## _spn0917

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---

### Executive summary: context and key challenges
- Global financial and economic crisis increases compliance risks and taxpayer support demands amid prospective budget cuts.
- Revenue decline timeline and magnitude:
  - 2008: general government revenue dropped by an average of 0.8 percentage point of GDP worldwide.
  - 2009 (first quarter): annualized tax yield decline averaged 4 percentage points of GDP across selected emerging and developing economies (staff estimates based on 16 emerging and developing economies).
- Shadow economy evidence:
  - Ongoing crisis will increase the shadow economy in 21 OECD countries by an average of 0.5 percent of GDP during 2009 after a decline each year since 2001.
  - Schneider estimates: shadow economy in 21 OECD countries was 16.7 percent of GDP in 2001, 13.3 percent of GDP in 2008, and 13.8 percent of GDP in 2009.
- Compliance problems likely to worsen: tax arrears, loss-reporting businesses, tax withholding failures, expansion of the cash economy.

### Fundamental objectives for tax agencies during the crisis
- Contain a rise in noncompliance.
- Help taxpayers cope with the pressures of the crisis to preserve viable businesses and prevent permanent exits from the tax system.

### Core strategy and four supporting pillars
- Structure strategy around the two objectives above and implement through four sets of measures:
  - expanding assistance to taxpayers,
  - refocusing enforcement on emerging areas of noncompliance that pose the greatest risk to revenue collection,
  - enacting legislative reforms that facilitate administration,
  - improving communication with the taxpayer population.
- Measures to avoid: tax amnesties and moratoria on audits.

### Targeted short-term measures to help taxpayers
- Adjusting advance payments.
- Accelerating the issuance of refunds.
- Making greater use of payment extensions (installment arrangements).
- Providing targeted and proactive assistance to taxpayers facing severe financial stress.

### Enforcement priorities in the crisis
- Refocus enforcement resources on highest revenue risks and sectors most affected by the downturn (examples: real estate, finance, automobile sectors where applicable).
- Safeguard revenue collection from large taxpayers, secure tax withholding, intensify arrears collection, focus on loss-reporting businesses, and enhance scrutiny of cross-border transactions.
- Contain the cash economy.

### Supporting actions and institutional arrangements
- Early warning: track indicators such as increases in late filing, growth in tax arrears, and taxpayer attitudes measured by surveys.
- Establish a high-level group within the tax agency to coordinate crisis tax compliance strategy; group should:
  - comprise the tax agency’s senior management,
  - include a small staff,
  - interact closely with operational departments,
  - confirm emerging revenue risks, coordinate treatments, ensure planning and resourcing, and monitor results.
- Government support for tax administration is critical during a crisis.
- Align near-term compliance strategies with medium-term modernization plans.

### Rationale for not tolerating increased noncompliance
- Tolerating noncompliance is distortionary, inequitable, and hampers rebuilding tax bases over the medium-term.
- Entrenched noncompliance complicates future fiscal consolidation.
- Fiscal stimulus should be transparent and rule-based, not implicit via tolerated noncompliance.

### Government support: role and alignment of strategies
- Tax agencies likely to face declining budget allocations as governments prioritize social expenditures.
- Substantial cuts to tax agencies’ budgets can reduce collection effectiveness and aggravate revenue decline.
- Align near-term crisis compliance strategies with medium-term priorities (organizational/staffing, taxpayer services and enforcement, information systems); structural problems require medium-term attention.

### Expanding assistance to taxpayers — five priority measures
- Ensure smooth implementation of government tax initiatives (particularly stimulus programs).
- Adjust advance tax payments to reduce cash-flow pressures.
- Accelerate issuance of tax refunds, subject to proper risk management.
- Make greater use of payment extensions.
- Provide targeted and proactive assistance to high-risk taxpayers.
- Avoid: tax amnesties, moratoria on auditing taxpayers, and similar measures.

### Implementing government tax initiatives — U.S. Economic Stimulus Act (ESA) lessons
- ESA context: enacted February 13, 2008; IRS required to begin issuing more than 100 million stimulus payments within about 12 weeks.
- IRS outcomes and operational impacts (as of September 2008):
  - issued more than 117 million stimulus payments;
  - payment accuracy rate of 99.6 percent;
  - totaling US$94 billion;
  - responded to more than 118 million telephone calls relating to the payments.
- Operational trade-offs and costs:
  - IRS shifted hundreds of staff from arrears collection to telephone services for refunds;
  - telephone service (percentage of calls answered) dropped from the filing season target of 82 percent to 50–55 percent;
  - reallocation of staff from arrears collection is estimated to have resulted in some US$650 million in foregone arrears recovery.
- Design lessons: simpler eligibility, timing outside peak filing period, comprehensive taxpayer register or alternative data sources.

### Adjusting advance payments — options and country examples
- Problem: advance payments based on previous year’s liability can aggravate cash-flow pressures in a downturn.
- Options:
  - calculate payments as current period sales × (previous year’s tax liability / sales);
  - permit taxpayers to estimate current-year revenue and expenses to set advance payments, with penalties if estimates prove significantly lower than full-year liability.
- Country examples:
  - Chile: advance payments calculated as a fixed percentage of current period sales; in applying this rule in 2009, taxpayers may reduce advance payments by 15 percent if gross income was equal to or less than about US$3.6 million in 2008 and by 7 percent if gross income was above this threshold or if the business started operations after January 1, 2008.
  - Australia: reduced its pay-as-you-go tax for qualified small businesses by 20 percent for the quarter that includes December 31, 2008.

### Accelerating issuance of refunds — benefits, examples, and fraud controls
- Benefits: refunds provide vital cash-flow relief to distressed taxpayers.
- Examples:
  - Chile: individuals may receive part of personal income tax refund six months before the close of the tax year; taxpayers entitled to receive an advance refund of 50 percent of the average refund received in the three most recent tax years.
  - Poland: reduced statutory deadline for issuing VAT refunds from 180 to 60 days.
  - United States: allowed small businesses to carry back net operating losses for a refund of taxes paid over the past five years instead of the usual two.
- Administrative approaches to speed refunds while managing fraud risk:
  - assign priority to processing returns with refund claims;
  - temporarily reallocate staff to refund operations;
  - eliminate requirement to audit all refund claims where applicable;
  - adopt or refine risk-based systems to select high-risk claims for audit;
  - use post-refund audits for lower-risk claims and reserve pre-refund audits for higher-risk claims.
- Warnings: avoid unnecessary refund delays without interest; deferral of VAT for imported capital goods can provide relief but is subject to abuse and should be restricted to compliant taxpayers with financial security.

