ATO bugs incorrectly revived 600 historic tax debts

Over 600 taxpayers fell afoul of an automated system the ATO used to revive old debts and get them paid out of tax refunds, after software bugs caused miscalculations. 

A cache of ATO correspondence, reports and minutes [pdf] iTnews obtained under freedom of information create a fuller picture of a disclosure to The Guardian earlier in February that “at least one system error” resulted in miscalculations of debt, affecting 49 taxpayers at the time.

The errors relate to a controversial program restarted by the ATO in June 2022, on the recommendation of the government’s audit office. 

For a variety of reasons, mostly business-related, some people have tax debts that are considered too small for the ATO to chase. Instead, the tax office sits on the debts until the taxpayer tries to claim a refund sometime in the future. If the refund amount is large enough to cover all of the old debt, the debt gets revived; if it’s too small, the debt continues to exist in the background.

An automated system runs those cross-checks and determines whether or not to revive the debt and extract it from a claimed tax refund. 

Within weeks of the June 2022 resumption of the debt recovery program - and the automated system’s use - it was clear that the system was producing errors.

ATO staff were initially unable to replicate the circumstances where the bugs created errors, and documents show it took the tax office until October 2023 to remediate them.

Considerable manual effort was required to verify the circumstances of 603 taxpayers and correct the errors the automated system produced.

Breaking down the 603 taxpayers

The ATO documents provide several sets of numbers around those impacted. 

At a high level, the system incorrectly revived 580 debts that the ATO said should have remained on-hold.

More seriously, the system created "false debts" - amounts "in excess of what was owed” to the ATO - 20 times, and these amounts were withheld from refunds on 13 occasions.

These were "remediated" and the ATO made direct contact with these people.

The documents provide further granularity on the other 580 impacted by the use of the automated system.

Some 60 taxpayers had a "credit sundry" - a sundry is a rare or insignificant amount - "added to their [ATO] accounts", because they were told their debt was higher than it was. It's not clear how this is circumstantially different from the 20 most serious cases.

Another 250 taxpayers were found to have a "debit balance" after a debt was revived, requiring manual checks, and the remainder were listed as needing "further investigation" as of October 2023.

It's not clear from the documents where this went, aside from ultimately concluding that in all cases, the debts were incorrectly re-raised.

How bugs were introduced to the automated system

The ATO is in a difficult position, in part because its legislative obligations require it to be able to claim old debts, even if it hasn't been doing so in practice.

Once being reminded of its legal obligations by the auditor-general, the ATO sent at least 28,000 letters informing taxpayers and agents about the reactivation of old debts from at least May 2022 to November 28 last year, when it paused the campaign.

The FOI decision letter to iTnews states that “when the ATO recommenced [the program] it needed to update systems, which previously applied some exclusions" to prevent an old debt being taken out of a new refund.

That's where several bugs were introduced: “As part of the changes deployed to support the approach for debts on hold, a small number of issues were identified, which required subsequent remediation.”

The government has since indicated it will draft new laws that give the ATO discretionary powers to "not use a taxpayer’s refund to offset old tax debts, where the commissioner had put that old tax debt on hold prior to 1 January 2017.”

“This discretion will apply to individuals, small businesses and not-for-profits, and will maintain the commissioner’s current administrative approach.” 

Anyone that paid off an old debt - once made aware of it - will not be reimbursed, finance minister Katy Gallagher has said.

That policy position is somewhat controversial.

Because the debts were old - well past any period where taxpayers or their accountants were required to hold records - and were also unexplained in ATO letters, it left taxpayers scrambling to understand the alleged debt, to get to an evidentiary position to be able to dispute it. 

Given few want to be indebted to the tax office, others felt pressured to pay.

One taxpayer, 75-year-old Joan Rodrigues, told The Guardian, she was upset by the decision because she forked out several hundred dollars “just to shut them [ATO] up and send them on their way as I was getting too stressed about it.”

The Australian Greens spokesperson for economic justice, Senator Nick McKim told iTnews that his position was that "all debts recovered under this program should be refunded in full."

"This pursuit of small historical debts should never have happened, and it should have been immediately ended once the ATO knew that a single false debt had been raised," McKim said.

ATO second commissioner for service delivery David Allen told senate estimates that the old debt "awareness" campaign raised $1 million.

“On the back of the awareness letters, which were just focused on the pre-2017 population, we've had about 7000 taxpayers who've paid: 3098 taxpayers have paid the full amount, and another 3985 have partially paid that debt on hold," Allen said.

Calls for more oversight over automated decision-making 

Characteristics of the debt revival program, including the use of an automated system that, in a small number of cases, created "false debts" - has led to it being dubbed “robotax” in some circles - a term ATO officials describe as “deeply offensive”.

The ATO's executive commissioner Rob Heferen has apologised for the way the scheme was run but rejected comparisons to "robodebt", an infamous scheme that raised fictitious debts against welfare recipients.

A key difference between the schemes is that the debts to the ATO are real, even if a system misinterpreted them and the communications around the debts was unsatisfactory.

“Our communication around historical debts placed on hold was confusing, and we apologise”, Heferen said in June.

“But I do just want to be clear that the label 'robotax' is unfair, and my officers find that deeply offensive.

“Robotax, as the name implies, suggests some link or some similar characteristic [to robodebt]. There was no similar characteristic.”

Others, such as digital rights activist Asher Wolf and Senator Nick McKim, see things differently, particularly with respect to the use of a buggy automated system.

"The information provided under FOI reveals that an algorithm created false debts which the ATO wrongly seized from people," McKim said. "That has shocking echoes of the robodebt scandal."

Wolf told iTnews that “this was an automated process of re-raising historic debts."

"The creation of false debts was the result of a system of re-raising debts and notifying customers before the system had been properly tested,” she said.

“It was essentially testing in production. The denials by Heferen, the victim blaming, informing the Minister while keeping customers and the call centre in the dark… the parallels to robodebt are strikingly clear. 

“The ATO wasn’t accountable to the public. Instead, it went into PR mode denying its zombie tax debt issue; it was similar to robodebt.” 

Wolf suggested that the ATO should be referred to the Australian Public Sector Commission for alleged "breaches of the APS values and code of conduct.”

The government "accepted" several of the Royal Commission into robodebt's recommendations to to prevent unjust outcomes resulting from existing and future automated decision-making programs, including a new or expanded statutory agency to “audit automated decision-making.”

Welfare advocate Tom Studans, recognised for his coverage of the Royal Commission, said the ATO and Albanese government administered the program with inadequate transparency.

"Unlike Services Australia, [the ATO] did not intend to generate these debts. But to keep this from the public, while they have scolded their critics and seen honest people slandered in the media as either being or defending tax cheats, is utterly characteristic of the actions of those who perpetrated and upheld robodebt," he said.

Update, 11.52am: An ATO spokesperson provided a statement to iTnews where it "acknowledged our communication approach for debts placed on hold was confusing and apologise for any frustration and confusion which may have been caused."

The spokesperson said the ATO "quickly identified that system updates resulted in the hold on the debts of approximately 580 taxpayers being removed. We took swift action to address this error and remediated the issue in under 10 days with no impact on taxpayers."

The FOI documents state that "account remediation" took two months after the fixes were made.

The ATO spokesperson added: "We undertake stringent quality assurance and have robust measures in place to monitor our systems and the accuracy of updates being deployed.

"We encourage taxpayers who have any questions about a debt on hold to reach out to the ATO or their registered tax professional for assistance."