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Chapter 8

Tax administration and tax intermediaries

This chapter outlines aspects concerned with revenue bodies’ administration of tax intermediaries.

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Key points

Many revenue bodies may be missing substantial opportunities for leveraging improved compliance and easing taxpayers’ compliance burden with tax laws, as evidenced by:

-Less than one third of revenue bodies reported the existence of specific laws/regulations governing the tax-related operations of tax professionals;

-Most revenue bodies were unable to report (or even estimate) the volumes of tax returns prepared by tax intermediaries;

-Less than half of revenue bodies regularly survey tax intermediaries on service delivery and other aspects of the tax systems operation;

-Only around 60% of revenue bodies have formal consultative arrangements for engaging with representatives, while a slightly lesser number have dedicated organisational arrangements to administer tax professionals;

-Relatively little or no service/support appears to be provided to tax intermediaries in many countries.

There appear opportunities for at least 75% of surveyed revenue bodies to enhance the range of services offered to tax intermediaries.

The practice of differentiating the compliance treatment afforded to particular tax intermediaries (based on risk) appears largely “untested territory” for just about all revenue bodies.

This is a new chapter in the CIS, intended to lay out in an informative and concise way details of revenue bodies’ approaches to administering and supporting the work of tax agents/preparers/professionals etc. (hereafter referred to as “tax intermediaries”).

Introduction

Tax intermediaries play a significant role in the operation of the tax system of many countries, carrying out a range of tasks essential to its smooth functioning (e.g. preparing tax returns, providing advice to taxpayers on the application of the tax laws, and representing them in their dealings with the revenue body). While tax intermediaries are engaged principally by taxpayers to assist them in meeting their tax obligations, their high usage in many countries means that they can play a very significant role in achieving high levels of compliance, in essence assisting the revenue body, and the community at large, achieve its overall revenue collection goals. For example:

Tax law complexity: With few exceptions, tax laws (and often the administrative procedures related to those laws) are complex; most taxpayers, particularly those in business, have neither the time nor the knowledge to fully understand and deal with all aspects of their taxation responsibilities and obligations. Tax intermediaries operate as conduits, advising taxpayers of the requirements of the law that apply to their affairs, what actions are required of them to meet those obligations, preparing relevant tax returns and other tax documents, and representing them when issues arise (e.g. an audit inquiry); for those taxpayers who do business globally, the assistance sought by them on tax matters invariably extends to the tax laws of other countries, thus increasing the degree of reliance on the services they provide.

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Tax law changes: Tax laws change frequently and many taxpayers may not be aware of such changes and the implications for their own financial and business affairs; timely provision of comprehensive and accurate tax information by revenue bodies to tax intermediaries can assist greatly in the dissemination of changed laws and their implications for taxpayers.

Tax compliance: Tax intermediaries can directly assist taxpayers comply with their tax obligations in a number of ways:

-Advising them on the nature and quality of books and records that they are required to keep to enable computation of tax liabilities;

-Reminding them when specific obligations fall due (e.g. return filing and payment);

-Correcting taxpayers’ misunderstandings of specific areas of law and administrative requirements;

-Warning them of common compliance risk issues (that may result in deliberate or inadvertent non-compliance) communicated by the revenue body; and

- Representing them in compliance-related dealings with the revenue body (e.g. seeking extensions of time to file or pay tax, executing a voluntary disclosure of previously undeclared liabilities, and dealing with tax audits).

It was largely in the context of the positive contribution that tax intermediaries could play in achieving tax compliance and contributing to the smooth functioning of the tax system that the FTA’s 2008 study (OECD, 2008) into the role of tax intermediaries1 conceived and recommended the idea of an “enhanced relationship” involving tax intermediaries, taxpayers and the revenue body. While the focus of the study was on aggressive tax planning and the tax affairs of large taxpayers, the general principles underpinning the “enhanced relationship” apply across all segments of taxpayers and their representatives. The essence of what the study recommended is set out in Box 8.1. (In early 2012, the FTA Bureau commissioned an evaluation of the progress made in the application of the concept as it applies to large taxpayers, and a report of its findings is expected to be published in the first half of 2013.)

