Five myths that prolong tax disputes

Looking for a quicker resolution to your clients’ tax disputes? Avoid falling into the traps created by five common beliefs about the CRA’s audit and appeal policies that the agency has advised me are mistaken.

CRA auditors and appeals officers want to steer clear of protracted tax disputes, just as much as you do. Misinformation or lack of communication drains the agency’s resources, steals time from other enforcement work, and slows the tax system’s operation. That’s why the CRA’s policy is to encourage dispute resolution at the earliest stage of the tax administration process.

Yet myths continue to spur taxpayers and their advisers to behave in ways that thwart easier, earlier resolution. Granted, some of these notions might have historical precedent. And, some taxpayers and advisers might still be experiencing audit activity that’s out of step with current guidelines. However, the CRA is quite clear that these activities no longer represent CRA policy. You can help reinforce current policy by helping me bring any breaches to the CRA’s attention. 

MYTH 1:

The CRA’s appeals branch will reject my appeal unless I bring it something new that I didn’t provide during the audit stage.

The appeals branch is mandated to review objections to CRA (re)assessments fairly and objectively. Current CRA policy says new information or evidence is not needed for appeals officers to review and decide on an assessment’s correctness. Generally, it is the CRA’s view that your best bet for avoiding, or quickly ending, a dispute is to present your auditor with all the facts at your earliest opportunity. Holding back information for the appeals stage is generally counterproductive.

MYTH 2:

Appeals officers perform their own independent audits.

Appeals officers do not audit. They review assessments, weigh evidence and apply the law based on the facts available. New information received by the appeals officer, if material to the issue being considered, may be sent back to the auditor for further consideration. Auditors and appeals officers are equally qualified to apply judgment to assessments. When auditors receive files from appeals, they may change their mind in light of any new information. In fact, if the auditor had the information during the audit, the auditor might not have made the same initial assessment. This type of situation adds significant inefficiencies to the dispute resolution process.

MYTH 3:

The auditor of my client might raise the issue of civil penalties, hoping that I will encourage my client to back away from any dispute.

The CRA has stated to me that it does not support such a strategy. The CRA is committed to applying the third-party penalties fairly, consistently and only when justified. The CRA values the contribution of tax professionals to the tax system’s continued health. The CRA explicitly recognizes the responsibility of tax professionals to act in their clients’ best interests — including their right to minimize their tax bill within the law. Procedural checks and balances are in place to ensure civil penalties are applied appropriately, including a dedicated CRA review committee.

MYTH 4:

The auditor might suggest large assessments or gross negligence penalties to encourage settling a dispute.

Again, such a tactic would be in clear breach of CRA policy. The CRA only proposes assessments and penalties after careful consideration and appropriate quality control review.

MYTH 5:

Technical staff  in the CRA’s compliance branch tend to side with their auditor colleagues, so my chances for success are better with appeals.

The CRA supplies its auditors with the resources they need to apply tax laws uniformly. The Legislative Application section of the CRA’s compliance branch is a resource that provides technical guidance for the branch’s auditors. These technical specialists aim to ensure the law is interpreted and applied objectively and consistently. In particular, they are required to consider previous CRA positions, including those of the Income Tax Rulings Directorate.

When it comes to tax audits and appeals, I believe that CPAs can help their clients make the best decisions about their options by understanding the CRA’s current policies. Approaching tax audits with openness and cooperation can go a long way to getting audit issues resolved efficiently and effectively. 

You can find out more about “What you should know about audits” and “Objections and appeals” on the CRA’s website.

KEEP THE CONVERSATION GOING

I want to hear from you. What’s been your experience with the audit and assessment process? How might things be improved? Please post the details below.

CPA Canada’s Tax Blog is designed to create an exchange of ideas on tax policy and practice issues, and their impact on those who practice tax. Your comments can provide helpful input into the public interest advocacy positions developed by CPA Canada.

About the Author

Gabe Hayos, FCPA, FCA, ICD.D

Vice-president, Taxation, CPA Canada

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