STRATEGY PAPER

TAX REVENUE AUDIT APPROACH AND METHODOLOGY:

A PROJECT TO IMPLEMENT A TAX ENFORCEMENT PROGRAM TO

COLLECT TAX DEBT OWED BY GOVERNMENT CONTRACTORS IN

INDONESIA

Prepared by:

Ahmad Adib Susilo

Country:

Indonesia

US GAO INTERNATIONAL AUDITOR FELLOWSHIP PROGRAM

2008

i

EXECUTIVE SUMMARY

GAO has performed a series of audits on the collection of tax debt owed by US government

contractors. GAO audits show the magnitude of tax debts owed by federal contractors, identify

examples of US government contractors who owe millions tax debts, and describe abusive,

fraudulent, or criminal activities. The purpose of GAO audits was to identify whether the US

Federal Payment Levy Program was being implemented as intended and to help the federal tax

collector in the US – the Internal Revenue Service – in collecting millions in unpaid tax. As part

of their work, GAO auditors assessed whether US government officials performed tax debt

screenings prior to awarding contracts (i.e., a test of existence of internal controls), and identified

statutory and policy impediments that allowed US tax officials to grant federal contracts to

contractors with federal tax liabilities.

BPK – the SAI of Indonesia – might implement a similar approach in dealing with the tax gap

and the collection of the unpaid tax in Indonesia. Subject to the availability of BPK resources,

the technical expertise of BPK auditors, and the access to tax information, BPK might undertake

an audit program on unpaid taxes owed by government contractors. The purpose of this BPK’s

work would be to help the Government of Indonesia to collect unpaid taxes and reduce the rapid

growth in unpaid taxes for the last four years.

The BPK’s audit would be aimed at determining the magnitude of tax debts owed by government

contractors; identifying the amount of government contracts awarded to government contractors

who owe taxes; identifying whether the internal controls in government agencies include a tax

debt screening procedure that takes place prior to awarding contracts; identifying major

examples of government contractors with tax debts and abusive, fraudulent, or criminal

ii

activities; and strengthening and modernizing the Indonesian government’s tax collection

system.

In doing this work, BPK would start by revising the scope and quality of its tax audit plan. The

quality of the BPK’s audit plan could be enhanced by providing its staff with subject matter

expertise in economics, taxes, accounting, and IT systems. New staffs with subject matter

expertise in the above areas can also provide technical support to existing auditors to design and

implement an effective audit program. As the taxpayer data in Indonesia are processed and reside

in a highly complex information system, BPK needs to assess the reliability of the computer-

processed data prior to undertaking in depth examination of unpaid taxes. This work, however,

would not be easy to undertake until BPK determines the extent of its access to taxpayer data

access and secures the technical expertise.

This paper is proposing a project to perform an audit work on the collection of tax debt owed by

government contractors. The figure of tax debt in Indonesia is considerably huge and increasing

year by year. This shows us that the government needs to improve the current efforts as well as

establish new and innovative ones. BPK should contribute in this matter by undertaking an audit

work aimed at enhancing the tax debt collection.

Having done the data reliability assessment, BPK would begin the work by designing the audit

plan to which the design matrix that GAO implements applies. The objectives of the work or

researchable questions and the methodology employed to answer them are as follows:

No Objective Methodology

1. What is the magnitude of tax

debts owed by government’s

contractors?

BPK auditors need to obtain the data from DGT as

well as the Directorate General of Treasury (DGTr).

The individual tax debt data are available at either IT

division or tax offices. BPK might obtain the same

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No Objective Methodology

data from both sources. The auditors perform a

comparative study on both data to ensure the validity

of the tax debt data. The government contractors’ data

are available at the DGTr’s expenditure information

system. Having obtained the DGT’s data and DGTr’s

data, BPK auditors would identify the tax debt, at a

certain period, owed by government’s contractors by

matching both data using Taxpayer Identity Number

(TIN) as the identifier.

2. What is the amount of

government expenditure spent

to government’s contractors

that owe tax debt?

BPK auditors would perform technical examination

on electronic data obtained from DGTr by employing

the computer assisted audit techniques (CAAT).

Auditors would identify the amount of government’s

expenditure spent to the designated government’s

contractors.

3. Do government agencies

screen contractors for tax debts

and criminal activities prior to

awarding contracts and at the

exercise of any government

contract options?

BPK auditors need to obtain agencies’

documentations prior to awarding the contract and

then evaluate them whether tax related analysis was

performed by agency’s officers. Auditors would also

perform some interviews to the related agency’s

officers as well as the contractor’s officers.

4. Are there examples of federal

contractors that have tax debts

and abusive, fraudulent, or

criminal activities?

BPK auditors would select some particular

government’s contractors to investigate whether they

have tax debts and abusive, fraudulent, or criminal

activities. To do so, auditors need to obtain individual

tax data from the tax offices for each selected

contractors as all detailed-individual documentations

are kept and administered by the tax offices. At one

hand, BPK auditors already have skills and capability

required to do such investigation, but on the other

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No Objective Methodology

hand, it will be difficult for BPK auditors to obtain the

detailed taxpayer data and information as a

consequence of the data access limitation endorsed by

tax law.

5. What new and innovative tax

debt collection efforts to

propose in dealing with the tax

debt owed by government’s

contractors?

BPK auditors would identify the weaknesses of

current tax debt collection policy and procedures by

obtaining and analyzing the policies and procedures in

place and performing an observation on how the tax

officers implement them. Afterward, auditors would

propose some recommendations to deal with the

identified weaknesses.

v

AKNOWLEDGEMENT

I would like to express my gratitude to: (1) Prof. Dr. Anwar Nasution, chairman of BPK for the

support and opportunity of joining the US GAO 2008 International Auditor Fellowship Program;

(2) Dr. Jose Oyola for providing me with a bulk of GAO materials, ideas, and constructive

comments to develop this paper; (3) Helen Hsing, SPEL Managing Director for some meaningful

stories; (4) Pam Sands and Mary Mohiyuddin for organizing the entire program; and (5) all

instructors as well as participants of the program.

