Senior tax official Michael Cranston was investigated by the ATO's anti-fraud unit last year over claims he improperly used his influence to have a court case against a "high-wealth individual" dropped, internal Tax Office documents reveal.
Although the deputy commissioner of taxation was cleared by the probe, the public servant who was ordered to drop the case is demanding a "proper and independent" investigation and says they were ordered to act outside proper ATO procedures in stopping the prosecution.
A cache of Tax Office documents seen by Fairfax show Mr Cranston, who is facing criminal charges linked to the alleged "Plutus" payroll scam, was approached about the case by the taxpayers' accountant, a partner with accounting giant KPMG, on the day in late 2015 before the matter was due in court.
Mr Cranston then told another senior Tax Office executive to "look at this matter urgently" and speak directly to the accountant, whose client was in trouble for failing to lodge GST returns.
When the prosecuting tax officials were ordered by a third senior public servant to drop the case and instead send the taxpayer a warning letter, they were told he had a good compliance history and that he did not owe the Tax Office any money.
The prosecution team's protests, that the man did not have a good compliance history and actually owed the Tax Office $110,000, fell on deaf ears, according to the complaint.
The Tax Office declined on Monday to answer questions about the case, saying whistleblower protection legislation prevented it from making any comment and KPMG did not respond to questions.
The internal emails show the frontline public servants struggling to justify the orders from above to withdraw the prosecution.
"On what basis am I withdrawing that fits current practice and/or procedure," one tax officer asked their boss.
"Ummm, that's a tough one," replied the supervisor.
When a member of the prosecution reported the affair internally, they alleged Mr Cranston used his influence to to confer an advantage on the KPMG client.
"I find it wrong that that a taxpayer gets treated in a way because of influence and other do not get the same treatment," the public servants told investigators.
But five months after making the detailed complaint, the prosecution team member received a three-line email from a member of the Internal Investigations team stating "there is no evidence to support misconduct or criminality against any person."
A request for a formal investigation report did not get a response.
The internal whistleblower whose disclosures launched the inquiry and who is no longer employed by the Tax Office, still has grave concerns and wants and "independent and proper" investigation into the matter.
The new revelations look set to increase the pressure for an inquiry into the Tax Office's internal culture with its top bosses due to be grilled in Senate estimates in Canberra on Tuesday.
The internal whistleblower has supplied a dossier of documents to shadow assistant treasurer Andrew Leigh, claiming the protections of the Public Interest Disclosure Act.
In the attached complaint, made through the public servant's union, The Australian Services Union, the whistleblower demands an independent investigation into "the extent of favours granted by [senior executive service] tax officers to large public and private groups and high wealth individuals".
The whistleblower also wants a fresh probe into the November 2015 affair to determine if Mr Cranston or other have breached the public service code of conduct.
Mr Cranston is currently suspended without pay as he faces charges of of abusing his position as a public official and is due to appear in court in June
His son, Adam Cranston, 30, and his daughter, Lauren Anne Cranston, 24, have also been charged over the alleged $165 million payroll scam.