Report to the Treasurer and Minister of revenue - by a committee of experts on tax complianceBill Birch Treasurer
Report to the Treasurer and Minister of revenue
By a committee of experts on tax compliance
Chapter 15 -
15.1 Tax advisers have an important role in the tax system. Professional assistance with tax matters is required except in the most straightforward situations because of the complexity of the tax system. As tax advisers generally assist taxpayers in preparing tax returns and represent and advise taxpayers in their communications with the Inland Revenue Department, they are, in effect, intermediaries between the taxpayers and the department. The quality of their advice, their professionalism and ethics play a central role in the tax system.
Is there a problem?
15.2 The assistance provided by professional tax advisers ought to result in better quality of the tax return and tax compliance generally. However, empirical studies in the United States have found that while professional tax advisers have increased compliance with unambiguous law, they have decreased compliance with ambiguous law 261 . In other words, if the law can be interpreted in various ways, professional tax advisers will encourage their clients to adopt tax positions which they would not otherwise take to minimise their declared tax liabilities.
15.3 Tax advisers are duty bound to advise their clients on how to pay no more than the law requires. But their behaviour causes concern if they advise their clients to engage in transactions that purport to be effective to avoid tax, but in fact are not. In these cases, the proper assessment of their client depends on detection by the Inland Revenue Department. It is also a matter of concern if they advise their clients to engage in tax evasion, or otherwise not to comply with their obligations, or if they hinder, delay or obstruct tax investigations. The committee is aware of instances in which tax advisers in New Zealand appear to have behaved in such ways. The evidence given in the Davison Commission inquiry suggested this behaviour.
Registration of tax advisers
15.4 Some countries require registration of tax agents. The rules vary in scope, as the following instances show. In Germany, only those people are allowed to engage in commercial tax practice. Australia allows a taxpayer to deduct fees paid for tax advice or preparation of returns only if the fees are paid to an authorised person. In the United States, anyone may prepare returns and represent taxpayers in audit. However, only lawyers, accountants and registered agents may represent the taxpayer before the Internal Revenue Service in more substantial proceedings, such as appeals against assessments and tax court proceedings. The Service may prohibit anyone from representing a taxpayer in audit if that person engaged in conduct that, had he or she been an enrolled agent, would have meant disbarment.
15.5 New Zealand does not require registration of tax advisers. Tax practitioners often choose to register with the Inland Revenue Department as tax agents, which allows them an extension of time for filing their clients' tax returns and to receive standard communications from Inland Revenue. However, people do not have to register in order to practice as a tax agent in New Zealand.
15.6 Three general reasons are given for registration. First, protection of the public: registration may be desirable if the benefit of maintaining competency standards outweighs the costs of administering the system and restricting membership in the profession. Secondly, administrative efficiency: the tax administration may operate more efficiently if tax officials are dealing with people of a certain level of competency. Thirdly, the integrity of the tax system: people who engage in unethical conduct should not be allowed to practice, and allowing them to continue to practice harms the integrity of the system.
15.7 Disadvantages of registration are said to be, first, restriction of competition: if only a limited number of practitioners are authorised to engage in an activity, that will reduce consumer choice and competition and increase the cost of the service. This concern is greater for the full registration model, as exemplified by Australia and Germany, than the partial registration model used in the United States. Secondly, capture by the profession: if tax agents must be registered and the profession regulates itself, tax agents may create barriers to entry and exacerbate the problem of restriction of competition. Thirdly, administrative costs: the costs of administering the system by the tax authority are high.
Regulation by professional societies
15.8 In New Zealand, most professional tax advisers are either accountants or lawyers, and are members of their respective professional societies. Those societies are responsible for regulating the professional behaviour of their members. Both the New Zealand Law Society and the Institute of Chartered Accountants of New Zealand (ICANZ) have codes of professional responsibility which apply to all of their professional services, including tax work. ICANZ is at present finalising tax practice guidelines which are intended to provide guidance on the application of the ethical guidelines to tax practice.
15.9 While professional bodies have the power to discipline members for breaching ethical standards, the committee is not aware of this power being used in relation to tax services. This fact may simply reflect the emergence of issues arising from 'aggressive' tax advising, which in some circumstances would, more appropriately, be called fraud, and is a relatively recent phenomenon in New Zealand. Whatever the reason, it is clear to the committee that the professional bodies have statutory obligations. These obligations exist when councillors and executives become aware of possible impropriety, irrespective of whether formal complaints have been made. Failure by those bodies to discharge those obligations diligently can damage society and the economy, and could require the introduction of rules to subject the members of those bodies to external regulation.
15.10 In the case of the legal profession, every member of the New Zealand Law Society has an obligation to make a formal complaint to the society on any matters of possible misconduct which come to their attention. Failure to discharge that obligation may itself be professional misconduct by the person in default. The ICANZ code of ethics does not at present contain a similar requirement, except in relation to defalcations. The committee understands that the Institute's code of ethics is scheduled for a thorough review in 1999. The committee expresses the hope that ICANZ will recognise the requirement that all instances of fraud, dishonesty and similar disreputable behaviour give rise to the need for members to report it to ICANZ executive. Further, the committee expresses the hope that the executive would take reported breaches seriously and initiate appropriate actions in the protection of its reputation.