I would also like to dedicate all this work to my wife and my children who are waiting for me far

away in my beloved country, Indonesia.

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TABLE OF CONTENTS Page

EXECUTIVE SUMMARY i

ACKNOWLEDGEMENT v

TABLE OF CONTENTS vi

I BACKGROUND 1

I.A Previous Work 1

I.B The Importance of Tax Revenue 1

I.C Current Tax Revenue Audit 2

II. OBJECTIVE 3

III. CURRENT MECHANISM OF COLLECTING TAX OWED BY

GOVERNMENT’S CONTRACTORS

3

III.A Tax authority 3

III.B Tax Debt Figures 4

III.C Tax debt collection process 5

IV AUDIT APPROACH & METHODOLOGY 6

IV.A Current BPK Audit Approach & Methodology 6

IV.B GAO Audit Approach & Methodology 7

IV.C Lessons Learned 14

IV.D Proposed Approach 16

IV.E Proposed Methodology 17

V BARRIERS AND LIMITATIONS 19

V.A Data Access 19

V.B Human Resources 20

V.C Cooperation with the Agency 21

VI PROPOSED PROJECT 21

VI.A Assessment of Data Reliability 21

VI.B Enforcement of collecting tax debt owed by government’s contractors 22

VII CONCLUSION 25

REFERENCE 27

APPENDICES

1

I. BACKGROUND

I.A. Previous work

Last year, an Indonesian fellow wrote a paper on designing a strategic plan and selecting

audit topics to conduct performance audits of tax administration. The paper described

lessons learned from GAO’s audit approach and how to implement them into BPK’s

works. The paper was concluded by proposing potential audit topics that might be

considered by BPK: the effectiveness of the administration of Indonesia’s taxpayer

registration system, the provision of services by the government to taxpayers, the tax

office’s information system, and the extent of Indonesia’s tax gap, including an analysis

of the low level and trends in Indonesia’s tax ratio, which is a comparison of tax revenues

to gross domestic product (GDP),

BPK has already performed some audit works on the administration of taxpayer

registration, the provision of services to taxpayers, and tax information system. In order

to develop effective programs to reduce the tax gap in Indonesia, this paper examines a

number of studies and audits which have been conducted by GAO and explores the

possible implementation of similar audits in Indonesia by BPK.

I.B. The importance of tax revenue

There are several reasons why BPK should conduct audits of the tax gap: tax revenue

contributes about 70% of Indonesian government’s annual revenue, the government’s tax

revenue reports are not verified independently, and the efficiency and effectiveness of its

tax collection and tax management systems have not been examined in depth.

Policymakers and tax administrators have identified indirect indicators of the inefficiency

of Indonesia's tax system. For example, the tax ratio has been about 13% for several

2

years. This figure is below to similar ratios in other developing countries. BPK officials

as well as Tax officials have also expressed concerns about the efficiency of tax

collections. For example, the Chairman of BPK cited the tax ratio figure as one of big

problems of Indonesia’s fiscal environment that the government should address. He also

called for strong cooperation and collaboration among related executive agencies and

BPK itself to deal with this low tax ratio.

This paper examines the potential for starting a comprehensive audit program to help

Indonesian tax authorities to reduce the growing level of unpaid taxes by government

contractors. The program will result in an estimate of the amount of unpaid taxes by

government contractors and identification of methods that tax authorities can use to

effectively collect unpaid taxes.

I.C. Current tax revenue audit

BPK, the Supreme Audit Institution in Indonesia, has the legal authority to conduct

financial, compliance and performance audits. For a number of years, BPK has conducted

tax audits on Directorate General of Tax (DGT), a unit under The Ministry of Finance,

which is responsible for collecting and administering tax revenue. BPK conducts annual

audits of the tax debt as part of the financial audit of government financial statements.

Although BPK has started to conduct performance audit in recent years, the number of

performance audit of tax revenue is very few compared to the number of financial and

compliance audits. In the second half of 2007, BPK conducted a first performance tax

audit, which focused on DGT’s taxpayer information system. This pilot audit was

followed by two performance audit assignments in the first half of 2008, which were

focused on the modernization of tax administration and the reporting process of tax

3

revenue and tax debt.

BPK has never conducted audit which focuses solely on unpaid tax debts. Tax debt owed

by the taxpayers is reported as a current asset within government balance sheet. It means

that the government expects to be able to collect the debt within a year. Indeed, it has

been impossible to collect all outstanding tax debt within a year and, as a result, the

unpaid tax debt keeps growing. The key challenge faced by DGT is, then, what changes

should be made to improve the effectiveness of its programs to collect unpaid tax debt.

The key challenge for BPK is to design an audit program to help DGT achieve this goal.

II. OBJECTIVE

This paper is a comparative study of selected US GAO studies on the US Internal Revenue

Service’s Tax Enforcement Program to detect non compliance of tax payments by

government’s contractors and to evaluate IRS’s offset program between tax owed and payment

received by government’s contractors. This paper also will introduce the possibility of the

implementation of the similar tax enforcement program in Indonesia by the BPK and identify

barriers and limitations the BPK might face in doing so and the way the BPK might do to

overcome any barriers and limitations.

