The New Zealand Tax Podcast: The CSI Inland Revenue edition – how Inland Revenue’s enhanced capabilities enable it to detect fraud

My guest this week is Tracey Lloyd, Service Leader, Compliance Strategy and Innovation at Inland Revenue. Kia ora Tracey, thanks for coming along.

Tracey Lloyd: Thank you for asking me.

TB: What's your role within Inland Revenue? What does Compliance Strategy and Innovation mean?

TL: OK, so I'm the service leader of a relatively new unit in Inland Revenue called Compliance Strategy and Innovation or CSI for short. During Inland Revenue’s Business Transformation, we introduced our brand-new computer solution called START (Simplified Taxation and Revenue Technology). I oversaw the team that was responsible for utilising the analytical tools of that system once Business Transformation was finished. CSI was designed and set up to take over and expand the work that we had been doing. It’s been in existence for about 20 months now and there's 25 of us, including me.

TB: CSI Inland Revenue sounds very ominous but joking aside you obviously you've got these new tools that Business Transformation has provided and other Inland Revenue officials have told me that it has greatly enhanced your capabilities. How have you deployed those capabilities? What does CSI do in this case?

TL: We're basically using intelligence to lead our approach to compliance. We combine insights from our customer segments, what our customers are saying, what our people are seeing, our systems, the tax and social policy products that we administer and analytics. We then connect the dots between all those different challenges to help the leadership teams make decisions about how to prioritise compliance initiatives.

It's not just proactive compliance activities. It's such things as sending out query letters, following up overdue debt overdue returns, but also working on educating our customers through tailored communications marketing campaigns and of course audit work. 

Basically, we look at problems where our compliance is not good or where customers are confused. And we think how we can help; how can we help our customers and how can we improve compliance with the amazing tools that we now have available?

CSI – connecting the dots and checking COVID payments

TB: Where is an initiative that you've been able to deploy some of these tools, which has helped clear up confusion.

TL: Probably one that we which should probably touch on is how CSI interacted with the Ministry of Social Development (MSD) and some of the various COVID products that Inland Revenue administered.

MSD had the wage subsidy, and I won't cover our interactions with them over that. I just want to clarify that if someone was in business and eligible for the wage subsidy which was administered by MSD, then that wage subsidy had to be in their income tax return be returned for income tax.

What we found within one week of the 2021 tax returns being able to be filed was that 80% of people who'd received the wage subsidy were not returning it.

TB: 80%? Wow!

TL: Yes, 80% and obviously we can identify that but then every single one of them needs some manual action and a contact for us to ask whether people are happy for us to include it because there was the odd one where the data wasn't quite right, but only very rarely.

What we did is we worked with MSD who were super helpful, and we were able to upload those Wage Subsidy files and pre-populate that information within 10 days into everyone's tax returns. That meant that we went from an 80% fail rate of people including it to a 20% fail rate where it was pre-populated, but people were perhaps changing that figure or deleting that figure out of their return before they submitted it.

TB: What happened then if they deleted or amended those numbers?

TL: The return would be stopped for manual review. We would contact the person and ask if there was a reason for the change, maybe they had paid some of it back to MSD. And so we would liaise over that to check that they returned the right amount.

TB: This group of people would be self-employed or shareholder employees because everyone’s else wage subsidies should have gone through PAYE?

TL: Yes, that's right. If you were an employee, then there was no impact to you.

TB: The other COVID support payments, those were directly Inland Revenue’s responsibility?

TL: They were, so we had Covid Support and Resurgence Support Payments and the Small Business Cashflow Scheme.

CSI in action – detecting COVID fraud early

TB: I see today there's a report about a Waikato sharemilker who was sentenced to home detention for fraudulently claiming Covid Support Payments and the Small Business Cashflow Scheme.  https://www.ird.govt.nz/media-releases/2023/waikato-sharemilker-sentenc… How might you have picked this up?

TL: Well, a lot of the work that we did was at front end based on the application rather than letting the money out the door because it's very difficult to recover once the money's gone out.

We are obviously doing that audit activity because we're starting to see prosecutions following on from those reviews. We will contact people and determine whether they fraudulently applied for it or applied in error.

But what we were able to use START for was to proactively stop those applications in the system based on running them across a whole lot of rules and then stop suspicious ones for manual review.

To give you an example of some of the rules that we ran such as duplicate bank accounts, or if someone had a few entities using the same bank account, that was usually a a trigger for us that there was some sort of identity theft potentially going on. We also had examples where we had no record of that particular customer being in business at all. We stopped applications completed from offshore, as you had to be a New Zealand based business.

TB: You would have identified those offshore applications through the domain and the IP address.

TL: That's right. All that information was available to us. We also had people putting deceased persons on their employee schedule or the number of employees over lockdown were going up, that generated some questions from us. We found employees that were either children or very, very elderly.