### Making greater use of payment extensions (installment arrangements)
- Typical features: span one to two years, interest accrues, late payment penalties usually waived, taxpayer must stay current with future payments; failure triggers plan termination and severe collection actions.
- Crisis application: increased use for viable businesses can recover more revenue over the medium term and preserve businesses.
- Constraints and remedies:
  - establish criteria for automatic entitlement (submitted financial statement showing viability and inability to pay short-term; liability below threshold; filed all returns; no failure to pay in past three years; no recent installment plan).
- Example: Hungary granted all individual taxpayers an automatic right to an installment plan for tax debts less than Ft 100,000 (approximately €340), payable in equal monthly installments over four months.

### Providing targeted and proactive assistance — rationale and examples
- Rationale: focus limited resources on taxpayers/issues with significant compliance risks; proactively contact high-risk taxpayers reluctant to seek help.
- Examples:
  - Australian Taxation Office (ATO) Small Business Assistance Program (created 2007): proactive profiling, text message reminders, telephone contact to offer assistance before failure to meet obligations.
  - IRS Volunteer Income Tax Assistance (VITA) program: assists low- to moderate-income people (generally, US$42,000 and below); VITA returns increased about 2.2 percent during the 2009 filing season.
- Large taxpayer outreach: proactive communication via e-mail alerts, websites, and discussions with corporate executives and tax professionals.

### Refocusing enforcement — six strategic priorities
- Safeguarding revenue from largest taxpayers.
- Intensifying arrears collection.
- Securing tax withholding.
- Paying greater attention to loss-reporting businesses.
- Enhancing scrutiny of cross-border transactions and offshore evasion.
- Containing growth of the cash economy.

### Safeguarding revenue collection from large taxpayers — measures
- Consolidate number of large taxpayer offices (LTO) and ensure direct reporting to senior headquarters.
- Review selection criteria so LTO controls at least 60 percent of the tax base.
- Increase LTO staff, particularly auditors, in line with increased taxpayer assignments.
- Shift LTO audit focus toward industries most affected and use issue-specific audits to broaden coverage.
- Introduce/expand industry specialists (financial products, valuation, computer-aided audit methods, transfer pricing, thin capitalization, tax losses).

### Withholding taxes and VAT efficiency in downturns
- Withholding taxes face high risk as credit-constrained businesses may illicitly retain withheld taxes (VAT or payroll) to finance operations.
- Strengthen enforcement because withholding accounts for a large revenue share and payments tend to decline in a crisis.
- VAT C-efficiency tends to decline during downturns; panel regression for EU countries during 1995–2008 shows positive and significant correlation between VAT C-efficiency and the output gap.
- Alternative explanation: shifts in consumption toward lower-taxed necessity goods as incomes fall.

### Strengthening enforcement for withholding and refunds
- Recommended measures for withholding-tax nonpayment:
  - Broaden audit coverage for tax withholding.
  - Assign higher priority to recovery of withholding arrears.
  - Enhance exchange of information with other agencies (customs, social insurance funds).
  - Review or increase penalties.
- VAT refund audit principles:
  - Distinguish between good and poor/unknown compliance histories.
  - Use pre-refund audits for high-risk claims and post-refund audits for lower-risk claims.
  - Apply analytical criteria to estimate revenue risk per claim.
  - Focus audit scope on issues material to the refund claim.

### Intensifying arrears collection — practices and timing
- Arrears tend to rise sharply in downturns.
- Liberalize payment arrangements for distressed taxpayers but enforce against those who can pay.
- Good practices:
  - early detection and time standards for follow-up;
  - maintain quality and timeliness of arrears data;
  - target recoverable arrears (recent and largest first);
  - use telephone contact centers for outgoing debt calls;
  - write off unrecoverable arrears;
  - proper organizational/staffing arrangements for collection enforcement, including focus on large tax debts;
  - ensure full set of enforcement powers.
- Recovery probability declines rapidly when a debt remains outstanding after 60–90 days.
- Bankruptcy: allocate enforcement staff to bankruptcy cases, create special bankruptcy units, improve coordination with bankruptcy courts.
- Nonfiling: use default assessments for nonfilers, reserve audits for larger cases; screen default assessments for reasonableness.

### Loss-reporting businesses — risks and controls
- Loss provisions (carry forwards, carry backs, loss transfers) provide relief but create compliance risk if losses are illicitly declared.
- Risk management priorities:
  - verify doubtful/larger loss claims;
  - ensure conditions/limitations on carryforwards/carrybacks/transfers are correctly applied;
  - check for manipulation by consolidated groups and partnerships;
  - sharpen audit focus on businesses reporting losses year after year.

### Enhancing scrutiny of cross-border transactions
- Crisis elevates risks: nonmarket pricing to shift offshore losses, increased inbound management service charges, aggressive repatriation practices.
- Noted trend: U.S.-based corporations more than tripled total foreign profits between 1994 and 2004, with 58 percent earned in low-tax or no-tax jurisdictions.
- International cooperation:
  - G-20 (April 2009) called for adoption of international standard for exchanging tax information and development of countermeasures against noncooperative jurisdictions (increased disclosure requirements, tax withholding on payments, denial of deductions).
  - Many countries committed to adopt the international standard; priority to negotiate tax information exchange agreements or exchange-of-information articles.
  - Low-income countries may require technical assistance or cost-sharing to implement standards.
- Strengthening programs:
  - targeted audit programs for cross-border evasion;
  - expand audits of international issues and international tax auditors (especially within LTO);
  - increase disclosure requirements and publish warnings on exploitative schemes;
  - promote exchange of information with anti-money-laundering agencies;
  - enter into tax information exchange agreements and use information for control purposes;
  - introduce voluntary disclosure programs distinct from one-off amnesties.
- Disclosure examples: report payments of interest, royalties, patent rights, trademarks; list nonresident related corporations with transaction amounts.
- Examples:
  - ATO uses AUSTRAC reports to profile industries and select cases.
  - U.S. IRS voluntary disclosure program (2009) offering reduced civil penalty and likely waiver of criminal charges under specified conditions (payment of taxes and interest going back six years; filing/amending returns; paying a penalty equivalent to 20 percent of the value of an offshore account during the tax year in which it had its highest value).

### Containing the cash (shadow) economy
- Cash economy risk: Schneider (2009) indicates cash economy will increase in OECD countries by an average of 0.5 percent of GDP during 2009.
- Compliance rates in the cash economy are substantially lower than in the formal economy.
- Successful containment involves:
  - identifying high-risk sectors and taxpayer behavior;
  - encouraging compliance through proactive/innovative measures;
  - implementing an escalated enforcement regime;
  - building partnerships with civic associations influencing cash-economy businesses.
- Responses should be proportionate to the magnitude of the problem and balanced against other compliance challenges.

### Reforming legislation — targeted changes to facilitate administration
- Avoid comprehensive tax reform during a crisis; pursue targeted legal changes:
  - strengthen transfer-pricing rules and consider a general anti-avoidance rule;
  - grant tax agencies broad authority to arrange installment plans and enforce collection, including seizing assets from uncooperative debtors;
  - provide authority to recover tax arrears directly from corporate officers under prescribed conditions to discourage nonpayment of withholding taxes;
  - permit tax agencies to use default assessments and indirect audit methods to assess taxes for nonfilers;
  - grant authority to summon taxpayers and third parties for evidence and testimony;
  - ensure bankruptcy laws accord tax debts appropriate creditor ranking;
  - ensure bank confidentiality rules do not impede access to taxpayer financial information in bona fide tax enforcement actions with due process protections.