III. CURRENT MECHANISM OF COLLECTING TAX OWED BY GOVERNMENT’S

CONTRACTORS

III.A. Tax authority

Tax revenue is collected by DGT which is the biggest organization under Ministry of

Finance administration. Currently, DGT has about 32,000 employees which count for the

4

half of Ministry of Finance's ones. As of the end of 2007, the DGT organization is

chaired by a Director General assisted by one Secretary of DGT and 12 Directors. DGT

also has 31 regional offices and 381 tax offices (TOs) spread among the country.

Within the headquarter organization, there is a unit which administers the nationwide tax

debt and also establishes policies and procedures which the tax officers should follow in

dealing with the tax debt.

III.B. Tax Debt Figures

According to the amended tax law of 2007, there are several types of tax which are

income tax, value added tax, property tax and other taxes. Income tax and value added

tax contribute about 70% - 80% of the total tax revenue.

An income tax is a tax levied on the financial income of persons, corporations, or other

legal entities. In Indonesia, income taxation is progressive. When the tax is levied on the

income of companies, it is called a corporate income tax. Likewise, when the tax is levied

on the income of persons, it is called an individual income tax. Income tax is the biggest

contributor toward the tax revenue collected by the government.

A value added tax is a tax levied on the delivery of goods and services and also on the

import of goods and services unless specifically exempted. The rate of VAT is 10% of

the value of delivery or the value of import. VAT makes the second biggest contribution

toward total tax revenues.

Besides the amount collected by DGT, unpaid tax still remains at a huge figure in

Indonesia. The following table shows the figures of tax debt within the last four years.

5

Table 1. Tax debt figures in 2007, 2006, 2005, and 2004

Year Tax Debt (IDR) Percentage of increase

2007 42.042.099.564.945,00 18.58%

2006 35.454.552.126.836,00 21.35%

2005 29.216.456.291.000,00 0.87%

2004 28.964.985.918.280,00

Source : Indonesia Government Financial Statements of fiscal year 2007, 2006, 2005,

and 2004

III.C. Tax debt collection process

The collection of tax debt is performed by responsible tax officers within the lowest unit

of DGT organization which is the Tax Office (TO). In Each TO, there is a section which

is established to maintain the tax debt individual documents, keep tax debt records,

collect tax debt through the established standard operating procedures, and produce

periodic reports.

Once a particular tax debt balance is overdue, the tax officers will perform a number of

procedural efforts to collect the overdue tax. The tax officers will prepare a warning letter

and send it to the respective taxpayer. If the taxpayer still does not pay the tax within

specified days, the tax officer will prepare a second warning letter and send it to the

taxpayer. If the taxpayer also ignores the second letter, the tax officer will send him a

letter stating that the tax officers will take over his property(ies) to sell in an auction.

BPK found in the previous audit works that this latest action, however, is rarely

6

performed by the tax officers.

IV. AUDIT APPROACH & METHODOLOGY

IV.A. Current BPK Audit Approach & Methodology

Approach

Most of BPK’s works are self initiated works. This condition takes place because

Article 9 of Audit Board Act of 2006 states that BPK has an authority to determine

the audit objects, to plan and undertake the audit works, to determine timeframe and

methodology, and to produce as well as issue the audit reports. By far, there is no

study yet on how many percentages of BPK’s works which were self initiated works

and how many which were parliamentary requests.

In case of audit of tax administration, the condition also takes place. Most of BPK’s

works were self initiated works. However in 2000s, BPK has received two

parliamentary requests. One of them was received in 2001 but accomplished in 2002

and the other one was received in the late 2007.

BPK undertakes audit of tax administration based on its annual audit plan which is

established in the late of preceding year. This plan comprises the designated tax

administration area to be audited, the time schedule and time frame, the number and

qualification of auditors needed as well as the audit budget. So far, BPK has never put

audit of tax debt collection into its annual audit plan.

BPK has performed financial audit of tax debt as part of the annual audit of Ministry

of Finance financial statements since 2004. The work only focused on the fairness of

the tax debt presentation in the Ministry of Finance balance sheet. The work had

7

nothing to do with the collection efforts as well as the amount of tax debts collected

annually.

Methodology

In general, BPK establishes a methodology to be performed in order to meet the audit

objectives when designing the audit program. The team is responsible of designing

the audit program during the period of audit planning phase, which is usually a month

before the field work begins. The audit program includes the audit objects of which

BPK auditors perform the examination, the audit objectives, the audit scope and

methodology, the audit period, the audit procedures, and the audit team personnel.

This audit program is approved by a responsible managing director.

The audit methodology usually comprises the following steps: (1) obtaining data and

documentation, (2) interviewing responsible officials, (3) evaluating internal controls,

(4) identifying high risk areas, (4) selecting sample, (5) performing in depth

examination, (6) identifying findings, and (7) making conclusions and reporting.

IV.B. GAO Audit Approach & Methodology

Approach

In fiscal year 2007, GAO issued 1,262 products including correspondence, testimony,

briefings, and chapter/letter reports. Most of them were performance audit reports

which count roughly 97% and the rest, about 3%, were financial audit reports. In term

of source of work, approximately 68% of GAO’s works came from congressional

requests, 22% of them were legislative mandates and the rest were GAO self initiated

works (Comptroller General’s authority).

8

GAO makes use of an Engagement Management Process to address congressional

requests. An Engagement Management Process is a process consisting of five phases

which are acceptance, planning and design, data gathering and analysis, product

development and distribution, and results. Once GAO receives a congressional

request, GAO will put the request into the first phase of Engagement Management

Process, which is acceptance phase. The acceptance phase has a purpose of assuring

that the work is within GAO’s statutory authority and competence, is managed at the

appropriate level, and involves relevant stakeholders, experts as well as specialists.

The key process within this phase is an Engagement Acceptance Meeting (EAM).