Sometimes the same employee was on a large number of schedules, which also raises a number of questions. Currently one of my team is preparing for a prosecution relating to a Resurgence Support Payment claim.

Just on Resurgence Support Payments, applications used to open at 8:00 AM in the morning and there five or six different iterations over time. One time, something like four out of the first five applications that arrived within a couple of minutes after 8:00 AM were fraudulent. A lot of those claims were from offshore, but our systems were able to stop all of those.

In relation to Covid Support Payments we stopped 9% of all applications for manual review. That's actually quite low if you think about it. 91% went automatically out the door overnight and people got the money that they desperately needed.

Of the 9% that we did stop, we declined 66% which is a very high percentage. Generally speaking, the ones that we did pay out after stopping for a manual review were people who had recently started in business. So we asked them for some proof of business and that type of stuff and then the application was fine.  I know that's no help to customers who had to wait, but did get the money in the end. But we did decline about 33,032 applications and we stopped $147 million from being erroneously issued to people who weren't entitled.

With the Small Business Cashflow Scheme  loan, we declined 67% of the applications we stopped and this amounted to $550 million.
    
TB: I mean the Small Business Cashflow Scheme was in many ways bigger than the various Covid support payments, I think it ran to over $1.5 billion. [$2.3 billion per Inland Revenue’s Annual Report for 30 June 2022] So people attempted to borrow $550 million on top of what was already lent?

TL: Yes, that’s correct. It's testament to the people that we had working on it and the new system that we were able to do it proactively instead of coming along afterwards and saying hey, you shouldn't have got that money, can you pay it back because that's very, very difficult.

TB: I mean the wage subsidy is a good example of a high trust environment. It was money out the door because we're in the midst of the COVID crisis.

TL: That's right, the wage subsidies were the first COVID product that was paid out.

Lessons from the Australian Tax Office TikTok GST scandal

TB: To give a comparison with another overseas tax agency that didn't quite get it so right, there's this ongoing scandal over the Australian Tax Office where these TikTok influencers basically said, “Here's how to scam the ATO out of GST”. I think it's over a billion dollars and counting. The ATO has admitted it really isn't sure how big this scandal is, and that's quite staggering.

I mean, what do you do about that? Could TikTok influencers do that here?

TL:    We’re going to talk about Integrity Manager a little later but we've definitely had people send us snips of social media marketing along the lines of “Hey, give me your IRD number and I'll get you a refund” but nothing quite to the extent of Australia.

We keep a very, very close eye on our own GST to ensure that nothing like that will happen in in New Zealand. We've spoken to our senior execs about it and we're very comfortable that we would be able to react immediately if we saw any of that behaviour. But I mean that the numbers are just staggering over in Australia.

TB: To repeat a point I made earlier, conversations I've had with other Revenue officials is that if START hadn't been available when COVID turned up, it would have been very difficult for Inland Revenue to have run any of these COVID support programmes. They probably would have all had to have been run out of MSD with a higher risk of fraud, perhaps.

TL: Yeah. Or even just high trust model with payouts from Inland Revenue with no checking beforehand.

START and auto-assessment

TB: One of the great things that START did was to bring in the year-end auto-assessment routine. https://www.ird.govt.nz/income-tax/income-tax-for-individuals/what-happ…  People no longer had to either go through a tax agent or the tax intermediaries and instead the majority of taxpayers who are salary-earners with all their income having tax withheld either through pay as you earn or through resident withholding tax are now on auto assessment.

You just mentioned Integrity Manager this is something that is part of this auto-assessment routing. How does it operate? Because you're dealing with 2,000,000 taxpayers in six or seven weeks.

TL:  I think our last auto-assessments had 3.2 million individual income tax returns were sent to customers and 88% of those required a customer to do absolutely nothing. I was one of those, I didn't have to do absolutely anything.

We’ve discussed Decision Support Manager which we used for the COVID products and Integrity Manager is another amazing tool that we now have which stops returns with potential errors and fraud in them.

Every single tax return goes through Integrity Manager before it's processed. We screened 10 million tax returns in the last year.

TB: Tax returns would not only be individual tax returns, but also GST returns which would be a big group and particularly the Pay As You Earn filings.

TL: The only one that doesn't have rules through Integrity Manager are the PAYE employer schedules. That’s because we need to make sure that the deductions and entitlements get paid out as soon as possible. You know, Child Support and Student Loan, etcetera. But we will do some back work on that on those.

Basically, we review Non Resident Withholding Tax, Approved Issuer Levy, GST returns and donations. That's another big group where we also run rules over returns. And so, while we had 10 million tax returns in the past year, over 200,000 were looked at to be manually reviewed because they hit a rule which raised some concern from us.