### Communicating the tax agency’s compliance strategy
- Use full service channels (website, e-mail, telephone contact centers, walk-in offices) and products to publicize compliance strategy.
- Explain tax implications of crisis events (job loss, debt forgiveness, cashing retirement funds, stimulus benefits); example: IRS What If? Q&A scenarios (IRS, 2008b).
- Dissuade noncompliance by informing taxpayers about emerging noncompliance types, consequences (penalties, additional taxes, seizure, prosecution), and publicizing enforcement results.

### Internal and stakeholder communication
- Internal: provide managers and staff with timely guidance via internal directives, newsletters, intranet postings, senior management presentations, and training.
  - Example: Netherlands package included a memorandum, questionnaire, analytical report on distressed sectors, and taxpayer information on stimulus and temporary postponement regulations.
- External stakeholders: consult industry associations and tax professionals to understand compliance problems and communicate solutions.
  - Example: New Zealand Inland Revenue industry partnership program (February 2002).

### Financial sector issues affecting tax administration
- Financial sector size and complexity: often one of the largest sectors, about one-quarter of GDP among OECD countries (Zee and Schenk, 2004).
- Crisis-driven compliance risks: valuation difficulties for illiquid assets, capital-raising operations, reported financial losses, mergers; longstanding risks include tax-leveraged products and avoidance schemes.
- Tax avoidance schemes: highly structured transactions, circular/cross-border flows, intra-group exchanges designed to create artificial losses or inappropriate foreign tax credits.
- Capital-raising and hybrids: hybrid securities may be equity for regulatory purposes and debt for tax purposes; misclassification across many issues can substantially reduce corporate tax base; agencies should communicate tax treatment of hybrids.
- Valuation and accounting changes:
  - April 2009: U.S. Financial Accounting Standards Board issued guidance on valuing illiquid assets using “best judgment” instead of quoted market prices (FASB, 2009).
  - April 2009: International Accounting Standards Board announced a six-month comprehensive review of accounting standards relating to financial instruments.
- Foreclosed property and fraud schemes: validate valuations, confirm deductible expenses, and provide guidance on treatment of taxes paid on fictitious income and deductibility of fraud losses.
- Cooperative approaches with financial institutions:
  - unilateral statements of intent, joint charters with stakeholders, or formal agreements with bank associations.
  - Example: South African Revenue Service cooperative arrangement with banking association to improve compliance and service.

### Appendix highlights
- Appendix 1 — Singapore: Managing tax arrears in a financial crisis:
  - IRAS measures: defer payments up to six months for job loss; interest-free installments for individuals with severe cash-flow difficulties; extended company installment plans up to 50 percent longer than standard; flexible payoff of arrears subject to penalties/interest.
  - Eligibility: restricted to taxpayers with good compliance histories and documentary evidence of hardship.
  - Outcomes: proportion of total tax arrears to current tax collections rose from 6.3 percent in 1997 to 8.2 percent in 1998, then declined to 7.1 percent in 1999; ratio of new flows of tax arrears to current tax collection increased by 2.1 percent, 3.0 percent, and 2.0 percent for 1997, 1998, and 1999 respectively.
- Appendix 2 — Main elements of a VAT refund verification program:
  - components: initial risk assessment, front-end data validation, risk-based audit selection, and differentiated verification methods.
  - differentiated methods: high-risk—pre-refund audits at taxpayer premises; moderate-risk—upper-refund limits with brief desk review and post-approval audit; low-risk—approved within 72 hours with random post-approval audits.
  - audit scope: limit to refund claim, use statistical sampling, trace exports through invoices/records rather than relying solely on Customs export documents, and confirm with importing-country Customs if doubt remains.
- Appendix 3 — Australia: Cash Economy Strategy:
  - balanced measures: communication campaigns, incentives for self-regulation (remission guidelines, industry benchmarks), targeted assistance (seminars, advisory visits, online tools, reminder communications), strategic alliances (tax practitioners, industry associations, software providers), and focused enforcement (data matching, indirect audit methods, unannounced visits, publicity of enforcement outcomes).

*IMF Fiscal Affairs Department — _spn0917_*

### Executive Summary ......................................................................................................

### Executive Summary

### Key challenges and context
- The global financial and economic crisis presents major challenges for tax administration: growing compliance risks and greater demands for taxpayer support amid prospective budget cuts.
- For many countries, the revenue decline began in 2008 when general government revenue dropped by an average of 0.8 percentage point of GDP worldwide.
- The revenue decline appears to have accelerated in 2009: the annualized tax yield decline averaged 4 percentage points of GDP across selected emerging and developing economies in the first quarter of 2009 (staff estimates based on 16 emerging and developing economies, for which revenue data were available for the first quarter of 2009).
- Empirical evidence and theoretical considerations point to an increased risk of noncompliance during downturns, especially where credit is tight or activity shifts to the informal sector.
  - A study reports that the ongoing crisis will increase the shadow economy in 21 OECD countries by an average of 0.5 percent of GDP during 2009 after a decline each year since 2001.
  - Schneider estimates the shadow economy in 21 OECD countries to have been equivalent to 16.7 percent of GDP in 2001, 13.3 percent of GDP in 2008, and 13.8 percent of GDP in 2009.
- Specific compliance problems likely to worsen include tax arrears, loss-reporting businesses, tax withholding failures, and expansion of the cash economy.

### Fundamental objectives for tax agencies during the crisis
- Contain a rise in noncompliance.
- Help taxpayers cope with the pressures of the crisis to preserve viable businesses and prevent permanent exits from the tax system.

### Core strategy and four supporting pillars
- The tax compliance strategy should be structured around two objectives (above) and implemented through four sets of measures:
  - expanding assistance to taxpayers,
  - refocusing enforcement on the emerging areas of noncompliance that pose the greatest risk to revenue collection,
  - enacting legislative reforms that facilitate administration,
  - improving communication with the taxpayer population.
- Some measures—such as tax amnesties and moratoria on audits—are counterproductive and should be avoided.

### Targeted short-term measures to help taxpayers
- Adjusting advance payments.
- Accelerating the issuance of refunds.
- Making greater use of payment extensions.
- Providing targeted and proactive assistance to taxpayers facing severe financial stress.

### Enforcement priorities in the crisis
- Refocus enforcement resources on highest revenue risks and the sectors most affected by the downturn (for example, real estate, finance, and automobile sectors where applicable).
- Safeguard revenue collection from large taxpayers, secure tax withholding, intensify arrears collection, pay greater attention to loss-reporting businesses, and enhance scrutiny of cross-border transactions.
- Contain the cash economy, recognizing that noncompliance rates are typically higher in the informal sector.

