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TAX AUDITS NOT ALWAYS CORRECT

CRA DATA SHOWS THE MAJORITY OF TAX AUDITS OVERTURNED!

When most taxpayers receive a Notice of Assessment from the Canada Revenue Agency (CRA), they likely have the following concern: what did I do wrong? That first instinct – although likely well-founded in the human psyche – ends up being a statistically incorrect assumption. In fact, the most recent data from the CRA suggests that the majority of CRA Assessments are INCORRECT and are ultimately overturned on Objection.

This Tax Audits Series Report reflects on this data and its implications and “best practices” for taxpayers.

CRA Data:  Most Assessments Incorrect

Recent reporting by The Globe and Mail reveals that CRA Audits and Assessments often get it wrong.  Specifically, 63% of taxpayer Notices of Objection (“NoOs”) are either fully or partially successful. (!)

These results echo those of a 2018 Auditor General Report on CRA compliance measures, which found a 60% full-or-partial success rate for NoOs. 

In other words, when the CRA tells a business (or, indeed, an individual taxpayer) there was a mistake in either GST or income tax reporting, there is a better-than-even chance that CRA is wrong!

The “Tax Earned by Audit” Trap

Why is the CRA issuing so many flawed Assessments?  One answer lies in how it measures success.  The CRA uses a metric called "Tax Earned by Audit" (TEBA) to evaluate its Auditors, which essentially credits Auditors based on the dollar yield of their Assessments.

This creates a seemingly perverse incentive structure:  an Auditor is rewarded for being aggressive, but NOT for being accurate.  Huge Assessments can be levied on innocent taxpayers just to meet quota and meet targets, with, it seems, no repercussions for these massive inaccuracies.  Indeed, it is the opposite.  The Auditor’s inflated TEBA leads to rewards, and/or an upwardly ranking, due to these incorrect Assessments, with apparently no “come to Jesus moment” when these same Assessments are ultimately overturned on Objection or by the Tax Court of Canada (“TCC”) years later. 

Why Taxpayers Should Fight (But Get Some Legal Help First)

The good news is that the system does work for taxpayers that push back.  The bad news is that the CRA is counting on taxpayers giving up or making a procedural error, like missing a filing deadline. 

Consulting Experienced Tax Counsel is a good idea for taxpayers planning to fight the CRA. A NoO is not a simple "customer service" complaint. Rather, filing a NoO initiates a formal, adversarial process. It is a legal dispute governed by technical legal rules. Tax Counsel understands that process and those rules, knows how to avoid common procedural pitfalls, and knows how to increase a taxpayers’ odds of success on the merits. And success on the initial NoO is much easier, cheaper, and quicker than success years later at the TCC.

Takeaways

Auditors are incentivized to issue large Assessments which are often wrong. Businesses under Audit can engage Tax Counsel to make sure the Audit is as accurate as possible, and to make sure Auditors are limited strictly to what the law allows them to access.

For businesses that disagree with their original or post-Audit Assessment, the odds are that they are correct. Experienced Counsel can help avoid common pitfalls when filing a NoO, and increase chances of success against the stubborn and formidable CRA.

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For an updated Index of our Tax Audits 101 Series Reports, click here.