There is room for improvement in the CRA's auditing process
April 5, 2016 - There is room for improvement in the Canadian Revenue Agency’s (CRA) auditing process, according to a new report from the C.D. Howe Institute. In “Auditing the Auditors: Tax Auditors’ Assessments and Incentives,” author Kenneth J. Klassen proposes that, in addition to traditional measures, the CRA adopt a new metric of success: the ultimate taxes paid after all efforts have been completed, including the appeals process, and any possible court decisions.
“The CRA, acting as an intermediary between government and the taxpayer, administers the law, collects revenues and ensures that the tax law is being applied appropriately,” states Klassen. “However, evaluating the performance of the audit function is difficult because the amount of tax that would result from the best application of the law is often ambiguous, even with full information,” he adds.
Academic research demonstrates that, in economic models, auditors will sometimes assess more tax than what is appropriate in instances when tax audits are not perfect. Improving audit precision enhances taxpayer fairness.
The CRA reports overall metrics including the additional taxes collected by auditing and the proportion of audits leading to a reassessment. While individual auditors are not rated on these metrics, broader research on employee motivation shows that both the possibility of promotion and the use of a metric for the group can become an implicit incentive for individual employees.
Hence, in addition to its current metrics, the report encourages the CRA to consider evaluating its audit assessments in light of the best measure of the appropriate application of the law – the final assessment after appeals and any court challenges. “This would further strengthen confidence in the system’s equity and tilt it toward minimizing unnecessary costs to taxpayers,” concludes Klassen.
Click here for the full report
The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. Widely considered to be Canada's most influential think tank, the Institute is a trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review.
For more information contact: Kenneth J. Klassen, KPMG Professor of Taxation at the School of Accounting & Finance, University of Waterloo; or Jeremy Kronick, Senior Policy Analyst, C.D. Howe Institute, at 416-865-1904; E-mail: amcbrien@cdhowe.org.