Report 2—Income Tax Objections—Canada Revenue Agency
Audit at a Glance Report 2—Income Tax Objections—Canada Revenue Agency
What we examined (see Focus of the audit)
Taxpayers who disagree with the Canada Revenue Agency’s assessment of their tax returns have multiple avenues to resolve their disputes. If they have additional or new information or would like further review of their assessments, they can contact the Agency by phone, in writing, or online. Taxpayers also have the right to file objections, which require impartial and timely review by the Agency.
This audit focused on whether the Canada Revenue Agency was efficiently managing income tax objections. To assess efficiency, we looked at the time the Agency took to provide taxpayers with decisions on their objections. We also examined the various stages in the objection process to identify where delays occurred. For income tax appeals, we examined how the Agency used and communicated information on court decisions.
We did not examine the appeals process in the courts, the review of how performance associated with appeals to the courts was measured, or the validity of assessment decisions. We also did not examine notices of objection or appeals that involved the goods and services tax, the Canada Pension Plan, or Employment Insurance.
Why we did this audit
In the 2014 calendar year, the Agency processed roughly 29,640,000 income tax returns, with the related tax income totalling almost $235 billion. During that same calendar year, taxpayers filed 66,864 objections, for which the income tax amount in dispute totalled $4.8 billion. As of 31 March 2016, the Agency had an inventory of 171,744 objections outstanding for personal and corporate income taxes, which represented more than $18 billion of federal taxes.
This audit is important because taxpayers who are not satisfied with their income tax assessments have the right to impartial and timely reviews of their tax returns. Taxpayers and the Agency may incur significant costs in time and resources as a result of undue delays.
What we concluded
We concluded that the Canada Revenue Agency did not process income tax objections in a timely manner.
Although the Agency had developed and reported performance indicators for the objection process, the indicators were incomplete and inaccurate. Specifically, there was no indicator or target for the time that taxpayers should wait for decisions on their objections.
In addition, the Agency did not adequately analyze or review decisions on income tax objections and appeals, and there was insufficient sharing of the results of these objection and court decisions within the Agency.
What we found
Processing objections and measuring results
Overall, we found that the Canada Revenue Agency took too long to process income tax objections, which contributed to a backlog of the inventory of objections. We also found that it did not adequately measure its performance results. What the Agency reported as the time to process an objection was shorter than the length of time taxpayers actually waited. The Agency’s method of measuring performance omitted certain steps in the objection process; therefore, its reported performance results for the time it took to process objections were inaccurate.
These findings are important because under the Agency’s Taxpayer Bill of Rights, taxpayers have the right to a formal review and subsequent appeal. They also have the right to receive timely information. The longer it takes to process objections, the higher the cost to taxpayers. To avoid additional interest, taxpayers can pay the amount in dispute when they first file their objections or at any time when there is a balance outstanding. Otherwise, they must pay interest later if their objections are not allowed. Taxpayers may incur high costs, given that it can take months, or even years, for the Agency to make a decision.
The Agency needs to take all steps in its process into account to measure and report on the time required to process an objection. Without this information, taxpayers cannot determine how long they will have to wait for decisions on their objections, and the Agency cannot determine whether it is improving or getting worse in meeting its mandate for timely review of objections.
Recommendation. The Canada Revenue Agency should provide taxpayers with the time frames in which it expects to resolve their objections. Time frames should be based on objections’ level of complexity.
Recommendation. The Canada Revenue Agency should develop and implement an action plan with defined timelines and targets to reduce the inventory of outstanding objections to a reasonable level.
Recommendation. The Canada Revenue Agency should conduct a complete review of the objection process to identify and implement modifications to improve the timely resolution of objections.
Recommendation. The Canada Revenue Agency should define what it considers the timely resolution of an objection. It may look to other comparable organizations to help it determine what is reasonable.
Recommendation. The Canada Revenue Agency should modify its performance indicators so that it can accurately measure and report on whether it is meeting its mandate to provide a timely review. These indicators should include all steps in the process from the time the objection is provided by the taxpayer, and they should be consistent year over year so that the Agency can identify trends and assess performance over time. The Agency should also report these indicators, related targets, and results to Parliament and communicate them to taxpayers.
Recommendation. The Canada Revenue Agency should add appropriate controls to its objection process and its information systems to ensure the integrity of its data.
Communicating the results of objections within the Agency
Overall, we found that the Agency did not adequately share information about the results of objections or appeals with the Agency’s auditors, assessors, or appeals officers, which restricted its ability to learn and to improve its performance and processes. We also found that 65 percent of objections accepted and processed by the Canada Revenue Agency were decided in favour of the taxpayers for either all or part of the disputed tax amounts.
These findings are important because in our view, assessment decisions that are overturned through the objection process or through the courts may signal inconsistencies in assessment or objection processes. Sharing information about overturned assessments could help assessors, auditors, and appeals officers deliver accurate and consistent decisions, which could ultimately reduce the numbers of objections and appeals.
Recommendation. The Canada Revenue Agency should review the reasons objections are decided in favour of taxpayers so that it can identify opportunities to resolve issues before objections are filed.
Recommendation. The Canada Revenue Agency should ensure that decisions on objections and appeals are shared within the Agency in such a way that those performing assessments can use that information to improve future assessments.
Entity Responses to Recommendations
Canada Revenue Agency agrees with our recommendations, and has responded (see List of Recommendations).
|Report of the||Auditor General of Canada|
|Type of product||Performance audit|
|Completion date||8 July 2016|
|Tabling date||29 November 2016|
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