The Canada Revenue Agency (CRA) could improve its corporate and small business audit process by tracking and reporting the amount of taxes that are ultimately paid to the government after all taxpayer appeals and any court challenges are exhausted, suggests a new report from the Toronto-based C.D. Howe Institute.
"This [change] would further strengthen confidence in the system's equity and tilt it toward minimizing unnecessary costs to taxpayers," concludes the report, entitled Auditing the Auditors: Tax Auditors' Assessments and Incentives and authored by Kenneth J. Klassen, professor in the School of Accounting and Finance at the University of Waterloo.
The CRA currently reports overall metrics of its audits, including "tax earned by audit" and the percentage of audits that lead to assessment, but does not actually report how much is ultimately paid by taxpayers, Klassen says.
"The main way that the CRA currently assesses the audit process is it will do quality control checks — the CRA will review the audit and look through what was done — as opposed to calibrating based on what ultimately happens with that particular taxpayer," Klassen says.
Evaluating the performance of audits is inherently problematic because it is difficult to determine the correct amount of taxes that should be assessed, given the complexity of tax law and corporate tax arrangements, the report argues.
"The real problem is that nobody knows, and, in fact, there isn't really a right answer," Klassen says. "And so, when you start with a situation in which you don't know what the right answer is, then it becomes difficult to calibrate how close we're getting. [Auditors] are in some cases overshooting [the amount of taxes that should be assessed] because the correct application of the tax law is ambiguous."
Klassen stresses that the CRA does not evaluate its individual auditors based on what assessments they produce. "That's not the function of auditing," he says.
However, a move to reporting the ultimate taxes that are paid, after all appeals are exhausted, would counteract any indirect incentive to overassess and ultimately reduce costs for taxpayers, Klassen says.
"It would potentially avoid the need [for taxpayers] to appeal assessments following the audit and potentially go to court," Klassen says. "Both of these processes are expensive for the taxpayer to engage in."