Death and taxes: Is the IRD pusing people over the edge?

Kent Richardson is hoping Lotto will save him from the IRD. Photo / Janna Dixon

Every Wednesday and Saturday, Kent Richardson makes a special trip to the shops for a Lotto Lucky Dip ticket. He's 51, unemployed and being pursued by the Inland Revenue Department for $97,000.

He thinks Lotto is the only chance he has to repay his debts - and he's probably right. So he buys, and checks, the tickets religiously.

He has imagined the moment many times: writing out the cheque, addressing it to the IRD, signing on the line. Then he'd buy an island, far, far away and run it off solar power to avoid so much as a utility bill turning up in the post.

"I'd never have to deal with these people again. It's my number-one wish," he says. "It sounds a bit fanciful, but I have a greater philosophy that somehow, someday, this will be sorted out."

Richardson's debt started off as around $12,000 in unpaid child support. It quickly ballooned. There was an initial 10 per cent penalty, then 2 per cent interest added each month for the past five years. That's nearly 27 per cent a year, on a par with the most unscrupulous loan sharks.

He's at a loss to explain why he came to owe the money in the first place, as deductions were taken directly from his wages. "I've never deliberately tried to avoid my child support obligations," he says. "Whenever I saw a pay slip, the deductions were made."

Richardson still doesn't have the answer, although he now believes the anomaly may have come from the IRD overestimating his earnings each year because he was made redundant several times. Getting to the bottom of it is difficult because his current case manager has more than 400 cases. He's often left to deal with a call centre.

"Every time I speak to them, the person on the phone will contradict what the last person told me." Overwhelmed by the growing sum on the bottom of the IRD's monthly invoice, Richardson began to feel hopeless.

He thought about suicide.

"At one stage I did have thoughts of ending it. I had police knocking on my door because I had verbalised my intention on the phone to one of these people.

"It's not nice living to just survive, praying for the only solution, to win Lotto, so I could write a cheque and make it all go away."

Now, he just tries not to think about his debt-and he's not alone. Nearly 400,000 individuals and companies together owe $5.5 billion in overdue taxes. Penalties and interest fees, rather than the core debt itself, account for most of this.

Arrears in child support, which is not a tax but is overseen by IRD, sit at $2.3 billion. It is estimated just one third of that is the original debt - the rest is penalties and interest.

If New Zealanders paid all their $7.8 billion in overdue taxes, child support and penalties tomorrow, the money would go more than halfway to rebuilding Christchurch. Finance Minister Bill English would be able to almost clear the government deficit overnight.

These figures are staggering, but the most bizarre lies in a 2010 child support report from the Auditor-General which shows 99 per cent of the penalty debt is not considered to be collectable. Billions will have to be simply written off.

Auditor-General Lyn Provost described the penalty regime as inflexible and obstructive. "In my view, Inland Revenue's debt strategy has not adequately focused on preventing debt, nor has it addressed the adverse effect the penalty regime is having on levels of debt."

IRD case officers are there to make people pay. Constant letters and demanding phone calls are a common weapon, although the officers rarely agree to meet in person. Legal action, liquidation and bankruptcy, supposed to be the last resort, are threatened so frequently that many wonder if officers are simply trying to get files off their desks.

Everything is dehumanised. Staff will not provide their full names on the phone. They won't transfer you to the person who signed the latest letter demanding money. Case officers are frequently based in a different city from the person they are dealing with. Former university lecturer Bob Jarman says he was"hounded" during his treatment for prostate cancer, despite asking the IRD's callers to let him recover in peace.

"They have no moral fibre," he says. "I must have spoken to them about eight times. I told them to stop calling me, that I couldn't deal with it. I was out of work, I had cancer and these people wouldn't stop hassling me."

In the end, Jarman was one of the one in 100 parents who pays off the child support debt, penalties and all. Although his income has hovered around $11,000 a year since his cancer, he received a windfall from the sale of his house. The IRD took the $10,000 he owed just as quickly as the money went in.

"They just took it out. It's literally killed my life," he says. "I'm not looking forward to a happy retirement." He hasn't got his money. He hasn't got his health. But at least he's got his life. Not everyone is so lucky.

An alleged "bullying culture" within the department made the headlines last week, when the Herald on Sunday revealed recycling worker Paul Jenkins, 39, had taken his own life after the Australian Child Support Service, acting on behalf of the IRD, emptied his bank account.

Tragically, it is not the first time someone has committed suicide over tax arrears and threatening letters. Sixteen years ago, air conditioning repairman Ian Mutton was found dead next to a suicide note addressed to the Commissioner of the IRD.

Enveloped in grief, Mutton's 13-year-old son followed suit just a few months later. Records showed Mutton's $84,000 in overdue tax had ballooned out from a missed payment of $84.

There was public outcry. The department was accused of having a culture of harassment and bullying and wielding too much unchecked power.

A parliamentary inquiry was held. The powers and practices of the IRD were scrutinised. The select committee recommended changes, including the introduction of a a charter that outlined the taxpayers' rights and a complaint management process.

Those on the receiving end of the IRD debt collection machine have a feeling the department never really took any of it on board.

