Tax Auditors

Continuing the discussion from Chat Room/Open Topic Experiment:

Tax auditors hurt people. (Lots of jobs hurt people, but most don’t have the power to fine someone $10k or even to force someone to deal with an issue instead of ignoring you.)

To limit the harm, tax auditors must judge who was highly malicious, and bend the rules for many regular citizens who just screwed up (instead of trying to scam the government in a major way). This conflicts with:

I think this is my first properly structured job in the sense that there’s very little stuff happening that isn’t covered by documentation/regulations (i.e. it’s all by the books).

Judging malice is hard because everyone cheats on their taxes. (Not really everyone, but a lot of people.) Small cheating is normal and should basically be forgiven without hurting the person significantly. Sometimes the rules work OK for that and sometimes they are way too harsh. Only a tiny fraction of people are cheating in some kinda big way that actually needs to be cracked down on.

Bending the rules is hard, even if you want to, because you can’t just tell your supervisor. You have to learn to navigate office politics. And there could be quotas or some other kind of encouragement to catch lots of stuff. The incentives might not recognize or reward someone who focuses on catching big stuff. Also, some of the big cheats have friends in government who may pressure you to leave the case alone.

I’d guess a small minority of big cheats and mistakes are the constraint, but I’m not positive that they are (I don’t know the stats), and other people might disagree. I could see people believing that getting a little more tax revenue from large numbers of people could make a big difference, and wanting to make examples of random people to scare the rest into compliance. That kind of campaign that punishes some ~random people heavily is way worse to enforce than trying to find people who have more of an actual criminal mindset or people who made big errors.

Caveat: I have never been audited nor have I been an auditor. My context is US with a relatively complicated tax situation.

I have heard from accountants and people who have been audited there are three main types of audit:
(1) The type where they suspect you of fraud / evasion
(2) The type where they flag something on your return as either wrong or at high risk to be wrong
(3) The type where they select your return at random as a sample to measure compliance among the population at large, either for the whole return or for a particular type of situation

The first type is rare, but if you get the first type then lawyer up, say nothing, send exactly but only what they specifically ask for, and document everything to the hilt. One of the other types can become the first type if they uncover clear & convincing evidence of fraud. But if you’re not actually doing significant fraud, I’ve been told it’s pretty rare for them to allege it. IOW, when it comes to tax crimes I’ve been told they’re actually pretty reasonable and not looking to give normal people criminal records even as an example.

For the second type, it’s important to determine as quickly and as best you can what they are looking at and if they have some wrong data causing the interest (like they associated data about someone else with you, or a corrected form about you was sent by the deadline but they failed to account for it, or something like that).

I’ve been told that unless they have some wrong data you can document and clear up right away, in the second type of audit you should pay them some additional money quickly and close the case as soon as you can even if you’re ‘right’ under the facts & law of the situation. Of course if you find you made a mistake, the sooner you correct it the better. But even if you didn’t, auditors assigned to these cases are supposedly measured on extra revenue obtained vs. time they spend on cases. If you contest stuff and bury them in documents cuz you’re ‘right’, they’ll want more money to close the case vs. if you just give them a quick win. And I’ve been told that they’re actually kinda unreasonable and vindictive about this, will often keep demanding stuff to wear you down & waste your time/money, broaden the scope, or make ridiculous rulings you then have to appeal etc. It’s not that you can’t get out of this type of audit without paying extra, it’s that chances are you’d have been better off just paying some extra at the first opportunity.

If you get the third type, then documentation is your friend. Explain and show them documentation you have about the matter(s) they’re asking about, refute suggestions you made a mistake unless, of course, you did. If you have documentation for what you did I’m told they’ll usually close the audit. If you made a mistake sure they’ll want you to pay (along with interest and penalties) but that’s not how they’re being measured & so they’re not vindictive about it. So it’s actually common to come out of this type of audit without paying extra or having to jump through unreasonable hoops.

The biggest problem can be that you don’t immediately know which type of audit you’re under. An accountant can probably help with that some. I’m told if they suspect you of fraud you’ll probably know because they may show up at your door with a warrant or give legal service as opposed to simply sending a letter. But it can be hard to distinguish between types 2 and 3.

I think this is my first properly structured job in the sense that there’s very little stuff happening that isn’t covered by documentation/regulations (i.e. it’s all by the books).

