Earlier this month, the Tax Executives Institute, Inc. (TEI) raised a number of important income tax administration issues in its annual meeting with the Canada Revenue Agency. Concerns were expressed about how the CRA conducts and manages large file audits (including the role of the Large File Case Manager or LFCM) as well as the design and development of the CRA’s new risk-based audit process for large businesses.
The agenda for those meetings (which also included the Department of Finance) is here. TEI plans to publish CRA’s responses as soon as they are released. The questions and concerns dealing with the audit process in particular are set out below.
- CRA Audit Practices — Taxpayer Field Experience
CRA and large taxpayers share a common interest and goals in promoting a smooth and efficient audit. The goals include:
- Ensuring that audits are current;
- Avoiding the use of waivers to extend the audit period unnecessarily or habitually;
- Focusing audit queries on high-risk compliance issues;
- Using accepted audit sampling procedures to expand stretched resources;
- Maintaining transparency in decision-making and the determination of tax positions;
- Promoting timely, consistent, and effective issue resolution;
- Deploying human resources as effectively as possible; and
- Maximizing cost controls.
Over the course of the last several years, CRA has developed new audit approaches based upon an enhanced relationship with large taxpayers and a risk-based audit approach. TEI supports CRA’s new audit approach not only because of the common interest and shared goal of promoting efficiency, but because it promotes certainty of tax treatment sooner. That said, many large taxpayers have experienced behaviours seemingly at odds with the shared interests and goals. Examples include:
- LFCMs are declining to discuss issues (or assert control over certain issues), saying they lack authority to make a decision in respect of subject matter. This suggests that issue resolution may be increasingly managed by CRA Headquarters in Ottawa as opposed to the TSOs. TEI believes that the objectives identified above can be advanced only if the LFCM is empowered to make decisions on issues and taxpayers are able to communicate directly with the decision-makers.
- Auditors are asking for information on behalf of an undisclosed CRA source or seeking opinions or advice from CRA Headquarters without communicating the issue to the taxpayer or informing the taxpayer of the request. Where an opinion or advice is solicited, the TSO is generally bound by the Headquarters decision even though the taxpayer had little or no input into the development of the facts upon which the opinion is based.
- Many auditors and LFCMs assert that they have no jurisdiction over specialty areas (e.g., SR&ED, International or Tax Avoidance matters). Thus, there seems to be no overriding coordinator or decision-maker.
- The scope and nature of the tax treatment of items seem to change dramatically from previous years (i.e., fewer adjustments are proposed, but high-level conceptual challenges to a taxpayer’s filing position are asserted with minimal or no apparent technical analysis). Examples include challenges to reclassify amounts long treated (and frequently reviewed) as current expenses into capital items or challenges to the longstanding (and frequently reviewed) classification of capital items into longer-lived capital asset pools.
- Adjustments are proposed without discussion or explanation of the technical position despite requests for the rationale, which leaves taxpayers questioning the quality of the audit or propriety of the asserted position. Without discussion, the position can seem arbitrary, and may be a consequence of the Tax Earned by Auditor (TEBA) metric.
- Information requests or proposals for adjustments are submitted shortly before a taxation year becomes statute barred.
- Certain audit queries seem intended to audit the taxpayer’s financial statements rather than the tax returns (e.g., there are instances where an auditor is verifying account balances in audited financial statements rather than trying to understand the adjustments on the tax returns to the financial accounts and the rationale for the adjustments).
- Requests are made for significant amounts of data as opposed to relying on sampling where practical (e.g., requests for all professional fee invoices). In addition, information requests require taxpayers to produce enormous amounts of data within an abbreviated time frame. Response times should be reasonable and proportional to the volume of information requested.
- Some auditors have refused to make taxpayer-favourable consequential changes and adjustments in subsequent years, even where the changes flow directly from an accepted audit adjustment to an earlier period. Instead, taxpayers are compelled to file amended returns to claim the consequential adjustments.
In addition to a general discussion of the member perceptions of audit behaviours and whether those behaviours are counterproductive to the shared goals of expeditious audits, transparency, and an enhanced relationship, TEI invites a discussion of the following:
- In connection with the new risk-based audit approach, have quality control reviews been performed on the audit files since the approach was adopted? If not, will the quality control review be conducted on all files or all files above a certain size? Will new roles be created within CRA to conduct the quality control reviews independently of the field auditors?
- Can CRA confirm whether the TEBA metric has been eliminated, as announced at the May 2012 TEI Annual Conference? If so, what measures will the Agency employ internally and for reporting its activities to other parts of the Government (e.g., Finance, Parliament, and the Auditor General)?
- What other changes are being implemented at Headquarters and the TSOs to support the risk-based audit initiative?
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- Risk-based Audit Process
In 2011 CRA announced it was instituting a risk-based approach to audits whereby CRA would meet with senior representatives of the taxpayer to:
- Explain the redefined risk-based approach to large business compliance and how the approach affects taxpayers;
- Share CRA’s findings and observations noted during the taxpayer’s risk assessment; and
- Understand how the taxpayer manages tax risk at its highest governance levels.
With the first round of meetings with taxpayers complete, TEI has the following questions in respect of the approach:
- Would CRA share its general observations, findings, trends, or conclusions with respect to the state of tax-risk governance?
- In the interests of transparency, will CRA consider publishing a document outlining and discussing its review and risk-assessment process?
- Has the first round of meetings with taxpayers led CRA to consider changes to its risk-assessment process and will it publicly announce the changes? Will affected taxpayers be apprised of changes to the scope of the risk-management approach that apply to their cases?
- Will CRA review the risk assessment with the affected taxpayer, including discussing the criteria and factors used to determine a taxpayer’s risk rating? If a taxpayer disagrees with its risk-assessment rating, what steps can it take to address its concerns?
- Assuming a taxpayer’s risk profile can change over time, will CRA revisit its risk-assessment ratings on a regular basis? If so, how often will the assessment be revised? Will CRA meet again with the taxpayer’s senior executives to review the revised rating?
- Can CRA provide any details about the factors affecting a taxpayer’s risk rating?
- Will CRA inform other tax jurisdictions (provincial or foreign) of its findings in respect of a taxpayer’s risk rating?
- What guidance has been provided to the TSOs to ensure that the objectives of the new audit approach are applied consistently by all the TSOs?