### Supporting actions and institutional arrangements
- Early warning of emerging compliance risks is crucial: track measurable indicators such as increases in late filing of tax returns, growth in tax arrears, and taxpayers’ attitudes toward compliance as measured by surveys.
- Establish a high-level group within the tax agency to coordinate the development and implementation of the crisis tax compliance strategy. The group should:
  - comprise the tax agency’s senior management,
  - include a small staff,
  - interact closely with operational departments,
  - confirm emerging revenue risks, coordinate treatments, ensure planning and resourcing, and monitor results.
- Government support for tax administration is more important than ever during a crisis.
- Align near-term compliance strategies with medium-term modernization plans.

### Rationale for not tolerating increased noncompliance
- Although some noncompliance may have countercyclical effects, tolerating noncompliance is distortionary, inequitable, and hampers rebuilding tax bases over the medium-term.
- If noncompliance becomes entrenched, it is likely to carry forward to future periods and make medium-term fiscal consolidation harder.
- If fiscal stimulus is needed, it should be delivered transparently and rule-based, not by allowing noncompliance to provide implicit stimulus.

_Executive Summary — IMF Fiscal Affairs Department, from the provided content unit_

### 17.      Third, government support for tax administration is critical during the crisis.

### Third, government support for tax administration is critical during the crisis.

### Role of government support and alignment of strategies
- Tax agencies face the prospect of declining budget allocations in an economic downturn as governments seek to create fiscal room for high-priority social expenditures.
- The task of tax administration becomes more demanding during difficult economic times; substantial cuts in tax agencies’ budgets are likely to reduce the effectiveness of tax collection and further aggravate a decline in revenue.
- Tax agencies should align their near-term compliance strategies and medium-term modernization plans:
  - Medium-term priorities include addressing poor organizational and staffing arrangements, weak taxpayer services and enforcement programs, and outdated information systems.
  - Near-term crisis compliance strategies should not neglect medium-term goals because such structural problems can be addressed only over the medium term.

### Expanding assistance to taxpayers — overview
- The first element in a tax compliance strategy for an economic crisis is to expand assistance to taxpayers to contain noncompliance and keep taxpayers in the system.
- Five measures of particular importance:
  - ensuring the smooth implementation of government tax initiatives, particularly those involving stimulus programs;
  - adjusting advance tax payments to reduce taxpayers’ cash-flow pressures;
  - accelerating the issuance of tax refunds, subject to proper risk management;
  - making greater use of payment extensions; and
  - providing targeted and proactive assistance to high-risk taxpayers.
- Measures to avoid: tax amnesties, moratoria on auditing taxpayers, and other similar measures (international experience shows these are not effective and create perverse incentives).

### Implementing government tax initiatives (lessons from the United States ESA)
- Context and mandate:
  - The Economic Stimulus Act (ESA) enacted on February 13, 2008 required the Internal Revenue Service (IRS) to begin issuing more than 100 million stimulus payments within about 12 weeks of its enactment.
- IRS outcomes and operational impacts (as of September 2008):
  - issued more than 117 million stimulus payments;
  - payment accuracy rate of 99.6 percent;
  - totaling US$94 billion;
  - responded to more than 118 million telephone calls relating to the payments.
- Operational trade-offs and costs:
  - IRS shifted hundreds of staff from arrears collection activities to telephone services for refunds;
  - telephone service (percentage of calls answered) dropped from the filing season target of 82 percent to 50–55 percent;
  - reallocation of staff from arrears collection is estimated to have resulted in some US$650 million in foregone arrears recovery.
- Lessons for designing tax rebate programs:
  - tax rebates are easier where individual refunds are a normal part of the tax system;
  - complexity of eligibility and rebate rules affects implementation difficulty;
  - implementing outside the peak filing period eases operations;
  - a comprehensive taxpayer register with sufficient data to determine eligibility is required (or registration information must be acquired from another source, e.g., social security agency).

### Adjusting advance payments
- Problem:
  - Advance payments based on the previous year’s liability can be higher than necessary in a downturn, aggravating cash-flow pressures.
- Options to mitigate:
  - calculate payments as current period sales × (previous year’s tax liability / sales);
  - permit taxpayers to estimate revenue and expenses for the current year to set advance payments, with penalties if payments prove significantly lower than full-year liability.
- Country examples and measures:
  - Chile: advance payments calculated as a fixed percentage of current period sales; in applying this rule in 2009, taxpayers may reduce advance payments by 15 percent if gross income was equal to or less than about US$3.6 million in 2008 and by 7 percent if gross income was above this threshold or if the business started operations after January 1, 2008.
  - Australia: reduced its pay-as-you-go tax for qualified small businesses by 20 percent for the quarter that includes December 31, 2008.

### Accelerating the issuance of refunds
- Benefits:
  - Refunds provide vital cash flow relief to financially distressed taxpayers.
- Examples of accelerated refund measures:
  - Chile: individuals may receive part of personal income tax refund six months before the close of the tax year, with the balance at year end (taxpayers are entitled to receive an advance refund of 50 percent of the average refund received in the three most recent tax years).
  - Poland: reduced statutory deadline for issuing VAT refunds from 180 to 60 days.
  - United States: allowed small businesses to carry back net operating losses for a refund of taxes paid over the past five years instead of the usual two.
- Administrative approaches to speed refunds while managing fraud risk:
  - assign priority to processing returns with refund claims;
  - temporarily reallocate staff to refund operations;
  - eliminate requirement to audit all refund claims where applicable;
  - adopt or refine risk-based systems to select high-risk claims for audit;
  - make greater use of post-refund audits for lower-risk claims and reserve pre-refund audits for higher-risk claims.
- Warnings:
  - some governments delay refunds without cause and without interest, which aggravates taxpayers’ cash flow problems and encourages withholding of tax payments; governments should make adequate budgetary provisions for refund payments.
  - deferral of VAT for imported capital goods can provide relief but is subject to abuse and revenue leakage; best implemented in countries with strong revenue administrations and restricted to taxpayers with proven compliance histories and who post financial security (e.g., a bond).

### Making greater use of payment extensions (installment arrangements)
- Installment arrangements:
  - typically span one to two years during which interest accrues but late payment penalties are usually waived;
  - require taxpayers to stay current with future tax payments; failure results in plan termination and severe collection actions.
- Crisis application:
  - increased use of installment arrangements for viable businesses can recover more revenue over the medium term and keep viable businesses afloat.
  - example: Inland Revenue Authority of Singapore introduced an enhanced installment program during a financial crisis (Appendix 1).
- Administrative/legal constraints and remedies:
  - some systems restrict installments to after exhausting recovery efforts;
  - criteria could be established for automatic entitlement to installments, such as:
    - taxpayer has submitted a financial statement demonstrating (1) business viability and (2) inability to fully pay in the short term;
    - tax liability does not exceed a prescribed threshold;
    - taxpayer has filed all returns, has not failed to pay tax within the past three years, and has not recently entered into an installment plan.
  - Example: Hungary granted all individual taxpayers an automatic right to an installment plan for tax debts less than Ft 100,000 (approximately €340), payable in equal monthly installments over four months.

