Nearly 25,000 Australian taxpayers will each be allowed to keep hundreds of dollars they double-dipped from the Health Insurance Rebate Scheme after the Tax Office botched its efforts to get the money back.
The ATO has been forced to give up on its efforts to retrieve the money, after being told that it had issued 24,700 unlawful assessments to individuals and families who had claimed double the amount they were entitled to, mostly through honest mistakes, between 2008 and 2012.
But not before hundreds of hours of overtime devoted to a fix by the ATO, several rounds of crisis meetings were held by the agency's senior management and thousands of letters and notifications produced.
One tax expert, and former ATO employee, said the matter was a "major issue" and called for an independent audit of the systems found to be at fault.
The debacle is understood to have wasted the equivalent of a full years' work for the ATO's audit section, which usually only gets through about 20,000 audits in a 12-month period, without bringing in any tax revenue.
The ATO has been under fire for its failure to stop multinational companies moving money offshore to avoid paying Australian taxes on profits made in this country but senior management told parliament this week that a crackdown on profit-shifting was set to recoup $1 billion in government revenue.
The Tax Office is also facing industrial strife, with unions threatening to strike over a below-inflation wage offer, and the loss of thousands of jobs by 2018 and insiders warn that the loss of experienced staff makes expensive mistakes more likely.
Taxpayers can claim the rebate through their insurance health companies in reduced premiums or through their tax returns, but in the 24,700 cases, claims were made using both methods, usually in innocent mistakes, leaving the individuals or families about $580 on average better off.
The mistakes were picked up early last year as ATO auditors cross-checked tax returns against data from the health insurers.
Amended assessments were sent out to the tens of thousands of taxpayers who had double-dipped, asking for the money back, but the letters were sent after the legal time limit had expired.
The first indication the ATO had a problem with the private health rebate assesments came in July 2014 when objections to the amended assessments began to arrive.
It soon became clear to senior managers that they would have to cancel the amendments or let stand tens of thousands of unlawful demands for money with the ATO bosses eventually making the decision to cancel and notifying accountants in early December
It looks like the ATO have been caught napping.Tax expert Mark Chapman
An ATO spokeswoman told Fairfax that the application of the relevant laws were complex and that the mistake was fixed as soon as possible.
"The correct application of the tax laws in relation to amendment periods involving the PHI tax offset is quite complex and required further consideration by our Tax Counsel," she said.
"The ATO took appropriate steps to inform relevant agencies and stakeholders.
"A streamlined process was implemented that allowed both the income tax amendments and communications with taxpayers to be undertaken without any significant additional cost to the ATO."
Independent tax expert Mark Chapman said a systems audit was now needed to make sure there could be no repeat of the affair.
"It looks like the ATO have been caught napping," Mr Chapman said.
"With nearly 25,000 assessments affected, this was clearly a major issue and – despite the ATO's denials – it looks like plenty of resources were expended on fixing this, including paying overtime to staff to deal with the objections, involving internal tax counsel.
"The next step should be an independent audit of their systems to ensure something like this can't happen again."