I said this meaning that the work environment and expectations have been clear to me and nobody has asked me to e.g. work unpaid overtime, take work calls outside of business hours, or respond to emails over the weekend. These were all normal things at all of my previous jobs so it feels nice to have a job where that isn’t the norm.

The idea of going after big fish makes sense, both because they are the bottleneck and also because most people cheat small amounts and that’s relatively fine. I was naive about this because the first time I filed taxes as self-employed, my accountant asked if I wanted him to just claim some token amount as business expenses like $500, and I was appalled because I hadn’t documented business expenses and thought it would be cheating/lying/stealing to claim any amount without receipts/documentation. My old boss and my accountant both expressed the view that it was fairly normal to file taxes without full documentation, and my old boss specifically said that he’s ok with taking money from “the taxman” if he can get away with it. I mostly disagreed but I understand now where they were coming from and how that’s normal in business culture.

Bending the rules is hard, even if you want to, because you can’t just tell your supervisor. You have to learn to navigate office politics. And there could be quotas or some other kind of encouragement to catch lots of stuff. The incentives might not recognize or reward someone who focuses on catching big stuff. Also, some of the big cheats have friends in government who may pressure you to leave the case alone.

I’m sure there will be more office politics in my new position than my current one because I’m fairly isolated right now and do my job solo. For my next job I’m guessing there will be more collaboration and more complex measures I need to live up to which might bend my incentives the wrong way (towards flagging the small, easy fish even though they are fairly innocent).

I have read about auditors being fairly forgiving with issues like people not having receipts for some expense and stuff. They seem to understand that things go wrong in the day to day workings of business, so they aren’t harsh about that stuff unless they’re seeing evidence of malice or people actively trying to evade taxes over multiple years. I don’t know if this is actually the case though.

I’ll update how my training goes and what standards I’m expected to follow. If I can, I might also ask the big fish question during training to see if they agree with the idea that the big fish/super malicious tax evaders are the constraint and who we should be targeting. It’s not a full auditing job, and more like validating corporate tax returns. I’m guessing if I see any major issues, then I’d likely flag the case and it would go to an actual auditor.

This article has example of the CRA being overly harsh with someone making an honest tax mistake, after being given inaccurate information from their bank.

The woman was assessed taxes, penalities and interest from the CRA of almost $28k (CAD), after making the honest mistake of contributing to her TFSA while she was a non-resident. She fixed the mistake herself when she realized her error, and even brought it to the CRA’s attention herself. She wrote a letter asking them to waive the penalties, but they denied her request and instead charged her the $28k in fees. She ended up going through court with them, and did win the case in the end.

(I don’t know how common this kind of behaviour is from the CRA vs them being reasonable. But this does show that they sometimes are unreasonable, imo.)

I just found the actual judgement for the case.

The total amount she contributed as a non-resident was $31,061.11 CAD. The total amount she was fined was $27,640.74 CAD, which is almost the entire principle of her investment.

It also says at the bottom under judgement is that “The Second Decision is set aside and the matter returned for redetermination by a different delegate of the Minister.” So I’m not sure if it is even settled yet - the original news article I read made it sound like it was, but that may have been misleading.

An additional bad thing is: auditors need to do that judgement before actually engaging with someone. Like, if you’re a person or business and the tax office says they’d like to do an audit, the only real response is to hire and accountant and see it through. Maybe there’s some room for leniency but a lot of the harm has already been done. An auditor can’t pull out half way through; they have a responsibility to complete the audit to some standard, and that’s onerous on the subject even if the auditor is being as lenient as they reasonably can be.

Thanks for researching and sharing. I think that is a good example of the CRA being unreasonable. I should have just googled “CRA tax penalty examples” or something to try to find some before I shared non-specific memories of something I had read indicating the opposite, since that was likely biased.

Imo that does seem super unreasonable both in penalty amount and also considering that the woman made every effort to avoid benefitting personally from her mistake by correcting it, bringing it to their attention, and basically making it so that even if the CRA had done nothing, her mistake would not have benefitted herself or cost the CRA anything.

I wonder how consistent the CRA is with issues like this.

Just read some of the judgment and it’s appalling that her bank support agent consulted with a manager and then advised her that she could contribute to the TFSA as a non-resident.

Ms. Ifi consulted her Canadian bank representative to ensure that she was eligible to contribute. Ms. Ifi informed the bank representative that she was no longer a Canadian resident and the representative—after consulting his bank manager—advised Ms. Ifi that she could contribute to her TFSA.