Box 8.1. Study into the role of tax intermediaries: The enhanced relationship

The study’s key finding is that revenue bodies could achieve a more effective and efficient relationship in their dealings with taxpayers and tax intermediaries if their actions are based upon the following attributes:

An explanation of the characteristics of these attributes and what it means for revenue bodies and their approach to tax administration is set out in the study report – see www.oecd.org/dataoecd/28/34/39882938.pdf

The report emphasises that these attributes are fundamental for any revenue body and should underpin all their dealings with all taxpayers. If revenue bodies demonstrate these five attributes and have effective risk-management processes in place taxpayers, especially large corporate taxpayers, would be more likely to engage in a relationship with revenue bodies based on co-operation and trust, what is described in the report as an “enhanced relationship”.

An enhanced relationship offers benefits for revenue bodies as well as taxpayers. The report notes that taxpayers who behave transparently and who provide a high level of disclosure of relevant information can expect greater certainty and an earlier resolution of tax issues with less extensive audits and lower compliance costs. An enhanced relationship between revenue bodies and tax intermediaries would also yield significant benefits.

Source: Study into the Role of Tax Intermediaries, OECD, 2008.

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The population and work volumes of tax intermediaries

Data on the population of tax intermediaries in surveyed countries are not readily available but the information hereunder reveals that for the countries concerned they are a sizeable population responsible for preparing a large proportion of tax returns, etc:

Australia: In 2011-12, around 23 000 active registered tax agents and over 6 000 active registered business activity statements agents advised and helped manage the tax affairs of their clients. In total, they lodged over 70% of individual tax returns and 90% of business tax returns (source: ATO Compliance Program 2012-13)

New Zealand: About 5 200 tax agents are registered with Inland Revenue and they handle the tax affairs of nearly two million clients, filing 83% of all income tax returns. Tax agents range from individual bookkeepers working from home, to larger businesses that offer management and accounting services. IRD defines a tax agent as a person who prepares returns of income required to be completed and sent in for 10 or more taxpayers, and is one of the following: 1) a practitioner carrying on a professional public practice; 2) a person carrying on a business or occupation in which annual returns of income are prepared; or 3) the Maori Trustee. (Source: IR website)

United Kingdom: HMRC has estimated that there are around 43 000 tax agent firms representing around 8 million clients-78% of corporation tax returns (1 million), 33% of end-of-year employer-submitted PAYE returns (2 million), 63% of self-assessed income tax returns (6.2 million), and 43% of VAT returns (0.8 million) (Source: The report “Engaging with tax agents” (UK National Audit Office (October 2010).

Regulation of tax intermediaries

The role of regulation and registration

The report of the study into the role of tax intermediaries made special reference to the role and value of regulation and registration of tax intermediaries;

An ability to identify tax intermediaries is generally seen as being an important step in understanding and effectively managing their role within the tax system. However, the level of revenue body involvement in the registration and regulation of tax intermediaries varies considerably among FTA countries. In some FTA countries, tax advisers are entirely self-registered and regulated; generally, within the framework provided by professional bodies. This framework can be very strict as some tax intermediary businesses are tightly regulated and operate under a number of professional and ethical codes.

The UK is an example of a country that, to some extent, relies on self-regulation by professional bodies. The five main principles of one such body, the Institute of Chartered Accountants in England and Wales (ICAEW), are integrity, objectivity, professional competence and due care, confidentiality and professional behaviour.