TB: That's what 2% of all returns?

TL: Yeah, a pretty small group. So, some of the main areas we look at are GST, income tax and donations. They're our big ones and examples of some of the things that we review are changing pre-populated figures. You know, why are you changing them? Because we have already got that data. Another is making up figures even though we can check that against other data we hold. I think you could describe that as a frequent flyer, shall we say. Every year people just making up figures.

Snapshotting to prevent incorrect tax returns

TB: You gave an example at a recent ATAINZ conference where one person was constantly changing the online return until they got the right number and by that stage they had amended it 50 or 60 times.

TL: We call that Snapshot and it’s another tool in the new START system. It's the ability for us to view activity in myIR.  We also use it just as much internally. For example, every time I'm in the system it's all recorded and for training purposes. So when we've got someone on the phone, I can hear the people sitting behind me saying, “OK, you're in the wrong part of the return. You need to go to this particular tab to do what you're trying to do”. We're able to track where a person is and help them through the system. 

But one of the sides things that's come from that is that we're actually able to look at what someone's done while they've been filing their return. For example, we can see when people are adjusting figures, to see how big or small the refund is now and then going back and changing the figures. Doing this backwards and forwards and backwards and forwards countless times.

Now if you're doing that type of behaviour, even either you're really confused and you need some help from us, or you're just making up figures. And so, we have the ability to see that and we're also able to stop such returns.

Some of the other rules we can run identify an IP address which has been used to commit fraud in the past so we can red list that. Identity theft is an ongoing issue for us unfortunately.

Overclaimed donations and other “creative” deductions

TL    Other rules that we have include one for large school donations, which may possibly be private and therefore not allowed. Or large donations compared with total income.  It may be totally legit, but let's just ask a question about it and see how you how you go.

I mean in the past we've had people just making up figures and putting them in the return such as made-up employee share scheme figures.  We’ve seen interest and resident withholding tax entries that are the same amount - $10,000 and $10,000. What we also see is that when people are making up figures to put in their return, they quite often make them all zeros. Nothing quite like a round number.

Over the last year to June 2023 year Integrity Manager reviews stopped $145 million of incorrect or fraudulent refunds dollars. $56 million of this was voluntarily disclosed by customers. Another $89 million of refunds were stopped after we engaged with the customer and asked them some questions.

With regards to some examples of non-business expenses, these have been a continual source of frustration for us. Under the auto-assessments system there are only four or five things that you can claim for. The one that most people claim for is for loss of income insurance. the main. But we get everything, literally everything coming through there.

One example I've got is someone had claimed just over $15,000 of non-business expenses and when we called to ask what it was, he said that he'd paid quite a lot of tax and his father-in-law suggested he claimed some of it back.

TB: Nothing like being honest.

TL: We did sort of point out that the amount of tax you pay is relevant to the amount of income that you and this person had earned a significant amount of income. We had another one where this person was only on salary and wages but had claimed $20,800 of non-business. Expenses and when we asked what they were, she said her son was at Auckland University and she was still supporting him. She thought she should be allowed to claim his expenses and added up his rent and groceries because he eats quite a lot. She did ask if we could put it in another box if that would help. But we said there was no other box that we could put that in. 

But an example of a more deliberate fraud, shall we say we had someone who was receiving Working for Families but had no income at all. And then when we did some deep diving into their searches, we found fifteen other customers were linked to the same bank account. And a majority of those customers were overseas because we can do Customs checks.

TB: Yes, because you share information fairly frequently.

TL: We do very regularly.

TB: In my role we're often determining when someone became tax-resident.  We’ll tell a client go to Immigration and they'll come back to you with the dates you arrived and left the country. Clients are often incredibly impressed how efficient Immigration is with providing those details.  And I've been in a meeting where the file of information which had been shared from Customs and Immigration was literally about a foot high and I thought “We’re in a bit of trouble here.” Unsurprisingly, we didn't win that case.

So, yes, a lot of information sharing regularly goes on. It's a common theme in the podcast, but I think people do not understand just how much information is shared and how much information you can access.

TL: That was definitely something that we saw with the wage subsidy when we pre-populated returns. And you know people deleted the entry and we asked “Why?”  and they actually admitted to us straight off the bat that they weren't actually eligible for it.

And we're just like “Well, we’re not sure what you want us to do about that because you did actually receive the money.”  They didn't obviously think that we would talk to MSD and get that information. While the pre-population was a second step, we were always getting that file with the income information.

Running information campaigns and engaging with migrant communities

TB: Inland Revenue sometimes runs campaigns based around this misinformation. Talking about expenses are I recall recently there was a campaign advising real estate agents about what they could claim. https://www.ird.govt.nz/pages/campaigns/realestateagents This arose because it had come to your attention that there seemed to be a lot of expenses being claimed. And I think the result of that campaign was the following tax year the amount of expenses claimed declined, is that right?

