By Dale Barrett - Managing Lawyer at Barrett Tax Law and Tax Columnist at the Lawyer's Daily. Originally published by the Lawyer's Daily.
In any self-reporting or honour system like we have in Canadian taxation, there must be a means by which the state can verify the correctness of information provided. Enter the tax audit - a component of such a system, which is both necessary to encourage taxpayer honesty by deterring cheating, and necessary to uncover inadvertent errors. And one could argue that the first and prime goal of the audit should always be to arrive at the correct outcome; to find the correct amount of tax payable – even if it means making an adjustment in the taxpayer’s favour.
In such a system, it should be obvious that auditors shouldn’t have reassessments as their primary motivator - a conclusion which seems to not have been arrived at by the Canada Revenue Agency. And the audit process itself definitely should not be adversarial. After all, the CRA refers to taxpayers as their “valued clients.”
So if the true goal of the audit should be to arrive at the correct tax payable, as is the inalienable right of Canadian taxpayers (See Taxpayer Bill of Rights, Right #1 – “You have the right to receive entitlements and pay no more and no less than what is required by law,”) then CRA auditors should not have their reassessments tracked like badges of honour, but rather they should have their accuracy tracked. They should not be rewarded with the Order of Canada for having made the most assessments in a year, but instead should be rewarded for upholding taxpayer rights through continued diligence in the quest to uncover the true amount that a taxpayer is required to pay by law.
Yet the performance of CRA auditors is not evaluated on the basis of their correctness or the number of their reassessments reversed upon objection or appeal to the Tax Court of Canada. It is not based on their accuracy at all. In fact, auditors seem to have very different motivators altogether.
As a tax lawyer having been involved in challenging the outcome of countless hundreds of audits on behalf of my clients, of course my perspective is warped. I don’t see the audits which are done competently, properly and fairly. Nor do I see the audits where the audit has resulted in a reduction of tax payable, which I imagine does occur from time to time. In my world, I paint all auditors and reassessments with the same brush.
In fact, in the large number of cases I see involving small and medium-sized enterprises, it is clear that within the Canada Revenue Agency there is a culture of incompetent or undereducated or improperly motivated auditors who are not looking for the truth, but instead looking for any reason to deny any expense and to add any questionable item to taxable income. Any reason at all.
There is a culture where auditors behave like cops and are often distrustful of taxpayers. A culture where auditors adopt the most conservative approach they can with respect to an expense or a possible instance of unreported income. And why not? No auditor was ever fired for coming up with wildly inaccurate and inflated reassessments – regardless of the number of errors committed or shortcuts taken or documents overlooked in the process. In fact, in arriving at their reassessments, auditors are very often guilty of ignoring protocol, especially with respect to agency directives regarding when not to perform a “net worth” tax audit – which (officially) is only to be used as a last resort.
And there is a proliferation, especially in these net worth audits, of a variety of systemic errors such as consistently ignoring inter-account transfers. And these errors are so common and ubiquitous (I see this particular error in virtually 100% of all net worth audits that I challenge) that it begs some serious questions. If I can see the pattern of errors, surely the CRA must see it too. But they appear not to. Or perhaps this is just wilful blindness. Perhaps this is simply an institution trying to meet targets.
And what may be most offensive is that there seems to be a culture of not putting in enough due diligence, time and effort to properly arrive at the correct outcome. If a taxpayer’s accountant takes 50 hours to do a proper audit, how can the CRA do a proper job in 5 or 10 or 15 hours? The answer is that they can’t.
By doing a quick and cursory job of an audit, by focusing on revenue and reassessments rather than correctness, and by forcing the taxpayer to address the issue with the appeals department to determine the correct outcome, CRA auditors are effectively having the taxpayer subsidize the tax audit itself.
By doing a lousy job and and passing the buck, auditors are essentially forcing taxpayers to either engage a representative to arrive at and argue the true amount required to be paid by law or simply roll over and accept the reassessments. All of this because there is a disconnect between the role the auditor is supposed to play in the system and the motivators at work.
Isn’t it about time to bridge this disconnect?