The opportunity – Tax Controversy

The tax profession is continuing to evolve, and new tax laws are released on an almost daily basis. Practitioners could almost be forgiven for missing releases from the Accounting Professional and Ethical Standards Board (the Board). The latest revision of the tax services standard is a good opportunity to consider not only this standard as part of the overall legislative context but also what it means in the new regulatory environment. This standard is relevant to the characterisation of the very laws that govern the behaviour of tax practitioners that hold a registration as a tax agent.

The recent rhetoric from the Commissioner of Taxation is that Tax Agents are complicit in assisting individuals and small business to drive tax evasion and revenue leakage. This article examines the strengths of his claim by going back to the fundamental standards that drive a professional’s behaviour and then applying a practitioner’s mind to the evidence the Commissioner has presented in support of his claim.

The ironic thing is that the approach in the preceding paragraph is precisely how practitioners should generally undertake tax controversy engagements and dispute resolution with a regulator. The key is to bear in mind the power of presenting dispassionately both disputed and undisputed facts as well as cogent arguments in your client’s interests and those of the public.

Tax Standard – Source of Obligations

This brings us to an analysis of a humble and prima facie uncontentious revised tax services standard by the Board. The proposed changes to the standard Accounting Professional & Ethical Standards (APES) 220 Taxation Services were released on 1 July 2018 with the intention of the revised standard being effective 1 October 2018.

The key, when examining the Commissioner’s assertions, is not so much what was changed in this standard. The key is actually what the obligation of client confidentiality and the other obligations of a tax practitioner that mean a professional and practitioner need to consider what their role is defined as by the standard.

The standard is by no means the sole source from which tax practitioners draw or determine their obligations as professionals to their client and the wider community. The other main source is the Tax Agent Services Act 2009 (Cth).

TASA – Source of Additional Obligations

The Tax Agent Services Act 2009 (Cth) (TASA) is a legally binding and important source of obligations for tax practitioners who are registered tax agents. There are also numerous more detailed laws that apply to registered tax agents in the various taxation laws enacted by both Federal and State Parliaments.

For present purposes, analysis will be restricted to certain core provisions in TASA and how they interact with APES 220. The key is to understand the scope and nature of a tax practitioners’ obligations to use this as a framework for analysing the Commissioner of Taxations claims and statements.

Preparing Tax Returns – APES 220

The role of a Tax Practitioner is to provide professional services to their client keeping in mind their obligation to the Community and balancing these two interests. Importantly, a practitioner in accordance with paragraph 4.1 of APES 220 must:

A Member shall prepare and/or lodge returns and other relevant documents required to be lodged with a Revenue Authority in accordance with the information provided by a Client or Employer, their instructions, and the relevant Taxation Law.

This mandatory standard creates a tension between information provided by the client and their instructions on the one hand and the tax law on the other. Fortunately, the next paragraph in APES 220 provides additional guidance to tax practitioners. Paragraph 4.2 reads:

Where appropriate, a Member may accept a Client’s or Employer’s information, and is not responsible for its veracity. However, within the agreed scope of work, a Member should obtain information which is sufficient to allow the Member to form a view as to the application of the law to that information and to be able to recommend the options available to the Client or Employer on how the information provided by them may be reflected in the relevant return or other documents to be lodged. Where a Member reasonably believes that the information provided by the Client or Employer may be incomplete, false or misleading, the Member should have regard to the provisions of paragraph 7.3 of this Standard and the law.

This paragraph clearly indicates that ultimate responsibility for a lodgement under professional standards rests with the client. Where a tax practitioner identifies potentially false or misleading information they have a professional obligation under paragraph 7.3 to undertake the following:

Where a Member forms the view that a Taxation Service is based on false or misleading information or the omission of material information, the Member shall discuss the matter with the Client or Employer and advise them of the consequences if no action is taken.

Finally, where the client takes no action to correct a material disclosure impacted upon by a false or misleading statement, the practitioner is required to consider whether they will continue to act for the client in accordance with paragraph 7.6.

The Tax Practitioner has no professional obligation under the standard to interrogate their client to determine whether information is correct and true. That obligation rightly rests with the client themselves and with the greatest respect, the Commissioner of Taxation.

TASA – Legislative Obligations

The legislative rules seem to be concentrated in various subsections of section 30-10 of TASA as follows: 

 (4) You must act lawfully in the best interests of your client. 

(9) You must take reasonable care in ascertaining a client's state of affairs, to the extent that ascertaining the state of those affairs is relevant to a statement you are making or a thing you are doing on behalf of the client.

(10) You must take reasonable care to ensure that * taxation laws are applied correctly to the circumstances in relation to which you are providing advice to a client.

