Yesterday, the Tax Office revealed that there was an $8.7 billion tax gap for individuals, more than three times the amount of the $2.5 billion tax gap from large corporates.
In the ATO’s analysis of 858 tax returns, of which 614 were returns prepared by a tax agent, and 244 returns self-prepared by a taxpayer, 78 per cent of agent-prepared returns required adjustments, compared to 57 per cent for self-preparers.
Speaking to Accountants Daily, ATO assistant commissioner Adam Kendrick said the three areas which saw the most adjustments in agent-prepared returns revolved around home office claims, including mobile phones and the internet; clothing and laundry claims; and private travel from home to work.
“We corrected more returns in terms of agents and the main issue we were seeing were over claiming of work-related expenses,” said Mr Kendrick.
“For individuals, I'm not saying they weren't over claiming their work-related expenses but we did see it being more prevalent in the agent-prepared returns.
“The other thing we saw in the agent-prepared returns were claims where we’ve simplified the record-keeping requirements, for instance the $300 standard WRE claim, $150 for laundry, the 5,000km cents per kilometre you can claim for cars — in the agent side we saw a lot of claims that were treated almost as standard deductions and when we looked into them we couldn’t see the connection to work or they weren’t able to substantiate or explain the basis for these claims.”
According to the Tax Office, all 614 tax agent-prepared returns were randomly selected and were subject to a full audit.
“We looked at every label on the return so it was a full audit… we essentially audited every area of the return,” said Mr Kendrick.
“[The adjustments] were right across the board from large preparers to suburban accountants.”
Further, the ATO has identified tax agents into three groups — one, those who are “examples of the profession” and have the right processes and checks in place; two, agents who are making “avoidable mistakes”; and lastly, a small number of 500 tax agents who fail to go by the law.
“The second group, and that’s by far the largest, are those ones who are making what we term as avoidable mistakes like not checking records thoroughly enough or not keeping up-to-date with the law and this group also do get pressure from taxpayers to generate a larger refund,” explained Mr Kendrick.
“The third group which is the smallest group are what we call the higher risk ones, these 500 that we have identified. These are the ones we will have a really strong focus on. Going forward we’re going to be reviewing their practice and their own affairs for about 150 of those this year and our aim is to get across that whole group in three to four years.”
Tax time 2018
In a bid to help tax agents better manage clients looking to push the envelope, the ATO will be rolling out pre-emptive notices available on the ATO’s online services as agents prepare returns.
“For tax time next year, we’re going to be replicating the real-time nudge messaging that we have in myTax at the moment. In tax time 2019, as agents are actually preparing returns, they’ll be able to get a message from us giving them a heads-up if these claims are higher than what we would expect,” said Mr Kendrick.
“For this year we’ve also included that message in their pre-fill reports so while it is talking about last year, we are getting a lot of good feedback from agents that it is very helpful for their conversations with their clients to have a third party, signalling there is an issue and we need to look more closely at it.
“If there was one thing we’d like to emphasise, we’re not expecting agents to verify every claim that’s made but we are asking them to take steps so they are reasonably comfortable the claims being made can be substantiated and explained.”