IRD officers should pay for their own mistakes

Thursday 17th Jun 1999

Rodney Hide

Article -- Economy

The distinction that government has over the rest of us is the useful facility to make magnificent and colossal mistakes without cost or consequence to the authors.

It's what makes government so attractive. It's an exciting prospect to be able to make sweeping decisions without personal consequence. All other fields of endeavour by comparison are depressing. In all other fields you have to bear responsibility for your own decisions and your own actions.

The usual pattern for politics is to spread the cost of mistakes over the entire populace. We each paid our share of the concrete uselessly poured when politicians thought to "Think Big".

But there is another pattern. The Select Committee Inquiry into the Inland Revenue Department is producing case studies of mistakes heaped on individuals.

Take the case of Dr Gerard Cosgrove who made a submission to the Committee last week.

He was granted study leave from the DSIR on full pay to complete a PhD in Crop Science at North Carolina State University. It was a big step for him, his wife and three children - soon to be four. The big question was could his family afford the costs of studying and living in the USA. The opportunity was a big one but the necessary sacrifice was considerable.

The scientist weighed up his options methodically and with care. He did everything right.

The key was the IRD Palmerston North office agreeing that his pay while studying was a study grant and therefore tax exempt. He filled out the relevant form, it was approved by IRD, and notification was sent to the DSIR to cease the soon-to-be Doctor's PAYE deductions.

There is no doubt that it was the tax relief that provided Dr Cosgrove with the necessary funds to undertake his study. Without that relief, he simply could not and would not have undertaken his advanced studies.

He began studying receiving his pay tax free as expected. In his first year in mid-1989, the IRD rescinded his tax exemption. No explanation for his change in status was provided. However, for each of the 1989, 1990 and 1991 tax years he reapplied for his exemption. In each case it was granted, and he received a full refund of his PAYE.

These funds were critical to him and to his family. They allowed him to eat and to survive.

He successfully completed his doctorate and returned to New Zealand in March 1992 to apply his hard-won knowledge in service of his country.

In his 1992 tax return Dr Cosgrove again applied for his exemption for the period of the year for which he was still studying. Here was when the trouble started. The IRD changed their mind. They withheld his expected refund.

The IRD reassessed his tax due for the 1989, 1990, 1991 years. The result was an unexpected and financially crippling tax bill to Dr Cosgrove of $42,000. The IRD had decided that contrary to their earlier advice and practice the good doctor's pay was not tax exempt.

The Cosgrove family faced financial ruin. In a weakened state it was hard for them to fight. They had to find a further $10,000 for professional advice to prepare a case to the Taxation Review Authority. Dr Cosgrove naturally thought that he had done everything right. He naturally thought he had a good case.

The Taxation Review Authority found against him. Judge Barber was sympathetic - and could understand his outrage - but determined that IRD's advice was simply incorrect. The IRD was wrong and they were wrong to be refunding his tax. It was their mistake but Dr Cosgrove and his family had to pay, and to pay and to pay.

The IRD refused to enter into any instalment arrangements for the now outstanding debt. The interest bill alone was $4,000.

To avoid penalties, the good Doctor had to run up overdrafts, increase his mortgage and put his family through severe financial hardship. The family suffered. There was the stress. The frustration. The anger. The financial hardship. The family continue to this day to pay because of the financial blow the IRD dealt to them.

Dr Cosgrove and his family's plight make a nonsense of the claim that taxpayer has nothing to fear from the IRD. They say, all you need do is be honest and make plain your financial arrangements. Dr Cosgrove did precisely that. He relied on the word of the Commissioner. He discovered to his great cost that the Commissioner's word cannot be relied upon.

It can be changed and can be changed at huge personal cost. It's difficult to know what more Dr Cosgrove could have done to protect himself and his family from faulty advice and erroneous refunds.

He did everything right. It was the IRD that screwed up. But it is Dr Cosgrove, his wife and each of their four children that pay the terrible and ongoing price. No consequence has befallen the IRD officers who so misled him.

No one doubts now that it was IRD's mistake. No one questions that Dr Cosgrove did everything correctly. And yet no consequence has befallen the staff or the Department that got it so horribly wrong.

It's Dr Cosgrove that has to pay for the IRD's mistake out of his weekly wage packet. It is his family's weekly budget that suffers. But it was the IRD's mistake. The logic then follows like night follows day. It's the individual officers concerned who should be making good the loss. It was their mistake. They should be paying for it - not Dr Cosgrove.

But then this is a scary principle: pay for your own mistakes. Such a principle ruthlessly applied would do away with the distinction of government and all the attraction that power brings.

(This article first appeared in the NBR)

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