The EAM is a meeting attended by the GAO senior executives with purpose of

screening proposed engagements, including congressional requests, to ensure that

GAO undertakes works which are within its statutory authority and competency.

Before making a decision, they will be having a discussion on a number of aspects

such as, among other things, the risk of involvement and the availability of staffs.

When evaluating the risk of involvement, they consider the cost of work, the

complexity of work, and the controversy of work. The risk level dictates the level of

senior leadership involvement and the extent of required expertise as well as

appropriate stakeholder involvement. When evaluating the availability of staffs, they

discuss on how many staffs needed to undertake the work as well as when the

assigned staffs are available. After discussing all aspects, the EAM will come up with

a decision of acceptance.

There are seven types of the EAM decision. They are A which stands for Accept/staff

available immediately or very soon, A/S which stands for Accept/staff not available

9

for weeks/months, P which stands for pending more information/request to be

acknowledged, R which stands for issue resolved and team to acknowledge/respond,

D/R which means decline because of resources constraints, D/O which means decline

because this is an ongoing work, and D/J which means decline because of no

jurisdiction.

The Comptroller General also might initiate an audit of tax administration. GAO has

put tax administration in a high risk list since 18 years ago. GAO has determined IRS

Business System Modernization and Enforcement of Tax laws since 1990 and 1995

respectively as high risk areas and put them into a High Risk Series Report published

by GAO every two years. Eventhough GAO has made a number of recommendations

to the IRS and the Congress aimed at improving those programs and also the IRS has

made some improvements, GAO still put those two areas in the last High Risk Series

Report issued in March, 2008.

In 1990 GAO designated the collection of tax debt, which is one aspect of tax law

enforcement, as high risk. In 1995 GAO designated IRS business system

modernization as high risk by considering that the IRS’s highly complex,

multibilliondollar business system modernization program is critical to (1) the

successful transformation of the agency’s manual paper-intensive business operation,

(2) fulfillment of its obligations under the IRS Restructuring and Reform Act, and (3)

providing the reliable and timely financial management information.

GAO also conducted audit of tax revenue every year as part of Internal Revenue

Service (IRS) Financial Statement audit. IRS has been increasingly implementing

computerized information systems to administer its works therefore it becomes

10

necessary for GAO to assess the reliability of data processed and produced by the IRS

information systems. The reliability of such data becomes more and more important

for GAO’s works.

The “Yellow Book” requires that a data reliability assessment should be performed

for all data used as support for findings, conclusions, or recommendations. Data are

considered reliable when they are complete and accurate and also meet the intended

purposes.

Methodology

What GAO did within the topic covered by this paper originally came from

congressional requests. In March 2003, GAO issued a report on tax administration

titled Federal Payment levy Program Measures, Performance, and Equity Can Be

Improved which revealed some weaknesses on the implementation of the Federal

payment Levy Program. The work was requested by congressional requesters as they

were interested in whether the Federal Payment Levy Program is being implemented

as intended.

A Federal Payment Levy Program (FPLP) is a program which authorizes IRS to levy

up to 15 percent of specified federal payments made to businesses and individuals

with unpaid federal taxes. Levy generically refers to seizure of property to collect a

debt. For tax debt, it is the legal process by which IRS orders third party (e.g.

Financial Management Service) to turn over property in its possession (e.g. the

federal payment) that belongs to the tax debtor named in a notice of levy. Overall, the

reduction of federal payments to satisfy debt is referred to as an offset. This program

was established by enacting Tax Relief Act of 1997. IRS began this program in July

11

2000.

In doing this particular work, GAO implemented a methodology as follows:

- Obtaining the data used by IRS to track program results in an effort to determine

whether IRS’s data on FPLP operations adequately measures program results;

- Reviewing the data;

- Selecting and analyzing three groups of delinquent taxpayers which were (1) all

taxpayers receiving federal retirement payments from the Office of Personnel

Management (OPM), (2) all taxpayers receiving vendor payments from federal

agencies whose payments are processed by the Financial Management Service

(FMS), and (3) a random sample of taxpayers receiving Social Security benefit

payments; and

- Interviewing IRS officials in FPLP, Automated Collection System (ACS) and

field collection areas.

The findings incorporated in the report of this work became a trigger to expand the

work to broader areas with purpose of identifying the likelihood of such weaknesses

in other areas. After receiving this report, congress has made several requests to

undertake the further studies on LPFP implementation. Some were federal payments

to Department of Defense (DOD) contractors in 2004, federal payments to Civilian

Agency contractors in 2005, federal payments to General Services Administration

(GSA) contractors in 2006, payments to federal contractors in 2007, federal payments

to Medicaid providers in 2007, and federal payments to Medicare providers in 2008.

In summary, all the works mentioned above had objectives as follow: (1) to

determine the magnitude of tax debts owed by particular federal contractors; (2) to

12

identify examples of federal contractors that have tax debts and abusive, fraudulent,

or criminal activities; (3) to determine whether federal agencies screen contractors for

tax debts and criminal activities prior to awarding contracts and at the exercise of any

government contract options; and (4) to identify any statutory or policy impediments

and control weaknesses that impede tax collections under the Federal Payment Levy

Program.

To meet the objectives, GAO established and employed a methodology as follows:

- To identify the magnitude of unpaid federal taxes owed by federal contractors,

GAO obtained and analyzed the IRS tax debt data as of the audit period. GAO

also obtained and analyzed the federal agencies payment data to the federal

contractors as of the audit period. The federal agencies include the Financial

Management Service that spends federal dollars for civilian agency’s expenditure

unless specifically exempted, the Department of Defense that spends federal

dollars for defense expenditure, the General Services Administration that spends

federal dollars for federal supply schedule and interagency contracts.