In other countries, the revenue body is more active and this may involve some form of regulation by it. This will typically involve a registration process that allocates a unique number to individual tax intermediary businesses or professionals within the business. The number must then be included on any contact with the

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revenue body and on any submission made by their clients to the revenue body.3 In order to become “registered”, tax advisers must sign up to a minimum standard of behaviour or meet a minimum standard of qualification as set out in relevant legislation. These standards are then monitored by the revenue body. For example, in Japan, the National Tax Agency (NTA) provides guidance and supervision for certified public tax accountants (CPTAs) or “Zeirishi”. The NTA is currently making efforts to collect information on cases of professional misconduct and dealing strictly with those in breach of the CPTA Law.

Box 8.2. Australia: Tax Agent Services Legislation

The key elements of the legislative regime are set out hereunder.

1.The establishment of a national Tax Practitioners Board: The Tax Practitioners Board (Board) has responsibility for registering tax agents and BAS agents (i.e. agents who prepare business activity statements (BAS), a return covering multiple taxes that is completed monthly or quarterly by businesses to report all periodic tax obligations), ensuring that agents maintain appropriate skills and knowledge, investigating complaints against agents and ensuring that unregistered entities do not hold themselves out to be agents.

2.A wider scope of application: Under the new arrangements, BAS agents will be governed in the same way as tax agents, but will only be able to provide a limited range of services relating to the taxation laws relevant to a BAS provision in the law.

3.Registration requirements: Meeting the fit and proper person test, as well as minimum educational qualifications and relevant experience requirements, will be required in order to obtain registration to provide tax agent services for a fee or other reward. The minimum educational qualifications and relevant experience requirements are set at a less demanding level for registration as a BAS agent than for registration as a tax agent, in recognition of the narrower scope of services provided by BAS agents.

The Board may impose conditions on registration limiting the scope of the services that an agent may provide to one or more areas of the taxation laws or one or more type of tax agent service. These limitations correspond to the prescribed qualifications and relevant experience of an individual agent or, in the case of an agent that is a partnership or company, to correspond to the prescribed qualifications and relevant experience of the individuals who work for the agent. While registration is restricted to individuals, partnerships and companies, there is flexibility for a registered entity to conduct its business through a trust structure. The registered entity needs to be a trustee of the trust. The law applies to the registered entity in its role as trustee in the same way it applies to that entity if it was not a trustee.

4.The introduction of a Code of Professional Conduct: A Code of Professional Conduct (Code) governs the ethical and professional standards of tax agents and BAS agents. The Code is set out as a statement of principles and the Board may issue binding written guidelines for the interpretation and application of the Code.

5.A range of sanctions for breaches of the Code of Professional Conduct: Under the new arrangements, if a tax agent or BAS agent has breached the Code, the Board has a range of options. The Board may caution the agent, require the agent to complete a course of training, subject the agent to practising restrictions, require the agent to practise under supervision, or suspend or terminate the agent’s registration. The Board may also apply to the Federal Court of Australia (Federal Court) for an order to pay a pecuniary penalty for certain serious misconduct, or seek an injunction to prevent an entity from engaging in, or compel an entity to undertake, certain conduct. Such a wide range of sanctions allows the Board to tailor its response according to the severity of the misconduct.

6.Safe harbour from penalties: Taxpayers who use a tax agent/BAS agent will benefit from a safe harbour from certain administrative penalties in certain circumstances. Penalties will no longer apply where: 1) a false or misleading statement is made carelessly, provided the taxpayer has taken reasonable care to comply with their tax obligations by giving their tax agent or BAS agent the information necessary to make the statement; and 2) a document (such as a return, notice or statement) is not lodged on time in the approved form due to the tax agent’s or BAS agent’s carelessness, provided the taxpayer gave the agent the necessary information, in sufficient time, to lodge the document on time and in the approved form.

Source: Tax Practitioners Board (September 2010).

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Since the study report was released, both Australia and the United States have introduced new regulatory requirements for tax intermediaries that are briefly described in the following section. The United Kingdom is currently exploring the establishment of its own regulatory requirements.