15.11 Whether or not they are members of either body, officers of the Inland Revenue Department who encounter misconduct by tax advisers should be able to have it drawn to the attention of the appropriate professional body. Because of the secrecy requirements in section 81 of the Tax Administration Act 1994, the first step should be internal to the department. Section 81 would need to be amended to allow the department then to report such misconduct. The committee recommends that the government should consider such an amendment.
15.12 If the adviser's conduct amounts to criminal misconduct, then it should in any event be reported to the police or the Serious Fraud Office in the ordinary way.
15.13 Another arm of regulation is the possible sanction of civil penalties for misconduct. The penalties provisions in the Tax Administration Act 1994 provide for civil penalties when taxpayers fail to meet their tax obligations. Some countries, such as the United States, have a system of penalties that apply specifically to tax advisers. When New Zealand was developing its current penalties rules, such a system was considered, but the government chose not to adopt it. It noted that standard civil law principles would allow the amount of the penalty to be recovered from a tax adviser when the adviser's wrongful conduct had caused the penalty to be imposed. For example, suppose a tax adviser negligently advised a client to take a tax position that was not 'reasonably arguable', and did not inform the taxpayer of the risk of penalty. If the taxpayer was subsequently penalised by the Inland Revenue Department, the taxpayer could seek recovery from the tax adviser on the grounds of professional negligence. While this may occur in some cases, the committee notes that attempting to recover the penalty in this way would be very costly, and could be used only in a few cases when the amount of the penalty is very high.
15.14 The committee is aware that the new penalties provisions have been in place for only a short period of time. The committee recommends that the provisions should be allowed to operate for some time to gauge their effect in practice with a later review, if necessary, to consider the desirability of having penalties apply directly to tax advisers. The committee hopes that the standards of performance of tax professionals and the vigilance and the enforcement rates of the key professional bodies will render it unnecessary to enact specific penalties for tax agents.
15.15 Section 148 of the Tax Administration Act 1994 provides that it is an offence to aid and abet a person to commit an offence, such as evading tax or obstructing officers of the Inland Revenue Department. This provision could obviously apply to a tax adviser who assists a taxpayer to commit such an offence. The penalty is the same as that which may apply for the principal offence, for example, up to five years imprisonment for tax evasion.
15.16 Section 66 of the Crimes Act 1961 provides that people who aid or abet anyone to commit an offence under that Act are themselves a party to that offence. Some examples of offences under the Crimes Act 1961 are destroying and fabricating evidence, attempts to commit offences, and conspiracy to defraud the revenue, both in New Zealand and elsewhere. These offences are set out in appendix 7. In the recent United Kingdom case of R v Charlton 262 , several tax advisers who devised a 'dishonest avoidance scheme' were jailed after being convicted of cheating the public revenue. It is, therefore, apparent that the aiding and abetting provisions in the Tax Administration Act 1994 are not the only penalties that can be imposed on defaulting tax advisers.
15.17 Another option for regulating repeated or serious misconduct is administrative disbarment, where the tax administration permanently or temporarily prohibits certain tax advisers from representing their clients in official matters, such as audits, before the tax department. The United States Internal Revenue Service provides for such regulation in Circular 230. Disbarment can result from behaviour such as facilitating fraud or evasion, repeatedly being rude and abusive to tax administration officials, and delaying or obstructing tax investigations. This sanction is serious, and administrative procedures would be necessary to implement it fairly. Judicial review proceedings would be available if a tax adviser thought a decision to disbar was unfair.
15.18 If New Zealand were to adopt a system of administrative disbarment, the United States provides a format for its design. The system there provides that the hearings to determine the facts and make an order of suspension or disbarment are before an administrative law judge. A tax administration official, called the Director of Practice, is responsible for acting on complaints and investigating misconduct of which he or she becomes aware. As with a court proceeding, a formal hearing for suspension or disbarment begins with a complaint issued by the Director to the person who is the subject of the complaint detailing the allegations of misconduct.
15.19 Once an adviser has been disbarred or suspended, the revenue is not able to accept tax returns or objections prepared by the adviser; nor is the adviser allowed to represent a client in audits, objection proceedings or tax court proceedings. Taxpayers may recover from the disbarred adviser any additional costs that they incur as a result of using the adviser, if the adviser did not disclose the disbarment. If this system were adopted in New Zealand, it would be possible to have as an additional consequence, that it would be an offence if such a person practised as a tax adviser.
15.20 This procedure would be costly and time-consuming. Because it would place a major administrative obligation on the Inland Revenue Department, the committee does not recommend that it be adopted unless future cases of undisciplined misconduct of tax advisers makes such a system desirable.
15.21 For the present, the committee considers that professional bodies should continue to have the responsibility for regulating the ethical conduct of their members. The Inland Revenue Department should assist in this process by referring cases of misconduct to the bodies when appropriate. However, the committee considers that the matter should be kept under review. If the professional bodies should be found wanting in diligence, then consideration of a possible administrative disbarment system will become essential.