### Providing targeted and proactive assistance
- Rationale:
  - Targeted assistance focuses limited resources on taxpayers and issues with significant compliance risks due to the crisis.
  - Proactive service delivery is important because high-risk taxpayers are often reluctant to seek assistance.
- Examples:
  - Australian Taxation Office (ATO) Small Business Assistance Program (created 2007):
    - helps businesses understand registration and comply with VAT and employer withholding;
    - improved record keeping;
    - refined to provide proactive assistance to high-risk taxpayers, including text message reminders to previous late filers in particular demographic groups;
    - in the crisis, uses profiling to identify taxpayers at risk for financial distress and contacts them by telephone to offer assistance before failure to meet obligations.
  - IRS Volunteer Income Tax Assistance (VITA) program:
    - offers free tax help to low- to moderate-income people (generally, US$42,000 and below);
    - certified volunteers prepare basic tax returns at community sites;
    - number of tax returns prepared under VITA increased by about 2.2 percent during the 2009 filing season, helping offset some decline in returns prepared by private sector professionals.
- Large taxpayer outreach:
  - crisis raises issues for large taxpayers (tax losses, payouts to laid-off workers, capital-raising);
  - tax agencies should proactively convey positions to large taxpayers via e-mail alerts, websites, and discussions with corporate executives and tax professionals.

### Refocusing enforcement — strategic priorities
- During a crisis enforcement programs should be adjusted to address emerging compliance problems. Six directions for enhanced enforcement (emphasis varies by country):
  - safeguarding revenue from the largest taxpayers by reassessing controls over this segment in light of the crisis;
  - intensifying arrears collection;
  - securing tax withholding;
  - giving greater attention to loss-reporting businesses;
  - enhancing scrutiny of cross-border transactions and offshore evasion;
  - containing growth of the cash economy.

### Safeguarding revenue collection from large taxpayers
- Rationale:
  - A relatively small number of taxpayers account for the largest portion of tax revenue; a decline in compliance by a few large taxpayers can lead to large foregone revenue.
- Recommended measures to reassess controls over large taxpayers:
  - consolidate the number of large taxpayer offices (LTO) and ensure they report directly to a senior headquarters official instead of through a regional tax office;
  - review selection criteria for assigning taxpayers to the LTO to ensure that the LTO controls, say, at least 60 percent of the tax base;
  - increase LTO staff, particularly auditors, in line with any increase in the number of taxpayers assigned to the LTO;
  - shift LTO audit focus toward industries most affected by the crisis and make greater use of issue-specific audits to broaden coverage;
  - introduce or expand the use of industry specialists at the LTO, including financial products, valuation, computer-aided audit methods, and complex cross-industry issues such as transfer pricing, thin capitalization, and tax losses.

*Source: _spn0917 - 17. Third, government support for tax administration is critical during the crisis.*

### 43.      Withholding taxes present a high risk to revenue collection during a crisis. This

### _spn0917 - 43.      Withholding taxes present a high risk to revenue collection during a crisis. This

### Withholding taxes and crisis-related revenue risk
- Withholding taxes present a high risk to revenue collection during a crisis because increasing numbers of credit-constrained businesses can be expected to illicitly retain the taxes they withhold from their customers (VAT) or employees (payroll taxes) to finance their ongoing operations.
- Because tax withholding accounts for a large revenue share in many countries and payment of these taxes to the government tends to decline in a crisis, tax agencies should take steps to strengthen enforcement in this area.

### VAT efficiency and compliance during downturns
- VAT efficiency—a measure of the effective coverage of the VAT—tends to decline during an economic downturn, suggestive of a decline in VAT compliance.
- A panel regression of the VAT C-efficiency ratio on the output gap points to a positive and significant correlation between the two variables for European Union countries during 1995–2008.
- The positive correlation is present for the majority of countries in the sample when each country is examined separately.
- Note: C-efficiency is defined as the ratio of VAT revenue to consumption per point of the standard VAT rate; a positive output gap means output above trend.
- Alternative explanation: The decline in VAT C-efficiency could also reflect shifts in consumption patterns (e.g., as incomes go down, the share of consumption of “necessity” goods, which tend to be taxed at a low rate, goes up).

### Strengthening enforcement for withholding and refunds
- Recommended enforcement measures to address withholding-tax nonpayment:
  - Broaden audit coverage for tax withholding.
  - Assign higher priority to recovery of arrears involving withholding taxes.
  - Enhance the exchange of information with other agencies (e.g., customs, social insurance funds) that play a role in administering tax withholding.
  - Review or increase penalties.
- VAT refund mechanism vulnerabilities and audit principles:
  - The VAT refund mechanism is particularly vulnerable to abuse during a crisis as cash-constrained businesses may file illicit refund claims.
  - A well-designed and -executed audit strategy should:
    - Distinguish between refund claimants with a good compliance history and those with poor or unknown compliance histories.
    - Use pre-refund audits for high-risk refund claims and post-refund audits for claims of lower risk.
    - Apply analytical criteria to determine the likely extent of revenue risk associated with each refund claim.
    - Focus the scope of a refund audit on issues material to the refund claim.

### Intensifying arrears collection
- Tax arrears tend to rise sharply during an economic downturn.
- Tax agencies should consider liberalizing the use of payment arrangements to assist distressed taxpayers, but take firm enforcement action against businesses that have the capacity to pay but refuse to do so.
- Good debt collection practices during a crisis:
  - Ensure early detection of tax arrears and establish appropriate time standards for follow-up.
  - Maintain the quality and timeliness of tax arrears data.
  - Target enforcement efforts on recoverable arrears—usually by focusing on the most recent and largest arrears first.
  - Leverage the telephone contact center to place outgoing debt collection calls.
  - Write off arrears deemed unrecoverable.
  - Implement proper organizational and staffing arrangements for collection enforcement, including a greater organizational focus for large tax debts.
  - Be vested with a full set of enforcement powers.
- International experience: The probability of debt recovery declines rapidly when a debt remains outstanding after 60–90 days.
- Bankruptcy-related arrears recovery:
  - Bankruptcies complicate recovery because the collection process is normally placed under the bankruptcy judicial system.
  - Responses include allocating more enforcement staff to bankruptcy cases, creating a special bankruptcy unit within debt collection departments, and improving coordination between the tax agency and the bankruptcy court.
- Nonfiling:
  - The number of taxpayers who fail to file can be expected to rise during an economic downturn.
  - Tax agencies should make greater use of default assessments in determining tax liability while reserving audits for larger nonfiling cases.
  - Default assessments should be screened for reasonableness before issuance to avoid large amounts of uncollectible tax debts.
  - Note: Default assessments establish the amount of tax owed by using information already available to the tax office, such as by charging a multiple of the previous period’s tax assessment.