Australia

Modernised laws governing the registration and operation of “tax agents” came into effect in Australia in March 2009. The new laws were introduced after extensive consultation with the tax and accounting profession to modernise an outdated legislative and administrative framework – see Box 8.2 (on preceding page). These laws are known as the: 1) Tax Agent Services Act 2009 (TASA 2009); 2) Tax Agent Services Regulations 2009 (TAS Regulations 2009); and 3) Tax Transitional Act.

United States

In the case of the United States, the IRS launched a return preparer review in 2009 to strengthen partnerships with tax return preparers and tax practitioners and ensure that all preparers and practitioners adhere to professional standards. After an extensive review that included significant public input, the IRS announced in January 2010 a fundamental change in how the agency will regulate the tax return preparation industry. Under this change, the IRS will implement new regulations and procedures that will better serve taxpayers, tax administration and the tax professional industry. Details of the actions to be taken were set out in CIS 2010. Since then, much progress has been made, as reflected in a recent report of the IRS’s Oversight Board – see Box 8.3.

Beyond these two countries, there is a relatively small population of other countries with a formal regulatory framework for tax intermediaries but this matter has not been explored in any detail. The 2008 FTA sudy report (OECD, 2008) gave some attention to this matter and Japan was one of the countries in respect of which brief details were provided – see Box 8.4 (page 260).

For this aspect of the CIS survey, revenue bodies were asked to indicate the following:

1.Whether there are any laws prescribing the registration and/or operation of tax intermediaries in relation to their dealings with revenue bodies;

2.To advise the extent of the role played by tax intermediaries in their tax systems, as reflected in the proportion of personal and corporate tax returns prepared 2011; and

3.Whether they regularly survey tax intermediaries (or their representative bodies) on their views and perceptions on aspects of service delivery and administration of the laws.

In addition, research was undertaken to identify any major recent developments in this field. A summary of the information provided by revenue bodies is set out in Table 8.1. The key observations are as follows:

Less than one third of revenue bodies reported the existence of specific laws/ regulations governing the tax-related operations of tax professionals;

Most revenue bodies did not report the proportion of tax returns prepared by tax intermediaries; of the 20 revenue bodies that did report, 10 indicated volumes over 30% of all PIT returns and 17 reported volumes of over 65% for CIT tax returns;

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Just over 40% (22) reported that they regularly survey tax intermediaries (or their representative bodies) on their views/perceptions of the revenue body’s service delivery and overall tax administration.

Box 8.3. United States: Paid Preparer Initiative

Progress with Paid Preparer Regulation

Beginning in FY 2009, in recognition of the fact that tax preparation is largely an unregulated industry, the IRS conducted a thorough review of the benefits and issues associated with the establishment of standards for the professional tax preparation industry. The IRS announced plans to implement a multi-year initiative to register, test, impose continuing education requirements, establish ethical standards, and enforce these regulations on paid tax preparers.

The programme is now in its second year. During FY 2011, the IRS moved the programme forward significantly by accomplishing the following activities:

The IRS Return Preparer Office (RPO) registered and issued Preparer Tax Identification Numbers (PTINs) to about 750 000 preparers.

The IRS released specifications for the competency test that individuals must pass to become a Registered Tax Return Preparer. Preparers who pass the test, a background check, a tax compliance check, and complete 15 hours of continuing professional education annually will have the designation of Registered Tax Return Preparer. Testing began in November 2011.

The continuing education (CE) programme is in the third phase of increased oversight of federal tax return preparers. In September 2011, the IRS selected a vendor to administer application and renewal services for Continuing Education Providers that will serve Registered Tax Return Preparers and Enrolled Agents. The CE requirements began in calendar year 2012.

The IRS is continuing to review the issues surrounding background checks and fingerprinting.

In July 2011, the IRS sent letters to approximately 100 000 tax return preparers who prepared returns in 2011 but failed to follow the new requirements. The letters explained the programme, informed preparers how to register for a new PTIN, and where to get assistance.