- To identify the agencies contractors with unpaid federal taxes, GAO matched the

record of contractors that received federal payments to the IRS unpaid assessment

data using the taxpayer identification number (TIN) as the identifier. GAO also

matched data of competing bidders (those who were not awarded the task order)

to the IRS assessment database using the TIN to determine whether they owed tax

debt.

- To identify indications of abuse or potentially criminal activity, GAO selected a

number of federal contractors for a detailed audit and investigation. They were

13

selected using a particular approach and a number of criteria. GAO also reviewed

the related entities and the owner(s) or officer(s) of the selected contractors. GAO

also contacted some contractors, performed interviews, and reviewed contract

files to determine the extent of price competition and to identify bidders on

competitively awarded contracts.

- To determine the extent to which contracting officers are to consider tax debts,

GAO examined the Federal Acquisition Regulation (FAR) as well as agencies

policy, procedures and guidelines in awarding contracts. GAO also interviewed

procurement agencies officials whether they considered tax debts upon awarding

contracts.

- To determine the effect of IRS and federal paying agencies policies and

procedures on the amounts actually collected through the FPLP, GAO conducted

work at those agencies related to their respective roles in the implementation of

the FPLP. GAO interviewed officials and obtained documentation that detailed

the statutory requirements, policy and administrative decisions, operating

procedures and internal controls related to the FPLP.

- To determine the reliability of computer processed data obtained from either IRS

or other federal agencies, GAO performed data reliability assessment. For the IRS

unpaid assessments data, GAO relied on the work performed during GAO annual

audits of IRS’s financial statements. For the paying agencies, GAO perform a data

reliability assessment based on the guidance issued by the Applied Research

Method (ARM) office which is a GAO unit dealing with research and

methodology. GAO reviewed documentation related to information system and

14

databases and also interviewed agency officials responsible for the databases.

To meet the quality assurance framework in developing the methodology, the

assigned team might coordinate and consult with the officials of the Center for

Design, Methods, and Analysis (CDMA). CDMA is a unit within ARM and has a

mission to enhance the quality of GAO’s work by providing the teams with

methodological, analytical, and technical research assistance. This is designed to

assure that audit work is professional, evidence is complete and reliable, conclusions

and products are fair and balanced, and recommendations are sound.

When designing the audit plan, including objectives and methodology, GAO makes

use of a design table well-known as a design matrix. A design matrix has at least five

columns and comprises the researchable question(s), information required and

source(s), scope and methodology, limitations, and the expected results of the work

(see appendix 1 for the design matrix form). A researchable question is the question

that the team is trying to answer. A methodology is the way the team will undertake

to answer the researchable question.

IV.C. Lessons learned

- Evaluating the risk level of tax administration

BPK needs to undertake an evaluation of tax administration risk to determine its

risk level and identify the weaknesses. By doing so, BPK could encourage both

government and parliament to develop innovative solutions in order to manage

such risks, deal with the identified weaknesses, improve the tax compliance,

reduce tax gap, and increase tax ratio.

- Assessing computer processed data reliability

15

BPK needs to perform assessment on the reliability of computer processed tax

data as the DGT has been transforming its paper-based business process into

paperless business process. Since the beginning of 2000s, DGT also has been

modernizing its computer information system by spending huge amount of

money.

- Cooperation and consultation with methodologist and specialist

BPK might either establish a group of methodologists and specialists or empower

the current Research and Development Division to be a unit that provides the

audit teams with methodological, analytical, and technical research assistance.

This unit or group is designed to provide auditors with assistances in designing

qualitative and quantitative measurement, sampling, designing and implementing

surveys & data collection instruments, assessing reliability of computer processed

data, designing and constructing databases, analyzing data and displaying

findings, interpreting findings, as well as writing and reviewing.

- Design matrix

A design matrix is to some extent like an audit program in BPK. However, a

design matrix is more detailed in the way to answer or meet the objectives.

Therefore it provides auditors with an easier way to answer the objectives. Each

objective or researchable question is followed by four elements as the ways to

answer it. The four elements are (1) what information is required and what the

source(s) of information is(are), (2) what the scope and methodology are, (3) what

the likely limitations are, and (4) what the expected results of the works are.

16

IV.D. Proposed approach

BPK should enhance the quality of audit of tax administration by implementing, to

some extent, the similar approach GAO has been implementing so far on tax

administration particularly in tax debt collection. Based on what has been learned

from the GAO approach, BPK should start the work by determining the risk level of

tax administration.

BPK officials should perform an overall evaluation of tax administration by

evaluating the past audit reports as well as conducting a new evaluation. In doing so,

it is strongly recommended that BPK employs specialists, consultants, or subject

matter experts to assist and work with responsible BPK officials. As Indonesian tax

system administration is highly complex, it is necessary for BPK to employ high-

skillful employees, specialists, consultants and experts that have not only accounting

background but also other related backgrounds.

Once the overall risk level of tax administration is determined and the high risk areas

within tax administration are identified, BPK should develop a comprehensive plan

consisting of short term plan, intermediate plan, and long term plan to deal with the

audit of tax administration. BPK is able to develop such plan because BPK has an

authority to determine the audit objects and to plan the audit works although BPK

might also receive requests from the parliament or other particular state agencies.

To make BPK reports of tax administration more valuable, useful and beneficial, it is

recommended that BPK build a strong relationship with the parliament to better

understand the parliamentary interests on tax administration. This strong relationship

is needed because of two reasons: the parliament is the main stakeholder of BPK

17

reports and tax revenue is one of most important aspects within government financial

structure.