TL: That's right. Integrity Manager was used because obviously we have BIC codes which tell us who's a real estate agent. Yeah. And we're able to look at the level of income compared with the level of expenditure. And it doesn't necessarily always prove that there's anything wrong, but it does beg a question and the number of very imaginative expenses that people claimed was huge.

And that's why on our website now it's very easy to find the real estate agents form which details what expenses you're able to claim and what you cannot.

I think we also did that in a few different languages as well to hopefully help people understand the rules a little bit better because it can be different in other countries.

TB: Just to talk about other languages in there, there was a little snippet that came out of the report that was released in connection with the repealed Tax Principles Act. One of the comments about trust and Inland Revenue was that it was extremely high amongst migrant communities, and highest amongst Asian migrant communities. That's credit to Inland Revenue for being able to build a level of trust there.

TL: Oh, thank you. Yeah, our community compliance folks spend a lot of time working with our migrant communities and speaking to them in their own languages and going to trade fairs and community halls and so on. Helping people understand because they're also entitled to social policy, which we need to make sure they get as well.

TB: That's right. Inland Revenue is not just about taking tax off people.  It also redistributes because it’s the key agency for distributing KiwiSaver, Working for Families, which is $2 billion and Child Support.

Inland Revenue and tax agents

TB: How important are tax agents to your role? Because we work with you on campaigns and we’ve seen increased engagement recently.

TL: Absolutely that's certainly how it feels like to us. I mean, tax agents represent about 1.8 million customers to Inland Revenue. It's a massive way for us to contact a huge customer group by using tax agents.

Many of the rules we’ve discussed when checking returns we don't enable for tax agents because we just don't see the same type of erroneous and fraudulent behaviour that we do with customers who aren't represented by tax agents. You know, there's always the odd one, but they're very rare.

Tax can be really complex and tax agents are a critical part of making sure that people get it right. And as you know, we have regular meetings with Chartered Accountants Australia New Zealand and also with ATAINZ, which is how we met after I did a presentation at an ATAINZ workshop. 

We share about what we're doing with compliance, and you know how we can help. Quite often when we're planning to do some sort of compliance campaign, the tax agents will be the first people that we contact to say, “Hey, this is what we're gearing up to do, we're just letting you know so that you can think about it in terms of your client base.”

Forthcoming campaigns on the shared economy and overdue Student Loan debt

TB: Speaking of which, any new compliance campaigns on the horizon?

TL: Well, there there's a few that are sort of in the planning stages. Obviously, you would have heard about payment service providers with the new legislation. We're getting that data and once we have that, obviously we will definitely kick off some campaigns around that.

We’ll be running a targeted campaign, focusing on raising awareness, educating and so on about ride sharing, food and beverage delivery and short stay accommodation. Trying to raise customers awareness and understanding as it applies from 1st April and some people might get caught out. We'll soon start our next campaign on auto-assessments around just letting people know that's coming soon.

The other big one that we've got on the go is about student loans. This targeted campaign is mostly focusing on overseas based borrowers who are in default. Only 26% of overseas borrowers are making the required repayments that they should be making on their loans whereas 94% of New Zealand based borrowers do.

The purpose of the campaign is to increase the overall compliance of student loan borrowing customers so that they understand their obligations when they leave New Zealand to perhaps go do their big OE and stuff that they're still obligated to make repayments.

This particular campaign we're slicing into nine specific segments to try and make our awareness campaigns a little bit more targeted and hopefully a little bit better at getting through to people. You might see some information on the sharing economy via LinkedIn, but you probably won't see targeted paid advertising unless you've got a student loan debt or you're doing a Uber side hustle.

TB: Quite a lot to ponder there about what CSI Inland Revenue is up to, but to wrap up what sort of message would you like to send Tracey. Like Liam Neeson in Taken we have the tools and we will find you?

TL: Pretty much. I mean obviously our first step is to make it as easy for people to get it right in the first place and we spend a lot of time reviewing how customers behave in the system so that we can help and maybe change the system to make it more intuitive for people. But you're right, we've got these amazing tools and we're using and utilising them all the time and we're learning more and more about them. It's a great system and it's good for All New Zealanders.

TB: Computer projects are controversial but START has been an enormous project which was delivered on time and under budget. Just to put some numbers in context. You mentioned earlier about identifying $145 million of fraud. Inland Revenue’s annual operating budget is about $700 million so you pretty much pay for yourself very, very quickly.

On that note, Tracey, thank you so much for joining us. It’s been a pleasure having you on the Podcast.

TL: Thank you for inviting me.

That's all for now. I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts.  Thank you for listening and please send me your feedback and tell your friends and clients. Until next time, kia pai to rā. Have a great day.