoa’s tip about not being too eager to lodge in the first few weeks of July is a wise one. It is prudent to wait until the ATO’s systems are properly ready to receive lodgments and process refunds, and the necessary data is available, including employers’ income statements once they have made their finalisation declarations via STP reporting.
Increasingly, the ATO is turning to technology and digital solutions to identify omitted income, overclaimed expenses or a failure to lodge returns. The digital footprint left by users of the sharing economy makes it easier for the ATO to profile taxpayers and determine whether the income declared and expenses claimed appear reasonable. Records obtainable from Airbnb, Uber, Airtasker and Menulog to name a few, and the use of metadata relating to e-tags, e-passports and mobile phones, provide a clear digital trail of our online activities. Failure to declare income from these activities is readily identifiable and more likely to result in an amended assessment. We shall say more about modern data-matching techniques later.
In summary, if you do have queries or concerns, reach out to the ATO. As noted by Hoa, there should be complete transparency of the reasons for any adjustment or amended assessment. It is acknowledged that there have been a small number of incidents where this has not occurred and the ATO has worked to rectify this. However, you have the right to seek clarity before needing to dispute and, in many instances, simple corrections can be made without the need for a dispute. Finally, not all systems are failsafe. There are a small number of occasions where the data is wrong. The ATO acknowledges this, so again, raise your queries and concerns early. If you continue to have challenges, please keep us informed.
We thank Hoa Wood for her willingness to provide her insights to our members on the issue of amended assessments. We hope that her forthright responses give you a better understanding of the process of how the ATO issues amended assessments and what you can do if you are unsure of the reasons underpinning an assessment or the amount of the adjustment.
As always, we welcome your views and thoughts, which you can provide here.
Robyn Jacobson, CTA