Alison Davidson killed herself in 2007, several years after the wide-ranging recommendations were put into effect. "She was a good person," her husband, Tom Brown, says. "She was extremely warm and intelligent. In our 20 years of marriage she certainly wasn't suicidal."

The bill that led to her downward spiral first arrived in 2002. It was for $1500 in unpaid income tax, relating to a trust account the couple had.

Brown and Davidson asked why they had been charged income tax on a transfer of money into a trust? The IRD responded by looking into the case further. Its investigators concluded the couple actually owed $564,000.

"Every time I had transferred some money from my 00 account to my 01 account, they were counting that as income," Brown says. "I said to them, 'this is craziness'. I had a book-keeper and an accountant who took care of all the business finances."

After two years of battling the IRD, Brown and Davidson separated. "She was slipping," he says. "She was convinced the IRD were going to take away the farm, convinced the IRD were stalking her."

Since her death, the debt has grown to $917,000. It's one of the many debts that IRD is unlikely ever to recover. Brown was declared bankrupt last year following an IRD petition and is still as sure as ever the department made a mistake.

"I don't know what's going on with the debt now," he says. "I certainly don't have any money to give them."

Western culture has a long and colourful history of tax enforcement. The modern attitude was captured more than 200 years ago, by a founding father of the United States, Benjamin Franklin, who famously observed that "in this world nothing can be said to be certain, except death and taxes."

But taxation specialist Terry Baucher says there has always been rebellion. "In the old days you got tax revolts; these days, people vote with their feet and move," he says."We're particularly vulnerable with people moving to Australia. Low-to-middle income earners are the ones going in huge numbers. It's not like they're making millions over there, but they've got more opportunities and a better lifestyle."

Baucher wants to know why the IRD invests so much time and resources in scaring people with huge penalties when the figures show it doesn't work. He says early payment discounts and reasonable, flat rates for late payments would be more effective.

"If you are smacking someone over the head repeatedly with a stick and they aren't moving, you have to rethink what you are doing," he says. "They're scaring people. They don't recognise that many people just clam up, they don't know how to deal with it so they just freeze and hope it goes away."

The box of tissues on Steve Dent's desk in his modest Lower Hutt office is for the strong men who end up in tears as they divulge their tax debts.

Dent is a tax-debt broker and his job is to negotiate tax repayment plans for people who are broken by years of being chased by the department. Dent started the business in the worst of the recession, taking a percentage cut of the reduction he negotiates from a person's tax debt.

"I'm not out there trying to get all this debt written off. I'm trying to work it out so people can pay," he says. "We acknowledge the need to collect the debt, but people are not being treated fairly."

His colleague Fiona Whyte adds: "You can see the fear in their eyes, they're sweating, physically breaking down and crying in front of you." Just last week, one of Whyte's clients texted in panic. She had just come out of surgery at Middlemore Hospital and the IRD had been calling - but she couldn't talk because she was hooked up to oxygen."I told her she could calm down, that it would be taken care of," Whyte said.

Other clients have admitted being suicidal before Dent and his team got involved.

"They still have to deal with it, but we get in the middle and help them get it resolved," Whyte says. Dent wants more willingness from the IRD to work with the people who are in over their heads. "The people we deal with are normal people," he says.

"I've never had anyone walk into my office who has been deliberately trying to get out of their tax obligations." And, after years of requesting a meeting, he may have finally got their foot in the door. Commissioner Bob Russell's right-hand man has agreed to sit down with them tomorrow.

Dent is keen to raise with him a recent change to the IR590 form, the form you fill out if you can't afford to pay your tax bill. It was changed last month, so the form now probes for a full account of the spouse's finances.

The law hasn't changed - the department has always been able to consider the assets and income of the de facto partner - but Dent is concerned the new tone will push people over the edge. "They're under pressure, they're stressed, they're not sleeping, the wife's having a go at them and they're filling this out ..."

Revenue Minister Peter Dunne admits the system is broken. He says changes are coming and points out his Child Support Amendment Bill passed its first reading in Parliament this week. It proposes law changes that make child support debt more affordable and collecting the money more efficient.

Tinkering in 2006 allowed IRD some flexibility - discretion previously reserved for the commissioner. But Dunne agrees that was not enough. "These are changes around the edges. The real change needs to be in the law," he says. "This has been a long process."

Dunne acknowledges he has charged IRD with making debt recovery a high priority, though it seems the department doesn't treat it as enough of a priority to meet the indebted taxpayers, nor to discuss its methods publicly.

Its spin doctors refused requests for an interview with a senior manager and dodged questions through tersely-worded emails that cited the Privacy Act or simply provided links to the department's website. Spokesman David Miller refused even to answer the question: "What is the job title of the staff who follow up with the people who owe money?"

None of the people spoken to for this story would dispute the IRD should make an effort to ensure people pay their fair share. But they share a belief that the department too often gets its sums wrong and piles penalty on penalty on people who are already in dire financial straits. They want management to be more transparent and the people working on the coal-face to display a little human decency towards their clients.

After Paul Jenkins killed himself his dad Tony called the Australian Child Support Service, which was acting on behalf of the IRD, to advise them his son had died. The taxman asked what assets had been left in the estate.

"They were determined to get the money somehow," Tony Jenkins says. "They asked, has he got a car? Has he got a house? I thought, what hounds they are, asking those sort of questions."