The intermediate and long term plans should describe the high and medium risk areas

to cover, the ways BPK might take to deal with the identified weaknesses, the work

timeframe, the works boundaries, the possible limitations that might occur, and the

expected outcome. The short term plan might be developed annually to explain the

specified works to be done within a year period. The short plan comprises particular

audit works to address the designated high risk area.

Depending on the result of the risk evaluation which would be performed, the tax

debt collection might be designated as one of high risk areas within tax

administration. In the last four years, the annual outstanding tax debt figures were

extremely high and have been increasing year by year. This condition reflects that tax

authority has been facing problems in collecting tax debt within recent years and still

need to enhance its efforts in tax debt collection. BPK also found that tax debt figures

presented at the last four years government’s balance sheets were to some extent not

reliable and sound.

IV.E. Proposed methodology

To meet the objectives (researchable questions) and to support the findings with

sufficient, competent and reliable evidences, BPK needs to implement the

comprehensive, sound and clear methodology. The methodology should be able to

identify the source of information, to obtain the information required, to analyze the

obtained information, to develop reliable findings, and to make sound and balanced

conclusions.

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During the audit work, it would be necessary for BPK to assess the reliability of the

obtained data. In case of audit of tax debt collection, it is highly possible that BPK

would make use of huge computer-processed data as the DGT as well as the

Directorate General of Treasury (DGTr) have implemented highly complex computer

information system. The DGT has administered the tax debt through widely spread

data processing units. Each Tax Office maintains the tax debt data of each taxpayer

through the computer system which is connected to any other stations spread among

the country as well as to the data processing center at the Headquarter. The DGTr also

implemented a quite similar computer system which maintains the data of

government disbursement. The local treasury office is responsible for disbursing

government expenditure by the order of agency treasurers.

BPK auditors who are in the tax audit division and therefore in charge of conducting

audit of tax revenue need to assess data reliability. In doing so, it would be beneficial

if they receive assistances from information technology (IT) experts although the tax

audit division already has a few numbers of qualified IT auditors. The assessment of

data reliability needs an expertise of IT environment, databases, IT security as well as

networking. In BPK, some IT experts are employed in the IT division.

After the reliability of data has been evaluated, BPK should go through to the next

step which is the audit plan/design. Learning from what GAO does in this phase, BPK

might set a group of discussion among related senior executives as well as middle and

lower managers in charge of tax audit to discuss the list of works and prioritize them.

BPK could prioritize works related to tax debt by considering the types of tax debt,

the wide range of taxpayer types, and the number of existing tax offices that manage

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tax debt.

During the audit plan/design phase, auditors must develop the audit methodology

which is the way to achieve the objectives. BPK might still make use the current way

of developing the methodology, but in order to enhance it BPK might also implement

a design matrix.

The design matrix begins with the list of researchable questions to answer. In order to

answer the questions, auditors should identify what information is required as well as

how to get the required information. Auditors should also develop the ways to

analyze the information obtained as well as how to come up with conclusions. In

doing so, auditors might ask assistances from the methodologist or specialist.

The methodologist or specialist provide the auditors with methodological, analytical

and technical assistances as well as information technology and economy issues.

These types of assistances are needed as tax debt administration is performed by

employing a high level information system and strongly related to the economy of the

country.

V. BARRIERS AND LIMITATIONS

V.A. Data access

The most possible barrier to this work is the taxpayer data access limitation.

According to the amended tax law of 2007, taxpayer data are confidential and BPK

has a limited access to certain data by the discretion of Minister of Finance. In fact,

for recent years Minister of Finance has never completely provided BPK with data

and information required to accomplish the audit work. Minister of Finance also

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delivered an opinion that individual taxpayer data, including individual tax debt data,

are considered confidential. In late 2007, BPK appealed to the constitutional court

regarding this matter but in the next couple of months the constitutional judges

decided that the amended tax law of 2006 is not against the constitution.

GAO also faced the similar problem many years ago. In 1970s, however, the rule

changed and GAO, since then, has an authority to access taxpayer data. GAO has the

right to access taxpayer data in two ways. If the work comes from congressional

requester, GAO is automatically entitled to the access right. If the work is GAO self

initiated, GAO must send the Congress a letter informing them about the audit work

to be done. If the Congress does not object the work within a month, GAO is entitled

to access taxpayer data.

V.B. Human Resources

Currently the tax audit division has approximately 30 auditors with a wide range of

capabilities from the mostly accounting background to law as well as information

technology backgrounds. Almost half of them have educational background in

taxation. This figure is, to some extent, capable enough to perform audit work of

taxation issues. However, there are two possible weaknesses which BPK needs to

overcome in order to conduct the audit work properly. The both weaknesses are (1)

the lack of methodology development capability and (2) the shortage of

comprehensive approach to information technology environment. These two

weaknesses could be, to some extent, resolved by involvements of subject matter

experts which are methodologists and information technology specialists.

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V.C. Cooperation with the agency

As a consequence of the data access limitation endorsed by the amended tax law of

2007 and the tight resistance showed by Minister of Finance in recent years, the

relationship between BPK and DGT has worsened, to some extent, in term of

execution of audit of tax revenue. Therefore, an improvement of the cooperation

between two agencies is necessary for the sake of successful audit works.

To do tax audit in a proper manner, GAO established an agency protocol which

regulates how GAO conduct tax audit. Learning from GAO, BPK might improve the

cooperation with DGT and Ministry of Finance by establishing an agency protocol

which describes how BPK conducts an audit and how DGT responds an audit.

VI. PROPOSED PROJECT

Having done the comparative study on what BPK and GAO have done, this paper introduces a

proposed project which is an audit work aimed at enforcing the collection of tax debt owed by

government’s contractors. This work is divided into two consecutive parts, an assessment of

data reliability and an enforcement of collecting tax debt owed by government’s contractors.