 (11) You must not knowingly obstruct the proper administration of the * taxation laws.

 (12) You must advise your client of the client's rights and obligations under the * taxation laws that are materially related to the * tax agent services you provide.

The legislative obligations appear to be largely similar to the professional standards under APES 220. The question of what is reasonable arises on review of the legislative provisions that apply in this context.

This framework should be the starting point when examining the claims of the Commissioner of Taxation.

Commissioner of Taxation – The Claims

In an article by the Financial Review titled ‘Tax Commissioner Chris Jordan blames tax agents for work expense blowout’ dated 15 March 2018 the Commissioner stated:

"What is concerning is the different results for self-preparers and those who use an agent,"

"The incorrect claiming in these random enquiries is actually worse in agent prepared returns."

"For years I've heard how tax agents were guardians of the system – these random enquiry results tell me this is not the case for some agents.”

"They are not fulfilling their duty as a registered tax practitioner in line with the Tax Practitioners Code of Conduct.”

"In reality, they are selling their clients short – they are not bringing their expertise, nor taking care beyond reliance or blind acceptance of information given by clients, or even, leading clients to deductions that are not allowable."

Tax Office – Objectivity & Analysis

In examining the Commissioner’s statements, there are a number of issues with how he arrives at his conclusion. The Commissioner's statements are based on analysis of the audit data filtering into the Tax Office systems. These issues are immediately obvious to a Chartered Accountant or Certified Practising Accountant familiar with the standards and laws governing their behaviour. The issues are:

  • Any unscrupulous taxpayer who is seeking to make a false claim will seek out a tax practitioner to lodge their return for them. This is because they can control the information provided to the practitioner and lower their risk of detection. The Commissioner seems to indicate a simplified understanding of the risks of incorrect claims being made by self-preparing taxpayers which would only serve to embolden these types of taxpayers to use this strategy;
  • Reliance on audit and adjustment is not a reliable indicator of legal error. The Commissioner of Taxation has lost court cases to smaller taxpayers in recent memory in relation to his interpretative positions taken. It is not controversial to point out that the task of interpretation of tax laws administered by the Tax Office are not done independently by that office. This is because the Tax Office also governs the collection of these very taxes; and
  • The frenetic pace of change and inherent increase in the level of complexity of tax laws (especially administrative and procedural changes) that comparatively small taxpayers face, often with limited resources to assist them with compliance, is exponentially growing. This may be a reason for incorrect claims being made rather than a tax practitioner not upholding their professional obligations.

The duty of a tax practitioner under both the professional obligations and indeed legislation is to take reasonable care in ensuring that a client’s state of affairs is ascertained in so far as a statement is made to the Tax Office. Practitioners are professionally skeptical, but they are not blood hounds that suspect fraud or mistake in every return they lodge. They also do not have a duty to check that every small claim is beyond doubt, they take a materiality approach to deductibility.

APES 220 makes it clear that the highest level of honesty and integrity should be applied by tax practitioners. This should not be confused with a fictional requirement to ensure every return prepared and lodged by a tax agent is free from error or misstatement. The tax practitioner’s responsibility is to put in place reasonable measures to ensure information provided to a tax practitioner is accurate and correct, not to impose measures that interrogate and destroy the trust between advisor and client that makes the Australian taxation system the envy of the world. The Commissioner may wish to seek to engage with practitioners to collaboratively determine what additional measures he would like to implement in this regard.

VT Advisory - Here to Help

The Commissioner of Taxation’s position is also contradicted by the comparatively small number of referrals of Tax Practitioners to the Tax Practitioner Board by the Tax Office compared to the number of registered agents because of tax agent wrong doing. The information the Commissioner cites to support his view is only compelling where a reader is unaware of what a tax practitioner’s role and responsibility is in the tax system and that the Tax Office is both the initial decision maker in amending returns following an audit and the collector of that same tax revenue.

Another salient observation to make here is what practitioners can learn from the Commissioner’s comments in relation to their strategic intentions. A reasonable inference to draw from the Tax Office’s comments is that the Tax Office appears to indicate a more adversarial relationship with tax practitioners would assist their enforcement and revenue collection activities. The authors believe that a greater focus on compliance and tax controversy management skills is essential in adjusting to this new Tax Office position. VT Advisory has a strong tax controversy service offering in both direct and indirect taxes and is more than happy to assist you.

The standards and law are clear, the community and client’s need advice and professional services to assist them in dealing with an environment of greater tax controversy. Tax practitioners have traditionally always stood up for their clients and been advocates for them and the community. This will take courage in the face of regulators with greater resources than many clients. The profession must galvanise to protect the community and their clients. I stand ready to assist in this endeavour.

Bill Mavropoulos and Thomas Palmieri