The Tax Office ordered a high-level review of its internal crime-busting unit after a botched investigation led to a team of Canberra-based bureaucrats raiding a naval base in Victoria.
The review came after an Ombudsman's inquiry into allegations the unit had gone rogue, overstepping its powers in pursuit of a former employee on a "hunch" the man had threatened one of their own.
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The ATO also ordered a review of the conduct of senior officers in its feared Fraud Prevention and Internal Investigations branch (FP&II) who ordered the inquiries into their former colleague who was suspected of sending hate mail to a senior tax official.
The office has admitted it should have called in police to assess the case before it sent seven Canberra public servants, armed with a search warrant, to burst into HMAS Cerberus on the Mornington Peninsula in October 2011.
The officials, who had been flown from the capital to conduct the raid, scoured the man's workplace and living quarters for nine hours but found no evidence against the ex-employee who had enlisted in the navy after leaving Tax Office the previous year.
The target of the raid, Gary Setter, who has consistently denied any wrongdoing, is considering legal action while another investigation, by the Privacy Commissioner, into the unit's conduct of the case is under way.
The Tax Office ordered an "independent" assessment of the conduct of the managers who ordered the raid, rewrote behavioural standards for the FP&II unit and called in its integrity adviser Damien Bugg, QC, to review the outfit's "powers, processes and systems".
In its response to the Ombudsman inquiries, the Tax Office said it relied on advice from the Attorney-General's Department that it should go it alone on the investigation and not refer it to police. The ATO conceded there might be the "possibility" of a conflict of interest in allowing officials to lead the pursuit of their former colleague, who had resigned as an ATO fraud investigator in 2010.
Mr Setter had been the target of an earlier FP&II investigation after being accused of improperly accessing the tax records of members of his family and left the department before the matter was fully resolved.
He told the Ombudsman he believed the internal fraud unit became convinced he was seeking revenge on the officials responsible for the first investigation.
Mr Setter complained to the official watchdog that his former colleagues pursued him on a "hunch" that he was the man behind a series of letters and phone calls to a senior tax official that were deemed to be threatening.
In a final determination issued last month, the Commonwealth Ombudsman said it was satisfied with the steps taken by the ATO to address Mr Setter's grievances.
"While the ATO maintains that it had the necessary authority to conduct the investigation in this case, it has accepted that a referral to the AFP would have been appropriate to allow the AFP the opportunity to assess the matter," the Ombudsman's delegate wrote.
"The ATO has also agreed to seek independent assessment of whether any officer involved in this matter has breached the Australian Public Service Code of Conduct.''
The ATO has not responded to requests for the results of the reviews it agreed to undertake in the wake of the affair and Mr Setter says he is not satisfied with the responses and that he is considering further legal action. He says he believes he was the victim of an illegal vendetta conducted on taxpayers' money.
"The requisite ethical behaviour has not been met, and significant taxpayer funds were wasted on what could only be viewed as a personal vendetta against a member of the public by a senior public servant," Mr Setter said.
"Again, I state that the actions of the persons involved in this matter are tantamount to criminal acts. To date, I have never been shown any evidence to justify these actions instigated and undertaken by the ATO. How public servants can get away with this and be defended by their taxpayer-funded employer has me baffled."