Audits don’t happen randomly

Commissioner and chief executive of the Canadian Revenue Agency reminds us in a story in the Financial Post that there are no random audits in Canada.

If your tax return is selected for audit, the CRA has identified some aspect of your return, be it a deduction claimed or an industry that it is focusing on, for additional scrutiny.

This should be reassuring to the majority of filers, since most people earning a wage have limited deductions available to them, compared to corporations. But should there be some percentage of tax audits selected at random from the entire population?

9 thoughts on “Audits don’t happen randomly

  1. I think that, indirectly, some returns are selected for audit on a random basis. In 2005 the Auditor General had a look at how the CRA verified T1s and T3s. The report is at:$file/20051103ce.pdf

    In paragraph 3.11, it says that 2.7% of returns are selected for review, mostly based on getting a high score on a test of the risk that the return was not done properly. However, some of these returns are also selected at random. So the CRA takes a harder looks at these, and if still not satisfied, then I think they do the audit. So, the actual selection of the audit target is not random, but it is possible to be a review target through random selection and consequently an audit target if something is fishy on your return.

    There is another interesting section in this report. In paragraph 3.29, the Auditor General reports that the CRA is not detecting taxpayers who overcontribute to their RRSP (and are therefore liable for a penalty if more that 2K over the limit). Well, last tax season, several clients at my firm were hit with review letters from the CRA about possible RRSP overcontributions. So, one way to predict what the CRA will be checking on is to see what the Auditor General is nagging them about.

  2. Whoa whoa whoa – I think Edmund’s right. I think the Commish meant that they don’t just pull SIN’s out of a hat and try and nail you, instead applying some logic to their audit process.

    If you recall SOA classes, if your instructor mentioned it (or was it my firm-sponsored training class for the UFE?), there’s a higher skew towards the big-money people, with a smaller distribution on smaller returns.

    After all, CRA wants to catch the big huge frauds, not rinky-dink cheaters who cost more to investigate than they’re likely to recover in revenue.

    Having said that (that must be what he meant in FP), Edmund’s middle paragraph hits the gut of what I was going to say so I’m not going to repeat myself – well said E! :)

  3. The more I think about it, the more I believe there is a certain class of returns that don’t even get thrown into the hat at all. For these returns I think the probability of being audited isn’t just approaching zero, it is zero. At least I hope the government is smart enough to apply cost-benefit analysis to their audit process.

  4. Oh for sure, free ICAO tax clinic returns pop to mind. :)

    The only reason it wouldn’t be ‘absolute zero’, would be if the SIN is associated (through marriage, tenancy) with a sketchy return.

  5. The CRA acts is a very dishonest fashion. They lie about policy all the time. Truth is they audit lottery system and for specific reasons. THey also waste a great deal of time hammering the same people over and ever again like its an ego game, meanwhile real evaders are raunning rampant cuz they know the i’s and t’s to have in place.

    People are funny this way. After all, both the taxpayer and the CRA agents are neighbors … so why not treat each other as people. The CRA has a huge non social workforce and a bad attitude to top off the dishonesty. THis does not support compliance from the public.

    Like most Canadians, I realize that taxes are nessesary BUT to much of our money is wasted on foolish things like Flahertys salary. We could save so much money by being honest and simplying the whole process. Forget all the rules and ratios – tax people 20% accross the board. It makes no sense to have credits here, there divide by 15% etc etc. It also makes no sense to punish people who work hard to increase their incomes. Someone who makes 100k per years should not pay a bigger percentage than somone who earns 30k per year. All that does is discourage people from moving up and reporting their incomes.

    Some people will always cheat, but that percentage is pretty small. The rest of us dont need to be harassed by pencil pushers with no socials skills such as Flaherty who destroyed income trusts then hires 4400 more CRA auditors. WHat for? All those losses he piled up created capital losses people will be writting off for years to come.

    Canada is a pretty corrupt system. Why not just tax people 20% across the board. No deductions, no special rules, credits … 20% thats it. I bet we’d see alot of people that are behind file their taxes.

    As for the welfare bums who cry foul – you guys are takers not giver so shut up and take what we give you with a smile – not attitude.

  6. I agree Tim. If taxes were deducted from wages, we wouldn’t have to fight corruption in the CRA. I would like to see a graduating percentage though. Campbell’s HS, is so wrong, it’s sick. We all know Campbell is for big business. He is having the low income families pay the same percentage as the wealthy. The HST, should be graduated as well. It would be such a relief not to have to contend with the CRA. Let the big business fight with the CRA, for a change. Just think, how much we taxpayers would save if, the CRA could be chopped in half, or more.

  7. I imagine HST will have the same rebate strcuture that low-income taxpayers get with GST, so in that sense it is “graduated”, as refunds will be given out to those with lower incomes.

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