### Loss-reporting businesses: risks and controls
- Loss provisions common in tax law:
  - Loss carry forwards, loss carry backs, and loss transfers in mergers can provide relief to distressed businesses and facilitate restructurings.
- Crisis-related compliance risk:
  - Tax losses present a growing compliance risk during a crisis as some businesses may declare illicit losses.
  - Uncontrolled losses can put significant revenue at risk because loss carry forwards can generate deductions for many years, loss carry backs can lead to immediate refunds, and loss transfers may encourage trafficking in loss-making companies.
- Recommended focus for tax agencies:
  - Verify doubtful loss claims, particularly larger claims.
  - Determine whether conditions and limitations for carrying forward, carrying back, and transferring losses have been correctly applied.
  - Check for possible manipulation of losses by consolidated groups and partnerships.
  - Sharpen audit focus on businesses that report tax losses year after year.

### Enhancing scrutiny of cross-border transactions
- Crisis highlights international tax compliance issues from complex cross-border planning to concealment in tax havens.
- Concerns and enforcement priorities:
  - Shifting offshore losses through nonmarket pricing is of growing concern as multinational groups seek to report losses where most advantageous.
  - Increased inbound management service charges to recover global costs without regard to arm's length value are being more closely reviewed.
  - Repatriation of funds may lead to aggressive tax practices related to nonresident withholding and foreign tax credit regimes; repatriated offshore funds during recessions have warranted investigation in prior downturns.
  - Noted trend: U.S.-based corporations more than tripled their total foreign profits between 1994 and 2004, with 58 percent of that profit earned in low-tax or no-tax jurisdictions (IRS, 2008a).
  - Large offshore assets and limited cooperation by tax havens raise concerns about revenue at risk via legal avoidance or illegal hidden accounts.
- International cooperation and standards:
  - G-20 leaders at their April 2009 meeting in London called on countries to adopt the international standard for exchanging tax information and stood ready to take action against jurisdictions that do not meet the standard.
  - G-20 countries agreed to develop a toolbox of countermeasures against noncooperative jurisdictions, including increased disclosure requirements on transactions involving noncooperative jurisdictions, tax withholding on a wide variety of payments, and denial of tax deductions for expense payments to payees resident in a noncooperative jurisdiction.
  - A raft of additional countries committed to adopting the international standard for exchanging tax information; priority shifts to swift negotiation and conclusion of tax information exchange agreements or exchange-of-information articles of double-taxation agreements.
  - Recognized challenge: Some low-income countries may face difficulties implementing the international standards and may require technical assistance and/or cost-sharing arrangements.
- Strengthening international enforcement programs:
  - Develop a targeted audit program to address cross-border evasion.
  - Expand the number of audits of international issues and increase the number of international tax auditors (particularly within the LTO), providing greater technical guidance to auditors on international issues.
  - Increase disclosure requirements on international transactions.
  - Publish warnings on specific international tax planning schemes that improperly exploit loopholes.
  - Promote exchange of information with the country’s anti-money-laundering agency to verify compliance and identify aggressive international tax practices.
  - Enter into tax information exchange agreements and effectively use this information for control purposes.
  - Introduce a voluntary disclosure program encouraging taxpayers to declare previously unreported income in offshore accounts; voluntary disclosures represent permanent programs distinct from one-off tax amnesties.
- Disclosure examples and measures:
  - Disclosure requirements may involve reporting payments of interest, royalties, patent rights, trademarks, and listing nonresident related corporations with transaction amounts.
  - Example: The ATO uses reports from anti-money-laundering agency AUSTRAC to profile industries, identify high-risk transactions, and select cases for investigation.
  - Example: In the United States, the IRS introduced a voluntary disclosure program in 2009 offering a reduced civil penalty and likely waiver of criminal charges under specified conditions (voluntary disclosure of unreported offshore income, payment of taxes and interest going back six years, filing or amending tax returns, and paying a penalty equivalent to 20 percent of the value of an offshore account during the tax year in which it had its highest value).

### Containing the cash (shadow) economy
- The cash economy represents an increasing risk to tax collection.
- Schneider (2009) indicates that the cash economy will increase in OECD countries by an average of 0.5 percent of GDP during 2009 as more persons attempt to make up for lost income via the cash economy.
- Taxpayers’ compliance rates in the cash economy are substantially lower than in the formal economy.
- Successful containment strategies involve a multifaceted approach:
  - Identify high-risk sectors and understand taxpayer behavior in those sectors.
  - Encourage compliance through proactive and innovative measures.
  - Implement an escalated regime of enforcement methods.
  - Build partnerships with relevant civic associations that may influence cash economy businesses.
- A tax agency’s response should be proportionate to the magnitude of the cash-economy problem and balanced against other compliance challenges (e.g., large taxpayers and cross-border issues).

### Reforming legislation (targeted changes)
- Comprehensive tax reform is generally not advisable during a crisis, but targeted legislative changes can facilitate the tax agency’s response.
- Reform priorities and suggested legal provisions:
  - Strengthen transfer-pricing rules (including, possibly, enactment of a general anti-avoidance rule) to address cross-border compliance risks.
  - Grant tax agencies broad authority to arrange installment plans (with reasonable terms and conditions) for genuinely distressed taxpayers and enforce collection from uncooperative debtors, including seizing physical and financial assets.
  - Provide authority for tax agencies to recover tax arrears directly from corporate officers under prescribed conditions to discourage nonpayment of withholding taxes.
  - Permit tax agencies to use all reasonable means (including default assessments and indirect audit methods) to assess taxes owed by taxpayers who fail to file a tax return.
  - Give tax administrations authority to summon taxpayers and third parties to provide evidence and testimony on relevant tax matters to address underreporting or overreporting of losses and refunds.
  - Ensure bankruptcy laws accord tax debts an appropriate ranking in the hierarchy of creditors to protect the government’s interest.
  - Ensure bank confidentiality restrictions do not impede a tax agency from accessing a taxpayer’s financial information held by a bank, provided access involves a bona fide tax enforcement action and is subject to due process protections.

*Sources: Eurostat; and IMF staff estimates.*

### 66.      A special communication program for taxpayers and other key stakeholders in

### 66.      A special communication program for taxpayers and other key stakeholders in

### Communicating the tax agency’s compliance strategy
- Tax agencies should clearly convey to stakeholders the various elements of the tax agency’s compliance strategy.
- Tax agencies should use their full set of service channels (website, e-mail, telephone contact centers, walk-in offices) and products in publicizing their compliance strategy to the public.

