Is CRA Executive Bonus Pay Tied To Tax Audit Yields?
November 21, 2019 Andrew AdolphCRA,Audits,Gross Negligence Penalty
There’s no denying executives get performance bonuses, but the question is: Is there a connection between tax audit yields and CRA executive bonus pay?
The Link Between CRA Executive Bonus Pay & Tax Audits
Another year, another CRA public outreach survey, asking the business and the accounting community for its opinions about CRA and what CRA can do to improve.
I don’t bother completing their surveys anymore because I know that the problems with today’s CRA are rooted in an executive bonus culture that only cares about how much money the audits bring in.
I know this because I was a CRA auditor for 25 years. Revenue Canada hired me as one of the first GST auditors when I was 24 years old. At first, my employer set no guidelines about how much money it expected us, the auditors, to bring.
Since the government needed public acceptance of the new tax, we enjoyed an initial honeymoon period. Plus, as new auditors, we were taught that we use education and enforcement (penalties) but always try education first.
But around the turn of the millennium, Revenue Canada, a government department, became the Canada Revenue Agency. Soon a much larger income tax department gobbled up the small GST organization where I began my career.
In addition, Canada Customs, the other major money-making department, also transformed into an agency. So, ultimately, we went from a department that served the public to an agency run like a corporation.
With this came a new approach that benefited management more than the people. These changes led me to suspect a connection between CRA executive bonus pay and audit yields.
Change #1: Increased Assessments
Auditors were under much greater pressure to produce assessments. Heaven forbid we came back to the office with nothing.
Getting assessments was surprisingly easy. I had no problems finding them, and I never came back empty. But at the same time, I felt that the things I was assessing were honest mistakes and often misunderstandings and confusion with the tax code.
About 12 years into my career, new management told us that because so many of our audits result in assessments, the businesses we were auditing must be making mistakes on purpose. With that, the gross negligence penalty became the norm.
Change #2: Increased Penalities
More aggressive application of the gross negligence penalty is how the CRA can increase audit yield. Originally designed as a last step, the agency now applies this nasty monetary penalty by default.
I’ve found that auditors use gross negligence much more frequently. Also known as the “knew or ought to have known” penalty, it was initially the last resort. Generally, gross negligence is the final step before a criminal case, which is very expensive and resource-intensive.
After auditing the CRA, the Office of the Auditor General (OAG) published its findings in the 2018 Fall Reports of the Auditor General of Canada to the Parliament of Canada. In it, the OAG’s office stated that the CRA “could not fully determine the results of its income tax compliance activities.”
“We found that the Canada Revenue Agency did not know the full results of its compliance activities. Its calculation of the additional revenues generated from compliance activities, beyond the initial taxes assessed, was incomplete. It did not know how much money it wrote off as uncollectible in its compliance reassessments. The amount it reported to Parliament as additional revenues resulting from extra funding for compliance activities was only an estimate.”
If only there were a gross negligence penalty for CRA executives who fudge their statistics to max out their bonuses.
Change #3: Expanded Audit Periods
Over the years, I’ve found expanded audit periods that exceed the “1 + 1” rule. As far as I know, this rule has remained unchanged since its introduction in 1996. It states that the audit period for a new income tax audit shall be the last year filed and the year before that. For GST, it is the last two years plus anything filed so far in the current year.
The 1996 Revenue Canada avoided long audit periods because it sought faster audits and higher penetration rates. But, contrary to policy, today’s CRA prolongs the audit period to increase audit yield and subsequently CRA executive bonus pay.
Incentive programs can be good things, but they come with moral hazards. This is probably why auditors themselves, at the bottom of the organizational chart, don’t receive bonuses based on how much money they bring in from audits. The public would not tolerate it.
Suppose I am wrong about this, and CRA executive bonus pay doesn’t hinge on the results of business audits. In that case, CRA should have the capacity to prove it. Until then, the agency’s customer service will continue to deteriorate. Additionally, more businesses will find themselves caught up in lengthy appeals as they try to reverse excessive audit assessments and penalties.
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Andrew Adolph is a CPA and former CRA auditor with 25 Years of experience. He helps businesses to not par any more in sales taxs than the law says they must and acts as an advocate for you if you are being audited, so you can fous on your business.