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IRD's Sharon Thompson responds to Terry Baucher and Andrea Black's critique of IRD's business transformation project

IRD's Sharon Thompson responds to Terry Baucher and Andrea Black's critique of IRD's business transformation project

By Sharon Thompson*

In an article on  last week, Terry Baucher and Andrea Black suggested Inland Revenue’s transformation hasn’t been successful because cost savings haven’t been re-invested into audit and investigation work. Their opinion reflects a narrow view of how IR ensures tax revenue in New Zealand is as close as possible to what is required under our laws. And that view is not supported by international research.

How a country best brings about compliance with tax laws has been studied extensively. These studies show that in a country with good tax compliance, increasing audits and investigations does not lead to a significant increase in tax revenue.  Instead, a tax agency should focus on:

  • Making it easy for citizens and businesses to get their tax right
  • Making it difficult for them to get it wrong (either accidentally or deliberately)
  • Reinforcing helpful attitudes towards tax and the tax agency

Getting tax right from the start

We can come back to the numbers quoted in the article later, but IR’s transformation work over the last five years has dramatically changed the way we do tax. Basically, we’ve moved the focus of compliance from the end of the taxpaying process, to the beginning.

We have been calling it, “Right from the Start”.

Individual taxpayers have noticed the automation of their tax return process. The automation and use of data in that process means that there is far less possibility of people getting their tax returns wrong – accidentally or deliberately. Basically, we do it for them, so they are able to get it right from the start.

To enable this kind of automation, businesses now must provide payroll details to IR every payday, rather than in a monthly retrospective report. The new reporting covers all the details for each of their workers about their pay, the PAYE the employer has deducted, and other details like student loan, child support and KiwiSaver payments. That data now comes directly from employers, into our system

Similarly, investment providers like banks and fund managers must now report customer investment income to IR monthly. Like wage and salary information from employers, this data is fed directly into our system.

That helps us to ensure investment income is being taxed correctly, and that we can make fixes throughout the year, rather than chasing it at the end.

Overall, these things, and many other changes besides, enable a system that is driven by data that is current and processes that are automated. So, it’s easier to manage, and quicker to deliver what needs to be delivered – that is, information, taxes for the Government, and payments for the people that need them.

The numbers are unsurprising

Baucher and Black appear surprised that spending on investigations and debt management has fallen, while the number of “tax discrepancies” we identify has stayed the same. Leaving aside the fact that the level of tax discrepancies found is not a valid measure of success – just as finding more crime is not a measure of success fighting crime - the result is not surprising.

Our new system has dramatically increased and improved the data we have access to. And we can watch, often in real time, as taxpayers file returns. So, if they’re getting it wrong, accidentally or deliberately, we can see and intervene, reducing the need for post-return audit and investigation.

With big companies for example, there is now less traditional auditing and a much bigger role for ongoing account-management and regular reporting relationships with New Zealand’s biggest company taxpayers. We help them get their tax right before it’s filed, rather than having to chase them through the Courts afterwards.

It’s well known that we collect data on transactions from property sales, crypto-currency, loyalty cards, and many more sources. What might be surprising to some is that we use this data primarily to see where businesses and people might not be filing as they should be, and then giving them the opportunity to get things right, often before they file. None of this shows up as discrepancies, nor does it need to go through a costly investigation and Court process to get the right amount of tax.

Every return that can generate a refund is checked automatically. All amended returns are checked and screened. Between 1 July 2019 and 30 June 2020, we identified approximately 23,000 returns across all tax types that had errors, or we believed were fraudulent, with a value of just under $200 million. We are or will be taking action on these cases – some through prompts and requests that customers review their position, some through audit and investigation, and some will go to prosecution.

This data is unaudited and is indicative only, as we are working to automate our reporting. Even with this caveat, it is nevertheless an impressive result. This is done, in an automated fashion, before any traditional audit and investigation.

This really is the new face of tax compliance.

IR tax collection capabilities stronger than ever

Of course, it does not mean audit and investigation has transformed into a human-free, robot populated environment. It is still people with expertise and experience in tax audit and investigation running the new world, and that will not change, no matter how good the algorithms. 