### Communicating with taxpayers
- To promote compliance in a crisis, tax agencies need to explain tax implications and steps taxpayers should take for events such as job loss, debt forgiveness, cashing in a retirement fund, and tax benefits under the government’s economic stimulus program.
- Example: the IRS has posted on its website a list of What If ? scenarios—in question-and-answer format—that provides practical guidance in responding to events that have significant tax consequences (IRS, 2008b).
- To dissuade noncompliance, tax agencies should:
  - inform the taxpayer community that they are aware of the types of noncompliance emerging from the crisis;
  - explain the consequences of engaging in noncompliance (including penalties, assessment of additional taxes, seizure of assets, and, in extreme cases, prosecution); and
  - publicize the results of actual enforcement cases.

### Communicating within the tax agency
- Managers and staff require timely, accurate, and specific guidance on how to apply new policies and administrative practices under the tax compliance strategy.
- Internal communications tools to be used include internal directives and newsletters, intranet postings, senior management presentations, and training programs.
- Example: the Netherlands Tax and Customs Administration issued a communication package to all regional tax offices consisting of:
  - (1) a memorandum outlining the need for specific attention to be given to emerging tax issues,
  - (2) a questionnaire on the impact that the recession is having on the offices’ various projects,
  - (3) an analytical report on economic sectors in financial distress, and
  - (4) information for taxpayers on the fiscal stimulus package and temporary regulations on the postponement of tax payments and other collection measures.

### Communicating with other stakeholders
- Tax agencies should establish or better use consultations with industry associations and tax professionals (tax agents, bookkeepers, other tax intermediaries).
- These associations can influence taxpayer behavior, help understand crisis-driven compliance problems, develop workable solutions, and communicate solutions to taxpayers.
- Example: New Zealand’s Inland Revenue Department launched an industry partnership program in February 2002 (Appendix 4).

### Financial sector issues affecting tax administration
- The financial sector’s size and complexity make it a difficult, specialized environment for tax agencies; financial institutions are often one of the largest sectors in the economy, accounting for an average one-quarter of GDP among OECD countries (Zee and Schenk, 2004) and contributing substantial amounts of tax revenue.
- The sector comprises a wide range of entities and a vast array of increasingly complex financial products; many large financial institutions operate globally, complicating tax oversight.

### Crisis-driven challenges and compliance risks
- Since the onset of the crisis, the financial sector has become more challenging due to large losses, collapses, restructurings, and mergers, often accompanied by growing tax compliance risks.
- Some risks are longstanding (tax-leveraged products, tax avoidance schemes); others are by-products of the crisis (valuation difficulties for illiquid assets, capital-raising operations, reported financial losses, and mergers).
- Not all financial institutions are noncompliant; some risks are shared with enterprises in other sectors.

### Tax avoidance schemes and enforcement
- Large compliance risks involve tax avoidance schemes engineered by major international financial institutions, featuring highly structured financial transactions, circular and cross-border flows of funds, and intra-group exchanges.
- Some transactions appear designed mainly to create artificial tax losses, inappropriate foreign tax credits, and other unintended tax benefits.
- In response, some tax agencies are allocating more resources to examining high-risk avoidance arrangements engineered by financial institutions.

### Capital-raising operations and hybrid securities
- Banks suffering capital declines may raise capital through issuance of hybrid securities, which contain both equity and debt features.
- For banks, some hybrids may be classified as equity for regulatory purposes and as debt (with tax deductibility of interest) for tax purposes.
- The misclassification of these securities, when combined with large numbers of issues, could substantially reduce the corporate income tax base.
- Tax agencies should clearly communicate how hybrid securities are to be treated for tax purposes.

### Losses, mergers, and valuation challenges
- Large financial losses incurred by many financial institutions have major revenue implications; tax laws in many countries permit loss-carryforward and/or carryback with limitation, and tax agencies will need to carefully evaluate reported losses.
- Mergers and acquisitions raise complex tax issues: taxable vs. tax-deferred treatment, whether the cost basis of acquired assets can be increased, and the extent to which an acquirer can benefit from an acquired company’s tax losses and attributes. Tax agencies should carefully scrutinize large-value mergers to ensure correct tax treatment.
- Valuing financial assets under mark-to-market accounting is complex in inactive markets or where prices reflect distressed sales.
  - April 2009: U.S. Financial Accounting Standards Board issued new guidance on conditions under which banks may value illiquid assets using “best judgment” instead of quoted market prices (FASB, 2009).
  - International Accounting Standards Board announced in April 2009 a six-month comprehensive review of accounting standards relating to financial instruments.
- Changing rules increase the need for tax agencies to pay particular attention to methods banks use to value financial assets; greater cooperation between tax agencies and bank regulatory agencies may help.

### Foreclosed property and fraudulent investment schemes
- Gains or losses on foreclosed property may have substantial revenue implications; in some countries banks must recognize a tax gain or loss measured as the difference between the basis of the loan and the fair market value of the property.
- To guard against revenue leakage, tax agencies need greater audit resources to validate valuation of foreclosed property, confirm deductible expenses while repossessed property is held for sale, and ensure no additional tax write-downs for bad debt after foreclosure.
- The crisis uncovered fraudulent investment schemes (including Ponzi schemes) resulting in huge investor losses; tax agencies need to provide guidance on:
  - (1) treatment of taxes paid on fictitious income;
  - (2) whether, how, and to what extent losses from fraud schemes are tax deductible; and
  - (3) supporting documentation taxpayers must present to substantiate claims for tax deduction.
- Where losses are deductible, tax agencies may need to invest considerable resources reviewing claimed deductions investor by investor.

### Cooperative approaches with financial institutions
- Tax agencies may use the crisis as an opportunity to enter into more cooperative relationships with financial institutions via:
  - (1) a unilateral statement by the tax agency of how it intends to work with financial institutions,
  - (2) a charter adopted jointly by the tax agency and all stakeholders setting out how they intend to work together, or
  - (3) a formal agreement between the tax agency and specific bank associations (OECD 2008b).
- Example: South African Revenue Service entered into a cooperative arrangement with the country’s banking association aimed at improving tax compliance, discouraging illicit tax avoidance schemes, and enhancing service (Appendix 5).

### Appendix 1 — Singapore: Managing Tax Arrears in a Financial Crisis (program elements and outcomes)
- IRAS special program measures:
  - Individuals who lost their jobs were allowed to defer their tax payments for up to six months or until they found a new job, whichever came first.
  - Individuals facing severe cash-flow difficulties were permitted to pay their taxes in interest-free installments, with the extension period determined on a case-by-case basis.
  - Companies facing severe cash-flow problems were allowed to apply for “extended” installment plans—with or without penalty, depending on the circumstances—that could be for a period of up to 50 percent longer than that under the standard installment plan.
  - Based on their cash flow, companies could pay off their tax arrears in a flexible manner, subject to late payment penalties and interest charges.
- Eligibility: restricted to taxpayers with good compliance histories who could produce documentary evidence that full and immediate payment would cause genuine hardship; enforcement officers reviewed each request case-by-case based on documentation.
- Outcomes:
  - Proportion of total tax arrears to current tax collections increased from 6.3 percent in 1997 to 8.2 percent in 1998, before declining to 7.1 percent in 1999.
  - The ratio of new flows of tax arrears to current tax collection increased by 2.1 percent, 3.0 percent, and 2.0 percent, respectively, for 1997, 1998, and 1999.
- IRAS officials believe the special debt program helped improve taxpayers’ perception of fairness and helped preserve a generally high level of compliance during a difficult period; the agency adopted similar approaches for the current global economic crisis.