VI.A. Assessment of data reliability

DGT, the tax authority, is employing a high level information system to administer

massive tax data including tax debt data. DGT has implemented a centralized

database distributed processing – tax information system. Within this system, each of

the hundreds of tax offices is treated as a client station which connects each other as

well as to the main server. Each client may obtain information from other clients

through the server.

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Prior to analysis works, BPK auditors should identify the reliability of tax debt data.

The data reliability can be determined by undertaking information technology related

examinations. The tax auditors might seek assistances from the subject matter

experts, either internal or external IT specialists, in doing this work. The assistances

are necessary as such examinations strongly require this kind of expertise which

financial auditors rarely have. To some extent, BPK already has a number of IT

specialists, some are employed in IT division and some others are spread among audit

teams/units. To deal with the shortage of IT specialists, BPK might seek for external

IT specialists.

BPK could form an IT team as an advance team to assess the data reliability. This

team might consist of tax auditors and IT specialist but it is preferably led by a tax

auditor. The objective of this pre-work is to identify the information required, the

source of information, the availability of information and the reliability of the

available data. Before conducting the field work, auditors should develop the audit

program to which the design matrix applies.

BPK could begin the work at the DGT headquarter at which the IT division is located

and afterward move to the regional offices and tax offices. The auditors would

perform some data collection and examinations at these sites.

VI.B. Enforcement of collecting tax debt owed by government’s contractors

The administration of the individual-detailed tax debt is carried out by each tax office.

There is a section within the tax office which keeps the documentation of tax debt,

maintains the outstanding tax debt, prepares tax debt reports as well as performs tax

debt collection efforts. This section prepares a periodical tax debt report consisting of

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the beginning balance, the additional tax debt during the period, the tax debt

collection during the period, and the end balance. This report is submitted to the

respective regional office which will incorporate all these reports and submits the

incorporated report to headquarter. There is a division within headquarter which deal

with the nationwide tax debt.

This paper is proposing a project to carry out an audit work on the collection of tax

debt owed by government contractors. As mentioned in the beginning of this paper,

the figure of tax debt is considerably huge and increasing year by year. This shows us

that the government needs to improve the current efforts as well as establish new and

innovative ones. BPK should contribute in this matter by doing an audit work aimed

at enhancing the tax debt collection.

Subject to the availability of BPK resources, the technical expertise of BPK auditors,

and the access to tax information, this paper is proposing an audit work on a certain

element of tax debt which is tax debt owed by government’s contractors. Currently

BPK has human resources who are capable to do this work and BPK also has access,

to some extent, to the tax data and information required although BPK might needs to

do more effort to obtain other particular data.

Having done the data reliability assessment, BPK should begin the work by designing

the audit plan to which the design matrix that GAO implements applies. The

objectives of the work or researchable questions and the methodology employed to

answer them are as follows:

No Objective Methodology

1. What is the magnitude of

tax debts owed by

BPK auditors need to obtain the data from DGT

as well as the Directorate General of Treasury

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No Objective Methodology

government’s contractors? (DGTr). The individual tax debt data are

available at either IT division or tax offices. BPK

might obtain the same data from both sources.

The auditors perform a comparative study on both

data to ensure the validity of the tax debt data.

The government contractors’ data are available at

the DGTr’s expenditure information system.

Having obtained the DGT’s data and DGTr’s

data, BPK auditors would identify the tax debt, at

a certain period, owed by government’s

contractors by matching both data using Taxpayer

Identity Number (TIN) as the identifier.

2. What is the amount of

government expenditure

spent to government’s

contractors that owe tax

debt?

BPK auditors would perform technical

examination on electronic data obtained from

DGTr by employing the computer assisted audit

techniques (CAAT). Auditors would identify the

amount of government’s expenditure spent to the

designated government’s contractors.

3. Do government agencies

screen contractors for tax

debts and criminal

activities prior to awarding

contracts and at the

exercise of any government

contract options?

BPK auditors need to obtain agencies’

documentations prior to awarding the contract

and then evaluate them whether tax related

analysis was performed by agency’s officers.

Auditors would also perform some interviews to

the related agency’s officers as well as the

contractor’s officers.

4. Are there examples of

federal contractors that

have tax debts and abusive,

fraudulent, or criminal

activities?

BPK auditors would select some particular

government’s contractors to investigate whether

they have tax debts and abusive, fraudulent, or

criminal activities. To do so, auditors need to

obtain individual tax data from the tax offices for

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No Objective Methodology

each selected contractors as all detailed-

individual documentations are kept and

administered by the tax offices. At one hand,

BPK auditors already have skills and capability

required to do such investigation, but on the other

hand, it will be difficult for BPK auditors to

obtain the detailed taxpayer data and information

as a consequence of the data access limitation

endorsed by tax law.

5. What new and innovative

tax debt collection efforts

to propose in dealing with

the tax debt owed by

government’s contractors?

BPK auditors would identify the weaknesses of

current tax debt collection policy and procedures

by obtaining and analyzing the policies and

procedures in place and performing an

observation on how the tax officers implement

them. Afterward, auditors would propose some

recommendations to deal with the identified

weaknesses.

VII. CONCLUSION

It is very important that BPK should assist government to deal with the tax debt collection as

unpaid tax is one of causes of tax gap. BPK should enhance the capacity and capability of its

internal resources as well as improve the cooperation and collaboration with the government

agencies. Both are necessary to do concurrently.

There are two efforts, among other things, that BPK could perform to improve the internal

capacity and capability. The first one is BPK provides the auditors with specialists,

methodologists and subject matter experts. BPK might enhance the capability of currently

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available specialists/methodologists and also hire new ones. The tax auditors should

collaborate with the designated specialists/methodologists in doing their audit works. BPK

could also ask for assistances from external specialists/methodologists, if necessary.