Audit and investigations remain an important part of our mix of activities, and anyone who believes we do not have the expertise to challenge their unlawful activity will be sorely surprised. But to suggest that less investment in traditional investigations equates to less ability to collect tax revenue is mistaken.

The numbers that Andrea Black obtained by Official Information Act from Inland Revenue tell the story you would expect them to, given the changes that have happened, and that are being made.

2020 has been an unusual year for IR with another major tech-release and the impact of Covid, all happening at the same time. It has meant we’ve been more focused than usual on customer-support (in using the new systems and with Covid) rather than on traditional investigation and audit activity.

Spending on traditional audit and investigations has gone down also because those things are being done differently, with more data and automation. That is part of the benefit we promised the government from the transformation.

Spending on processing, conversely, has gone up. It should be no surprise that extra expense has come from having to run both our old system and the new one alongside each other to successfully migrate the massive amount of data that needed to move. And many staff have been involved in delivering the support needed out there this year as our transformation has progressed.

More work to do and more change coming

We haven’t got everything completely right in implementing the new system, and there are many issues that have been dealt with and others being resolved as we write. Much of that work has been done with the invaluable assistance and involvement of tax agents from around the country.

And we are very proud of what our people at Inland Revenue have achieved but this has not been an easy time for them. And, as the article points out, our staff engagement scores have been low.

IR has been open from the outset about this organisation having fewer people in it at the completion of transformation. Being open however, does not make it any easier and we know that change is difficult. The engagement figures are in part, reflecting the uncertainty that comes with change. But we are working all the time to improve the situation through good communications and positive leadership and teamwork.

And of course, the work is not over. After April next year the final stages of transformation will be implemented and we will do it, as we have up to now, with the close assistance from a range of tax agents who have offered their experience and expertise in helping get as much as we can, as right as possible, right from the start.

*Sharon Thompson is deputy commissioner for customer and compliance services at the Inland Revenue Department.

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Kia ora Sharon.

Thanks for the reply.

One thing though - I am not sure I ever said that the cost savings of BT should be re- invested in audit and investigation work. What I said was:

"Yes, funding for investigations and debt management funding is falling, but you would expect Inland Revenue funding to fall overall because of all the money that's gone into Business Transformation."

I then went on to query why the cost of processing was increasing in a world where there was now a big powerful computer.

The main point I was making though was what were the discrepancies given they had stayed the same with much reduced audit hours. I was also surprised to find the type of discrepancy was no longer available given computing was now more powerful.

Thank you for addressing this point.

Although account management and regular reporting relationships by large companies has been the case since at least 2004, I note your comment about watching and correcting taxpayers as they file their returns in real time. If that is indeed the source of the 'discrepancy' - great.

I am sure you understand, though, that when a 'discrepancy' can have varying value and when details of the type are no longer captured - it is easy to assume the worst.

Cheers Andrea


The Roman Empire at its height [correct me if I'm wrong] funded itself via a 1% LAND tax - zero income tax?

If wage earners = slaves of old, then our country is funded by slave labour. The IRD then becomes a state sanctioned accountancy service for the Labour plantation.

Wage and Salary taxation might have run it's course - a bit like Orr still flogging that dead horse of his.


Excellent to see a considered response. Informed, respectful, robust discussion - as Andrea, Terry and Sharon have graced us - is vital, and so very rare. Officials too often hide away (yet mutter darkly in private), many commentators just troll, and with the trend to shout facts that (on analysis) are often a dominant narrative mis-shaping fact, we keep drifting further from a shared understanding. Thank you all for an island of genuine discourse.


Great also to see comments about success metrics (eg "finding more crime is not a measure of success fighting crime") which appear to reflect an appreciation of modern outcomes science, still patchy in many agencies after decades of NPM targets, despite NZ officials' global leadership a few decades ago, and now supposedly post-NPM often just labeling old targets as 'outcomes' - and the prospect of genuinely better economic/social outcomes languish another decade. If IRD 'get' outcomes, you could really help some of those other agencies by sharing experiences, if you're not already.


My observation is the black economy is growing. Of the sort that the computer analysis won't see, but 'boots on ground' will.
ie: Doorknock a street in South Auckland. Do you rent? Who too? and follow that through relentlessly. How many would you find of which the IRD has never even heard of.
'Boots' are absent now with the IRD.