### Appendix 2 — Main Elements of a VAT Refund Verification Program
- An effective refund verification program should provide for:
  - (1) an initial risk assessment of new VAT applicants,
  - (2) a front-end data validation system,
  - (3) risk-based audit selection, and
  - (4) differentiated verification methods.
- Initial risk assessment:
  - Compare registration applications with standardized risk profiles; suspect applications referred for a preregistration visit; suspect applications after the visit should be denied or conditioned (e.g., posting of a security).
- Front-end data validation:
  - Refund claims subjected to checks of completeness (including supporting documentation), arithmetic correctness, and consistency before audit screening; authority to override minor arithmetic errors; serious errors lead to rejection and resubmission.
- Risk-based audit selection:
  - Classify validated refund claims into high, moderate, low risk for audit selection using criteria such as deviation from previously claimed amounts, compliance history, first-time claim status, and date of most recent audit.
  - Audit resource allocation should match revenue risk; example allocation: 30 percent of audit resources to verifying refund claims and 70 percent to other types of audits.
- Differentiated verification methods:
  - High-risk claims: audit prior to issuing refund, usually at taxpayer’s premises.
  - Moderate-risk claims: assigned an upper-refund limit; claims not exceeding upper limit and with supporting documents get a brief desk review before refund and a post-approval audit periodically; claims exceeding limit subject to pre-approval audit.
  - Low-risk claims: typically approved within 72 hours without pre-approval audit; post-approval audits may be random.
- Audit scope and methods:
  - Limit audit scope to the refund claim; focus on issues material to the refund.
  - Use statistical sampling to determine number of transactions to check.
  - Do not rely excessively on export documents from Customs; instead trace export shipments through purchase invoices, sales records, inventory records, shipping receipts, and payment and bank records.
  - If doubt remains, confirm with Customs of the importing country that goods were properly entered for consumption.

*IMF staff paper: Section covering communication programs, financial sector issues, and appendices on Singapore arrears management and VAT refund verification program.*

### Appendix 3. Australia: Cash Economy Strategy

### Appendix 3. Australia: Cash Economy Strategy

### Overview
- The Australian Tax Office (ATO) cash economy strategy provides for a balanced set of measures to improve compliance in the cash economy, including communication measures, incentives to encourage self-service, targeted assistance, strategic alliances, and focused enforcement.

### Communication measures
- targeting national and local publicity campaigns at specific high-risk sectors—for example, construction, to make potential taxpayers aware of their obligations and the potential penalties for noncompliance;
- establishing connections between business and professional associations in high-risk industries and tax practitioners to alert them to the problems caused by cash economy firms, explaining the risks and eliciting their support in combating the cash economy; and
- encouraging the community to report instances of tax evasion via a special tax evasion hotline, fax, website, and mail as well as through other government agencies.

### Incentives to encourage self-regulation
- Remission guidelines for penalties and interest differentiate between taxpayers who have a good compliance record and miss an obligation on an isolated basis and those who regularly transgress.
- Less-onerous reporting requirements and extended filing periods are available for those with a record of good compliance.
- Industry benchmarks have been established for high-risk industries. These benchmarks reflect the expected relationship between inputs and outputs for a particular business activity based on industry standards. The focus is on trades where there is a strong correlation between only a few inputs and total business income.
- The benchmarks are developed in partnership with the relevant industry or business association, which enhances their credibility. They are well-publicized throughout the target industry (again, in partnership with the relevant industry association).
- Although the benchmarks are marketed primarily as a self-checking mechanism to enable taxpayers to compare their own business performance with industry standards and to assist trade participants with voluntarily compliance by using the benchmarks as a reference point, this is complemented with a strong message that any taxpayer filing a return that varies significantly from the benchmark will be closely examined by the ATO.
- All returns filed by taxpayers in these industries are automatically checked against the benchmarks, and outliers are subject to risk assessment.

### Targeted assistance measures
- simple information products that explain key tax obligations and inform taxpayers of how they can seek help from the tax office;
- free seminars conducted in conjunction with other key government agencies (e.g., social insurance) to help new businesses understand their obligations and entitlements;
- telephone calls to check whether a new business operator is experiencing any difficulties and to offer advice;
- optional free advisory visits to the taxpayer’s premises to resolve any problems that may have arisen;
- targeted advisory visits (obligatory) to the premises of new businesses that are considered high risk;
- modern and easily navigable websites that replicate the range of help and assistance products and services available to new businesses;
- provision of free electronic record-keeping software to all new businesses;
- provision of online self-help tools—for example, an online decision support system for determination of the employment status of workers (i.e., employee or contractor); and
- reminder letters, text messages, and telephone calls.

### Strategic alliances
- Tax practitioners. Tax practitioners are provided with a premium service that includes dedicated telephone inquiry teams, direct access to expert tax interpretation officers, and tailored seminars.
- Industry and business associations. Partnership arrangements with key industry and business associations are used to identify compliance problems (e.g., ambiguous or impractical law, overly complex forms and procedures, unreasonable time limits, onerous reporting requirements, etc.) and develop workable solutions.
- Business service providers. Manufacturers of accounting software packages are another leverage point for small business. Close liaison with the developers of such packages can ensure that the packages comply with all tax obligations.

### Focused enforcement measures
- cross-matching tax agency information with information held by other agencies, companies, and industry bodies to identify enterprises that are not registered. For example, data from insurance, shopping center operators, and regulatory authorities have been used to identify nonreporting of cash income in various industries;
- data matching to identify individuals who appear to be living beyond their reported income. For example, ATO matches tax return data against information from government licensing bodies on luxury cars and boats;
- vesting auditors with the authority to apply indirect audit methods for reconstructing income and training staff in these methods;
- unannounced visits to the premises of high-risk taxpayers for the purpose of confirming their registration details and reviewing their record-keeping practices;
- telephoning or making personal visits to selected new businesses that fail to meet their filing obligations to ensure they understand their requirements;
- letters to businesses that report figures outside the norm, asking them to review their reported figures and ensure they are correct;
- targeted reviews and audits of taxpayers in high-risk industries resulting in the assessment of additional taxes, penalties, and, in some cases, prosecutions; and
- publicizing the results of enforcement measures to discourage others from noncompliance. For example, ATO highlights how data matching and other new approaches facilitated the detection of taxpayers operating in the cash economy and publicizes how these businesses were dealt with.

*Appendix 3. Australia: Cash Economy Strategy, _spn0917*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/spn/2009/_spn0917.pdf_