The second one is BPK should enhance the auditor’s capability in developing the audit

design/plan. The auditors should prepare a comprehensive and clear audit design/plan so that it

is clear what objectives to achieve, what procedures to do, what limitations to resolve, and how

to report. In doing so, BPK auditors might employ design matrix technique.

Learning what GAO did in dealing with the tax gap, BPK could select tax debt collection as an

audit object. BPK is having enough resources, including IT resources, to conduct this audit

work but still needs to enhance the audit design/plan quality. In this work, however, BPK

might still face a problem in accessing tax payer data.

Prior to starting this work, BPK should ensure the followings: the availability of capable tax

auditors; the availability of specialists, methodologists and subject matter experts; and the

availability and accessibility of required data. BPK should also set the time frame of the work

as well as the objective of doing this work.

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REFERENCES

1. CDMA brochure

2. Indonesia Audit Board Act of 2006

3. Indonesia Amended Tax Law of 2007

4. GAO Report: Federal Payment levy Program Measures, Performance, and Equity Can Be

Improved; March 2003

5. GAO Report: Thousands of Civilian Agency Contractors Abuse the Federal Tax System with

Little Consequence; June 2005

6. GAO Testimony: Thousands of GSA Contractors Abuse the Federal Tax System; March

2006

7. GAO Testimony: Thousands of Federal Contractors Abuse the Federal Tax System; April

2007

8. GAO Report: Thousands of Medicare Providers Abuse the Federal Tax System; June 2008

9. GAO: High Risk Series; January 2007

10. GAO: High Risk Series; March 2008

11. GAO: Assessing the Reliability of Computer-Processed Data; September 2002

12. www.irs.gov; official website of Internal Revenue Service

13. www.gao.gov; official website of Government Accountability Office

14. www.bpk.go.id; official website of Indonesian SAI

15. www.pajak.go.id; official website of Indonesian Tax Authority

Appendix 1

28

Design Matrix for (Add Short Title) Engagement Code (Add Code)

Issue Problem Statement: Guidance: (Delete this guidance as you prepare matrix.) 1. Put the issue into context. Provide sufficient background information for the reader to understand the nature of the issue,

the significance of the program, potential problem or concern and its magnitude, political environment, and key players. Do not paraphrase or repeat the researchable questions to be addressed.

2. Identify the potential users of the audit product. Potential users could be the requesters, the agency, etc.

Researchable Question(s) Information Required and Source(s)

Scope and Methodology Limitations What This Analysis Will Likely Allow GAO to Say

What question(s) is the team trying to answer? Identify key researchable questions. Ensure each question is specific, objective, neutral, measurable, and doable. Ensure key terms are defined. Each major evaluation question should be addressed in a separate row on this table. Include the appropriate codes from the attachment to the design matrix.

What information does the team need to address the question? Where will they get it? Identify documents or types of information that the team must have. Identify plans to address internal controls and compliance. Identify plans to collect documents that establish the “criteria” to be used to evaluate the condition of the issue. Identify plans to follow up on known significant findings and open recommendations that team found in obtaining background information. Identify sources of the required information, such as databases, studies, subject area experts, program officials, models, etc.

How will the team answer each question? Describe strategies for collecting the required information or data, such as random sampling, case studies, DCIs, focus groups, questionnaires, benchmarking to best practices, use of existing data bases, etc. Describe the planned scope

of each strategy, including

the timeframe, locations to

visit, and sample sizes.

Describe the analytical techniques to be used, such as regression analysis, cost benefit analysis, sensitivity analysis, modeling, descriptive analysis, content analysis, case study summaries, etc.

What are the engagement’s design's limitations and how will it affect the product? Cite any limitations as a result of the information required or the scope and methodology, such as: --Questionable data quality and/or

reliability. --Inability to access certain types of

data or obtain data covering a certain time frame.

--Security classification restrictions. --Inability to generalize or extrapolate

findings to the universe. Be sure to address how these limitations will affect the product.

What are the expected results of the work? Describe what GAO can likely say. Draw on preliminary results for illustrative purposes, if helpful. Ensure that the proposed answer addresses the question in column one.

Appendix 1

29

Engagement Team and Stakeholder Approval of Design Matrix and Independence Verification

Independence Verification Statement

VIII. Engagement team members and stakeholders listed below stated that they

1. concur with the design matrix; 2. have no personal or external impairments to their independence that will affect their ability to plan, conduct, or provide advice on the engagement and

reach independent conclusions based on the evidence; and 3. will notify the cognizant Director if an impairment surfaces during the course of the engagement.

Attended Discussion (email / signatures not required)

Concurrence and Independence Obtained via Written Communication

(email / other written documentation must be attached) Names and Titles GAO Team Names and Titles GAO Team

IMPORTANT GUIDANCE (Delete this guidance as you prepare matrix.) 1. For those team members and stakeholders attending the meeting, concurrence and independence can be documented by filling in the table above—no initials or

signatures are required. However, if the team member or stakeholder did not attend the meeting, a written communication (i.e. email) is to be attached and state two things—that they concur with matrix and have no personal or external impairments.

2. If new engagement team members and stakeholders join the engagement after independence statements have been documented, a statement of independence must be obtained, documented, and placed within the EMPF.

3. Communication Analysts do not need to be listed, thus, no concurrence and statement of independence are necessary. 4. If a stakeholder has been “dropped” from the engagement since identified at EAM and/or at Initiation, the engagement team documents that a discussion(s) took

place with the stakeholder and all parties agreed to this action. (Document in a memo and place in EMPFile under item 2.2.3.)