Tax commissioner Chris Jordan has announced an internal review of the Tax Office's policies and procedures following news that one of its highest ranking officers, Michael Cranston, allegedly abused his position as a public official.

Mr Jordan said the Australian Federal Police had informed him in January about Operation Elbrus, the undercover team that exposed the alleged $165 million tax fraud ring.

Appearing before Senate estimates on Tuesday morning, Mr Jordan said the tax fraud ring was actually worth $130 million, and the ATO had so far collected about a third of money.

The ATO had been aware of the alleged criminal syndicate that was promoting phoenix arrangements, and had ensured that audit files were locked down. 

"Our systems are very much a needs-to-know basis," Mr Jordan told the hearing.

"The systems did work, no access was gained. It was a tax crime covert operation on our behalf." 

Mr Jordan said Mr Cranston - who has been suspended without pay while investigations are taking place - had made a "huge error of judgment" in talking about the matter to his son, Adam Cranston, who was allegedly involved in the criminal syndicate.

But Mr Jordan said at no point did Mr Cranston access or try to access audit files in relation to his son.

"There is no evidence of actual intervention or influence on the audit cases, or of money being refunded, or of tax liability being changed," Mr Jordan said. "And no deals were done." 

However, if he had, hypothetically, Mr Cranston would never have been able to get access because the files were not accessible. 

"Michael Cranston couldn't get access himself, even if he did try," Mr Jordan said.

"We will look at this, but it's not as though there was a big breach there. I do not want to sound defensive but we will wait and see what comes out."

But Mr Jordan said even with all these checks, "no system involving humans will ever be infallible".

ATO reputation hit

Three senior executive service officers are being investigated by former Fair Work commissioner Barbara Deegan for potential breaches of the Public Service code of conduct. 

​"If breaches are found, potential sanctions range from a reprimand through to demotion or termination of employment," Mr Jordan said.

Mr Jordan admitted that alleged wrongdoing by ATO officers had "struck at the heart and values of those who work at the ATO".

"We are keenly aware that the community must have full trust in us – in our integrity, objectivity and expertise – we cannot do our job effectively without this," he said.

"The events of the last couple of weeks and some of the media attention associated with them have potentially been detrimental to our reputation and the respect people have for our role in the community.  

"When confidence in us is jeopardised, it can impact negatively on taxpayers and on the tax system, and I will do everything in my power to eliminate the risk of that happening."

He said the ATO would be "thoroughly reviewing what has happened and whether our policies, practices and procedures need to be strengthened".

The Inspector-General of Taxation could initiate a review, as could the Auditor-General, but neither had told him they would so far.

How the ATO got involved

Mr Jordan said the ATO's work relating to Operation Elbrus began early last year. 

He said the Australian Criminal Intelligence Commission (ACIC) and Australian Federal Police (AFP) also initiated their investigations last year, in early August and in September respectively. 

When ACIC learned AFP was looking into the same matter, it agreed AFP should take the running and handed over the financial data and other intelligence it had gathered.  

"In February 2016, as part of our routine monitoring, we identified a small number of entities that went into liquidation owing pay-as-you-go withholding (PAYGW) and GST payments and the matter was referred to our tax evasion and crimes area for review and potential audit action," Mr Jordan said.

"Our initial reviews showed the presence of a syndicate that appeared to be promoting phoenix arrangements to the labour hire industry in the construction and IT sectors, and because some potential criminal links were identified, covert audits and reviews were commenced."

So far, over 200 entities in layered structures and complex transactional and business relationships had been identified. 

"When officers in the ATO working on the investigations were certain that one of the principals of the syndicate had a personal connection with deputy commissioner Michael Cranston, they took steps to further isolate and lock down the casework – this was in addition to the extra security and compartmentalisation already in place for such tax crime cases," Mr Jordan said.

In December and January 2017, ATO audits and investigations led to assessments and recovery of unpaid taxes through garnishee notices. 

"We have raised liabilities to date of more than $130 million from Operation Elbrus and have collected almost a third of the amount so far, including from garnishees," he said.

"We were able to collect these amounts because we targeted bank accounts with significant balances and current payroll activity so that they could be garnisheed as soon as the tax liability was assessed – protecting the revenue at risk. "

The ATO garnishee action in December and January "caused significant disruption to the syndicate and alerted the AFP's Operation Elbrus team of the ATO's interest in their targets".

Mr Jordan said AFP commissioner Andrew Colvin visited him on January 11 to make him aware of the investigation.

"Commissioner Colvin was clear to me that Michael Cranston was not suspected, and is still not suspected, of being involved in the syndicate and its activities of defrauding the commonwealth," he said.

"I was not asked by the AFP to intervene, in fact the ATO was asked to leave things as they were, and to keep all existing arrangements in place, keeping Michael Cranston in the deputy commissioner position while further information continued to be gathered about the syndicate and its operations." 

In February, the ATO and AFP joined the tax crime intelligence with the AFP criminal intelligence.

In April, the ATO undertook further steps to collect outstanding tax and froze bank accounts due to the high risk of the removal of funds by account owners.

"Conscious of the impact this can have on innocent third parties, especially regarding wages, we established the names of those due to be legitimately paid so that funds could be released to pay the wages owing," Mr Jordan said.

"We did not stop people being paid.  We are continuing to look into how we may be able to have any of the remaining funds released to pay outstanding superannuation guarantee amounts."

"In mid-May, the warrants that were executed by the AFP yielded seizure of a large volume and high value of cash and assets.  With these significant amounts of cash and assets seized, we would hope and expect there to be recovery of significant amounts for the commonwealth."