In an effort to identify “ghost preparers” (preparers who do not sign the returns they prepare), the IRS also sent letters to taxpayers whose returns appeared to have assistance but lacked preparer signatures. The goal of the letters was to protect taxpayers and ensure that taxpayers know that all paid federal tax return preparers should be registered with the IRS and sign tax returns they prepare.

The IRS also is working to identify tax return preparers who make repeated errors and schedule educational face-to-face meetings with them.

The IRS established a Facebook page where it has informal conversations with the tax professional community on issues that affect return preparers, with the goal to improve overall tax administration.

Many tax professionals, and the IRS Oversight Board, continue to see the programme to regulate paid tax preparers as an effort to enhance the profession of tax preparation, and praise the IRS for deciding to implement regulations on paid tax preparers. There is a broad belief within the tax administration community that preparer regulation will lead to increased taxpayer compliance.

Source: IRS Oversight Board, Annual Report to Congress 2011 (May 2012).

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Box 8.4. Japan: The regulation of tax intermediaries

Background: Japan Certified Public Tax Accountant (CPTA) or “Zeirishi” is the tax profession qualified, regulated and supervised by the National Tax Agency (NTA) under the CPTA Law. The mandate of the CPTAs stipulated in the Law is to promote voluntary compliance with tax obligations as independent and impartial tax professionals in view of the principle of the selfassessment system.

Any person who wishes to do the following business is statutorily required to register as a CPTA with the Japan Federation of CPTA Associations that is mandated to do so by the CPTA Law and supervised by the NTA:

Act as an agent for filing tax returns, applications, claims or petitions with tax authorities or advocating for taxpayers with respect to their tax returns or against actions by tax authorities;

Prepare tax returns, applications, claims or petitions, to be filed with tax authorities, on behalf of taxpayers; and

Provide taxpayers with any advice on tax matters such as calculation of a tax base or tax planning.

As such, CPTAs are subject to stringent regulations and supervision by the NTA so that their conduct will not diverge from the mandate of the CPTAs and ultimately the fundamental objective of the CPTA system.

Key Features: Regulations in the CPTA Law give the NTA the authority to take disciplinary action against misconduct of CPTAs, while the Japan Federation of CPTA Associations is also allowed to cancel the registration of CPTAs on grounds of a lack of certain qualifications. The key provisions of the law.include: 1) prohibition against engaging in instructions or advice on tax evasion or any other similar conduct; 2) prohibition against discreditable or disgraceful conducts; 3) protection of taxpayer confidentiality; and 4) observance of professional standards set by the CPTA Associations and the Japan Federation of CPTA Associations.

Any conduct against these statutory codes of practice in the law, whether intentional or by negligence, would cause a disciplinary action by the NTA Commissioner by virtue of the statutory authority. The disciplinary measures specified in the law are: 1) reprimand; 2) suspension of business (no more than one year); and 3) termination of business. Since the business of the CPTA is permitted only for qualified CPTAs, the latter two sanctions are particularly powerful in regulating their conduct though due diligence is required on the part of the NTA. In Japan’s fiscal year 2006, nine CPTAs were terminated from the CPTA business, whereas eighteen CPTAs and one CPTA were imposed suspensions of business and a reprimand respectively.

Impact: Although no systematic study on assessment of its success is currently available, it is generally viewed that the CPTA system has significantly contributed to enhancing the public trust in tax advisers and to raising self-esteem as well as awareness among CPTAs as the independent and impartial profession mandated to serve for the fairness of the tax system. Consequently, through more than 50-year history of the interactions under the CPTA Law, it has worked as a major impetus for and has provided the building block of co-operative relationships between CPTAs and the NTA. Thus, the CPTA system constitutes the backbone of the tripartite relationship between taxpayers, tax advisers, and the revenue body in Japan.

Source: National Tax Agency of Japan (as compiled for the Study into the Role of Tax Intermediaries).

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Table 8.1. Tax intermediaries: Laws and regulations, returns prepared and surveys

For notes indicated by “/ (number)”, see Notes to Tables section at the end of the chapter, p. 270. Source: CIS survey responses.

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