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.

Links

• Auditing Small and Medium Enterprises by Canada Revenue Agency (Auditor General, March 2009 | 40 page PDF)
• 2009 Auditor General's Reports Released (KPMG)
• Biography of Auditor General Sheila Fraser (about.com)
• Mope, Gloat or Move: How tax compares by province
• Surviving an audit: two lies and three tips
• photo courtesy of Adam Ciesielski (Capetown, South Africa)

Podcast Episode 37 (5:45)

direct download | Internet Archive page