Taxpayers on the hook to review returns: Woodyard
By Paul Russell, AdvocateDaily.com Contributor
The Canada Revenue Agency (CRA) is limited in terms of how far back it can look into back tax returns, but don’t assume that will protect you from being audited for past statements, says Toronto tax litigator Adrienne Woodyard.
“Many individuals assume that they're safe from a CRA audit once the three-year limit has expired for a tax year (four years for non-Canadian corporations), but there are many situations in which the limitation period will be extended,” says Woodyard, partner with DLA Piper (Canada) LLP.
Woodyard tells AdvocateDaily.com that many cases where the CRA seeks to look past the usual time limit involve errors or omissions — any kind of "misrepresentation" in CRA parlance — that are attributable to carelessness, neglect, wilful default or fraud, even if the return was prepared by a professional.
“It’s a common, but misguided belief that if you had your return prepared by an accountant, the CRA won’t be able to prove that errors in it were attributable to carelessness, neglect or wilful default,” she says. “But there are many cases in which taxpayers have been held liable even when they have farmed out the task to an expert.”
Reassessments of accountant-prepared returns beyond the usual time limit generally fall into three categories, Woodyard says, adding that the first group comprises individuals who fail to disclose complete or accurate information to their accountants.
“Those are the easier cases for the CRA to argue," she says. "If you give your accountant the wrong numbers, or don’t tell them about all of your sources of income, that will usually be considered at least carelessness or even wilful default."
The second group includes cases “where there was no intention to mislead — innocent mistakes,” as Woodyard describes them — such as a transcription error that results in an underreporting of income.
“This is typically the sort of error that would have been detected if the taxpayer had actually reviewed the return before it was filed,” she says. “If no effort was made to check the return, taxpayers will usually be considered liable on the basis of carelessness or neglect.”
Woodyard acknowledges that many people do not take the time to check their accountant-prepared returns.
“It is understandable— taxpayers may feel they don’t have the knowledge or technical expertise to assess what their accountant has done, so they don’t bother. Also, if people wait until the last minute to file their taxes, they may not feel they have time to sit down and do a meaningful review,” she says.
Woodyard says the third category of misrepresentation cases are the most difficult ones, where the error is innocent and also a “technical one that the accountant missed and is beyond the ability of the taxpayer to detect.” In those cases, the question of whether the taxpayer's conduct rises to the level of carelessness or wilful default is typically determined by whether they made “reasonable efforts” to review the return.
“Even if the taxpayer is not in any position to spot the error, and it escaped the notice of their accountant, culpability usually comes down to the question, 'Did the taxpayer actually conduct a meaningful review of the return?” she says. But, “in many cases, the taxpayer quite reasonably argues, ‘This was a technical error, what difference would it have made anyway? I never would have spotted the problem.’ But courts have generally been reluctant to allow taxpayers to escape liability on that basis.”
While that may seem unfair, especially if the tax preparer made the mistake, Woodyard concedes the logic in this approach.
“We have a self-assessment system that relies heavily for its integrity and fairness on taxpayers’ providing accurate information, and since taxpayers bear the burden of completing returns it follows that they must make some effort to oversee the work of the person they have hired," she says.
When having a tax return prepared by a professional, Woodyard says people should review the document to the best of their ability, and flag any number that doesn’t seem right.
“You should be able to say you went through your return, and if there is a record of some discussion — such as an email that confirms, ‘I have reviewed, and all appears to be in order’— this may be helpful in demonstrating that the taxpayer exercised the requisite degree of diligence," she says.
Woodyard says the CRA has implemented some ways to minimize the most common errors in returns, such as the matching program, which automatically compares the return to tax slips issued by third parties such as employers and banks.
“If the income reported in your return is different from what was already reported to the CRA by a third party, the system will usually automatically flag the error,” she says. “That is one way the CRA has attempted to remove some of the compliance burdens from taxpayers — to help them help themselves. In addition, there is CRA-certified commercial tax preparation software available to consumers, which is quite effective at flagging errors."
Woodyard says people should also be careful about who they hire to prepare their returns.
“Some tax preparers may not have the expertise to deal with complex filings, and reliance on friends or family who ‘know how to do this stuff’ may not be the safest option even for basic returns," she says.
“Our tax system is, of necessity, a complicated one, and the preparation of tax returns is not an intuitive process for most people. But your chances of resisting a reassessment after the expiry of the usual time limit are only as good as the efforts you made to ensure the return was correctly prepared,” she says.