October 3, 2009

HOW EFFECTIVE ARE TAX AUDITORS?

No one wants to get audited. Not even the tax auditors. But they get audited too.

The Auditor General, Sheila Fraser, looked at how the Canada Revenue Agency (CRA) audits Small and Medium Enterprises (SMEs). Despite 5,600 staff focusing on these businesses, earlier problems remain. As taxpayers, we want compliance with the rules to ease our tax burdens, which vary considerably by province, especially for entrepreneurs.

We're talking about big dollars. The CRA estimates there aren't many tax cheaters but those abusers cost us plenty. About $12.7 billion in unpaid tax according to their 2006-07 Annual Report. Of that, about $2.5 billion relates to SMEs.
Overall, the Canada Revenue Agency (the Agency) has made unsatisfactory progress in addressing the recommendations we selected from our previous reports for follow-up.
--- Auditor General, March 2009 Status Report
Sheila found the "taxman" fares poorly in
  • taxing the underground cash economy (targeted by 1,000 CRA staff): "about half of its underground economy audits over the past five years did not detect unreported income"
  • auditing too many low-risk files
Auditing The Wrong Files
The CRA "has difficulty demonstrating that it is selecting and auditing small and medium enterprises of high risk or priority."
--- Auditor General, March 2009 Status Report
The CRA uses computerized risk assessment to classify tax returns by the potential tax recovery into four categories from low to high. That makes sense.

However, the CRA focuses on low-risk files where they expect a $0 tax recovery. This is like targeting drivers going 0-10 above the speed limit but ignoring drivers zooming past at 50+.

In the last two fiscal years, the CRA audited 87,000 SMEs. Of these, 13% were tagged as high-risk and brought in 41% of the total tax recoveries. However, 56% of the audits were on zero or low-risk files and brought in 39% of the total tax recoveries.
"Available auditors may lack the experience necessary to do complex high-risk files and therefore audit lower-risk files."
--- Auditor General, March 2009 Status Report
What's going on? Among other explanations, CRA says their auditors are better suited to doing low risk audits. Also, audits do turn up problems even where tax recoveries are low. This is like a "broken windows" approach: tackle minor crimes like speeding and littering to prevent bigger crimes.

The CRA does not know why high-risk files bypass audits because the human screeners who make the ultimate decisions aren't required to document their reasons. Screeners favour their own judgement over computerized risk assessments. Human judgement leads to inconsistencies.

The Right Staff
During the Tax Roundtable in the 2008 CALU conference, a CRA official reported difficulties filling two senior vacancies in the Ontario audit unit. Why? The pay scale starts at $40,973 and caps out at $110,779. The private sector pays better. Also, tax auditors would rank among the least prestigious professions. Want proof?

At a party, announce that you're an actuary and people will leave you for fear of boredom. Say you're a tax auditor and watch them bolt even faster and go further away.

Cheaters
The study found that most people know little about the implications of tax cheating, and concluded that more communication would encourage better compliance.
--- 2007 public opinion research by the CRA
Honest taxpayers suffer. Cheaters prosper and encourage others to follow. Until they're caught. Let's see what happens.

4 comments:

nancy (aka moneycoach) said...

Clearly what's needed is a tv series. I'm kinda serious, actually - something that sexes up what it means to be a tax auditor. Something similar to the HBO series "The Wire", that shows people putting pieces together and slowly circling around the white-collar sociopaths who may either escape to a tax haven, or gets sent to jail, or gets caught, but let off for political reasons.

Promod said...

TV can't solve all problems, Nancy. Neither can chocolate, but both are worth a try :)

Thanks for your comment.

davidbaer said...

What I like about small business owners is that they are not afraid to take huge risks and lay it all on the line. But, I agree they do need a lot of help with their marketing. I think having them go the social media and email route is not only the least expensive but its also the most effective. Thanks for the stats!
With Facebook and Twitter being among the leaders of the Social networks, marketing as a small business is being transformed..
Respondents according to the Vertical Response survey appear to need some differentiation with the use of SE marketing and Social media Marketing
smallbusiness

kiramatali shah said...

Often we forget the little guy, the SMB, in our discussions of the comings and goings of the Internet marketing industry. Sure there are times like this when a report surfaces talking about their issues and concerns but, for the most part, we like to talk about big brands and how they do the Internet marketing thing well or not so well.


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