Registered taxpayers in fiscal year 2010: World Bank unhappy with slow completion of audit cases

The World Bank has expressed serious concern over slow pace of registered taxpayers audit during 2009-10 and made recommendation to the Federal Board of Revenue not to send the annual audit plan to the Ministry of Finance for approval, which is a time-consuming process. Sources told Business Recorder on Tuesday that the WB review mission has submitted a detailed report to the FBR on audit performance.
According to the WB, the current practice of sending the audit plan to the Minister of Finance for approval causes delay in its execution. The FBR Board after approval of the plan sent it to the minister for information. The WB has also showed displeasure over the slow progress on the completion of audit cases outsourced to the chartered accountant firms. It also pointed out the discretionary powers available to the commissioners to select cases for audit and 100 percent manual desk-audit of companies by the department. The WB said that the fiscal 2009-10 was a major setback for audit. The audit of companies was outsourced, the risk analysis selection system was not used, companies were randomly selected for audit and many taxpayers filed cases in court against the use of random selection. The commissioners of Large Taxpayer Units (LTUs) and Regional Tax Offices (RTOs) have too much discretion in selecting cases. The desk audit (particularly for companies) is performed manually for almost 100 percent of the returns.
Although some additional taxes are detected, the system should be improved. The returns should be validated by the IT system and prioritised. The RTO/LTU auditors should be assigned the cases automatically by the system, according to the priority set by the IT system (following Member Audit's rules). Auditors should be given targets in terms of cases per day or week.
The WB recommended that the auditors should be better equipped in terms of training and material resources. Training of auditors should be a priority. They need refreshing courses on audit techniques. The report recommends a list of audit courses to be designed and delivered to auditors. Auditors should be provided with transportation, laptops, and relevant software.
The WB further recommended the FBR to transform desk audit to an IT-based system, where the cases are selected by the system and automatically assigned to desk auditors. The FBR should also establish monthly targets for all types of audit.
The WB report said that the field audit action in 2009-2010 was virtually non-existent. The most important audit cases were outsourced to the Institute of Chartered Accountants of Pakistan (ICAP) members and the results, so far, are disappointing. Selection of taxpayers for audit was done on random basis and very few cases ended with additional assessments. Moreover many taxpayers filed petitions in court against random selection (mainly in Lahore where Stay orders have been issued to the courts).
The audit plan for 2010-11 was sent to the Minister of Finance in early August, was approved on September 17 and has been sent out to the RTOs/LTUs for execution. Now, the selection will be based on risk criteria but the cases will not be selected by the FBR headquarter. The audit commissioners will make the selection themselves using the Audit IT system.
However, the Audit Wing will monitor the selection process and review ex-post the cases select by the commissioners. The field formations will be able to include 20 percent of the cases according to their own experience in the region.
The WB said that the targets are set for the percent of taxpayers, which will be audited annually according to their size (large, medium, and small). The targets refer only to composite audits (income tax returns for 2009 and corresponding tax periods for sales tax). This is a good starting point, but additional targets could be provided to the field formations for all types of audits (composite desk audit, tax specific audits etc).
As in enforcement, the audit commissioners have too much discretion in executing the audit plan. They select the cases for all types of audit and they decide how many cases they will conduct. They also define the way they will conduct desk audits. Most tax administrations selection is done centrally at HQ level giving some room (10 percent-20 percent) for selecting cases at field formation level, the WB said.
The WB stated that the desk audits are not carried out in an effective manner. Between 80-100 percent of income tax returns are desk audited, which involves the auditors reviewing the returns on the screen. Although this can lead to revenue recovery, it would be significantly more productive if the returns were verified by the IT system and then made available to the auditors with an indication of the potential for recovery. The IT system would validate the return calculations, calculate pre-established ratios, compare them with pre-set benchmarks, and cross check information with other FBR and third party data sources.
The Audit Wing would prepare the SOP for the desk audit including, massive notification of taxpayers with discrepancies in their returns, the internal analysis by desk audit officers, follow-up notices, calls by the audit officers, visits to taxpayers premises and assessment.
Desk audits and tax specific cases should be prioritised according to their revenue potential. Enforcement is already using some prioritisation criteria that could be used to prioritise audit cases for both desk audits and tax specific audits.
It is necessary to clarify that the new cross-checking information systems will initially misidentify discrepancies because of insufficient accuracy of the underlying data. These problems have to be dealt with as they appear to make sure that discrepancies shown by the systems are reasonably reliable. After introducing necessary adjustments to the crosschecking systems and following few months of using the system the problems will be reduced, and the results of this kind of audit will improve significantly.
The auditors could be given a target in terms of cases per day or week and this should be monitored through the Tax Audit Management System (TAMS). The auditors' capacity is a recurrent issue. After many years of reduced audit activity many auditors became outdated regarding audit knowledge, and there is an urgent need for training auditors in audit techniques and tools.
During this year audit teams are expected to be fully operational, therefore, it is necessary to ensure that auditors are adequately equipped to perform their tasks. Besides the relevant training, they should be provided with laptops, and audit software.
The WB recommended that the FBR should establish monthly targets to the field formations in terms of number of cases by type of audit (from November 2010 to Jun 2011); define the priority criteria for selecting taxpayers for desk and tax specific audit. The FBR should select the 80 percent of cases for composite audit at HQ and send them to the field formations for action. Any case not audited should be accounted for, the WB report added.