It looks like this may be an issue in the CRA’s process here because they keep saying that they notified her and she continued to over-contribute, which is why they are insisting on the penalty.

The Delegate denied Ms. Ifi’s request on the basis that Ms. Ifi continued to make excess and non-resident contributions to her TFSA after she was notified that she had over-contributed in 2009. Ms. Ifi submits the Delegate’s decision was unreasonable because she was a Canadian resident in 2009, and she did not repeat the same mistake when she contributed to her TFSA as a non-resident after 2009.

Ms. Ifi’s Initial Request was denied (First Decision). The First Decision explained that Ms. Ifi had continued to make excess TFSA contributions along with contributions as a non-resident from 2010 through 2017, after the CRA notified her about TFSA excess contributions made in 2009. The CRA assessed $27,640.74 in tax, penalties and interest for Ms. Ifi’s excess and non-resident TFSA contributions, effectively wiping out her retirement savings.

(Emphasis Mine below)

The key paragraphs of the Second Decision are as follows:

… We determined that we cannot grant a request to cancel the tax in your particular situation.

In your letter, you stated that your financial institution did not notify you that you could not contribute to a TFSA as a non-resident.

After a thorough review of the information submitted and the facts of your case, we have determined that you continued to make excess and non-resident contributions to your TFSA from 2010 – 2018, after you were notified by the Canada Revenue Agency about TFSA excess made in 2009 by letter that was issued to you June 1, 2010. We have to confirm that, after reviewing the documentation submitted and information available, there are no circumstances that would support the cancellation of the tax on excess and non-resident TFSA contributions.

It is the individual’s responsibility to educate themselves about the TFSA rules after being notified.

The thing that doesn’t make sense to me is that the CRA is treating one type of mistake that they notified her for (excess contributions to TFSA while being a Canadian resident in 2009) as evidence that she should have educated herself on the rules and thus been liable for a different kind of mistake (contributing to her TFSA while being a non-resident AFTER 2009), which doesn’t make sense unless the CRA literally expects people who have been notified of any TFSA non-compliance to educate themselves on all TFSA rules and become a TFSA expert after that point… If so, that seems unreasonable to me, but I can’t even tell explicitly that that is what they are claiming they expected. It seems like the CRA might be confusing the two issues and basically thinking of the excess contributions as being a similar/same mistake to the non-resident contributions because they mentioned them together as if they were done at the same time. I wonder if this is some sort of gap in the CRA’s process where the two issues are getting conflated.

Nice, that crit is actually in this judgment:

Second, it was unreasonable for the Delegate to suggest that Ms. Ifi continued to make excess contributions after being warned. The Delegate failed to recognize that Ms. Ifi’s excess contribution in 2009 and her subsequent excess contributions resulted from different errors. Ms. Ifi did not repeat a previous mistake—the one the CRA warned her about—when she made an excess contribution in 2014. The excess contribution in 2014 arose due to the fact that Ms. Ifi had not accrued any TFSA contribution room as a non-resident, and as such, the 2014 excess contribution error was tied to Ms. Ifi’s status as a non-resident. If Ms. Ifi had remained a Canadian resident, her 2014 contribution would not have exceeded her cumulative contribution room accrued between 2010 and 2014, and Ms. Ifi would not have been assessed any liability for the 2014 to 2017 taxation years. In my view, this is similar to the situation in Sangha, where Justice Walker found that the delegate’s failure to distinguish between Mr. Sangha’s excess contributions made and withdrawn before June 2017, which were the subject of a previous notification letter, and his subsequent September 2017 contribution was unreasonable.


No source. My reasoning is that once an audit has been started an auditor: it needs to be completed according to some process. Depending on the system there might be leniency for honest mistakes, but the auditor can’t really bend the rules after that. There might be even worse cases where an algorithm flags ppl and the auditor doesn’t have any discretion, too.

Similar to how a police officer might have some discretion before something is written down, but if someone gets arrested or brought in for questioning then the officer can’t just drop it if they change their mind. (I guess that’d count as ‘misconduct’ or something like that).

One thing I didn’t account for: there might be room for some softer process beforehand. Like some off-the-record conversations so the auditor gets more of an idea. Tho, I know ppl who have gone through an audit (even tho they’re not doing anything illegal) – costs 4-5 figures. I have never heard of an auditor dropping an audit once it’s started. IDK if my jurisdiction has targets for auditors re cost recovery or things.