Non-Filer/Non-Registrant Program - Internal Audit Report
Corporate Audit and Evaluation Branch
March 2007
Executive summary
Background : The Non-Filer/Non-Registrant (NF/NR) program is mandated to help maintain the integrity of the Canadian tax system and protect the tax base by identifying and resolving non-compliance related to the filing of income tax and information returns as well as registration for the Goods and Services Tax/Harmonized Sales Tax (GST/HST).
Organizationally, the NF/NR program is positioned within the Trust Accounts Division (TAD) in the Taxpayer Services and Debt Management Branch (TSDMB). This program is one of four areas that the CRA committed to focusing on in its 2005-2006 to 2007-2008 Corporate Business Plan. The TSDMB has a strategic plan in place to support the CRA's overall compliance strategy, and this plan includes strategies to address non-filers and non-registrants.
NF/NR workloads are generated from a variety of sources, including internal and external referrals (or leads), regional and national identification projects, and CRA mainframe tools. The nature of these workloads places a premium on collaboration with other areas, both within TSDMB and in other branches of the Agency with related compliance mandates. In particular, linkages between NF/NR and overall work focused on the underground economy are important.
During the 2005-2006 fiscal period, the NF/NR program generated 934,671 individual, corporate and trust returns, and registered 4,283 clients for GST/HST, with an estimated fiscal impact of $2.6 billion.
2005-2006 resource allocations for the NF/NR program consisted of $30.9 million in salaries for 674 full time equivalents (FTEs) and $2.1 million in operating and maintenance (O&M) costs.
Focus of the Audit: The objective of the audit was to assess the adequacy of the management controls in place to achieve program goals and objectives. This audit was included in the approved Corporate Audit and Evaluation Branch Business Plan for 2005-2008.
Several aspects of the control framework, such as training and procedures, were removed from the audit scope during the preliminary risk assessment because they were determined to be areas of strength. For example, on-line courses for field staff and a comprehensive on-line NF/NR operations manual exist to support the NF/NR program.
In addition, the NF/NR operations manual includes comprehensive risk assessment criteria to support staff in their decision-making regarding leads received from other program areas of the CRA or external sources. Consequently, the management of incoming leads to NF/NR was determined to be low risk and not included in the audit scope.
The examination phase of the audit took place from April to September of 2006 in six selected tax services offices in three regions as well as the NF/NR Section at Headquarters. Methodology included audit tests and individual and group interviews with management and staff.
The audit was conducted in accordance with the International Standards for the Professional Practice of Internal Auditing.
Conclusion: The audit found that overall, the management controls in place are adequate for the NF/NR program to achieve its key objectives.
Procedural, training, budget and overall Headquarters (HQ) and regional communication mechanisms are well established.
Also, the NF/NR HQ function is implementing a renewed focus on identification projects that identify non-filers and non-registrants. This approach promotes timely, targeted action focused on areas of greatest risk, including the underground economy.
Aspects of NF/NR program management that require attention include:
- HQ and regional communication and collaboration with related programs;
- measurement of program performance; and
- quality assurance.
Horizontal planning and co-ordination need to be strengthened so that the NF/NR program is better aligned with broader compliance efforts at the Branch and Agency levels. A Special Initiatives and Compliance Liaison Section (SICL) was formed within TAD in August of 2005 for similar purposes; however, the mandate of SICL regarding roles and responsibilities for liaising with the Compliance Programs Branch (CPB) on behalf of NF/NR is not sufficiently clear.
Leads is the NF/NR term for referrals to other program areas such as audit for additional, specialised compliance work. The creation of outgoing leads is an essential activity of the NF/NR program. An audit test conducted on leads generated by the six offices selected showed them to be clear and well documented. However, there is minimal systematic involvement by HQ to support the field in terms of criteria for outgoing leads, timelines for working these leads, and providing feedback to the NF/NR sections on the usefulness of outgoing leads.
The existing NF/NR performance measures and indicators are sufficient in terms of assessing outputs (i.e. units of production and taxes assessed). By themselves, however, these measures and indicators are not comprehensive enough to provide management with a performance picture necessary to support strategic decision-making and priority setting. This is particularly important as a $33 million investment
in NF/NR influences tax assessments estimated to be in the range of $2.6 billion.
Quality assurance monitoring activities were primarily reliant on individual and ad hoc efforts by regions and local offices. National guidelines should be in place to ensure consistency with respect to standards for quality and monitoring frequency.
The NF/NR Section concurs with Internal Audit's findings and recommendations and has prepared actions plans to address all the identified areas of improvement to strengthen the delivery of this program.
Action Plans: As a result of the internal audit, NF/NR consulted with the Manager of the SICL section, who has revised the section's mandate to include NF/NR interests within the Trust Accounts Division and in strategic partnerships, as well as a requirement to formally document key discussions and decisions for continuity and follow up. The revised mandate will be communicated to all stakeholders and posted on the TAD website by June 2007.
NF/NR in HQ will work with Integrated Revenue Collections (IRC) to ensure a facility exists to ensure consistency for the handling of lead information. IRC has an implementation date of 2010. In the interim, by June 2007, HQ will advise the field to individually monitor and follow up outgoing leads.
HQ will develop and communicate to the field roles and responsibilities for analyzing and communicating the results of leads through updated guidelines and workshops that will be conducted by September 2007.
HQ will consult with the Continuous Improvement and Quality Assurance Section (CIQAS) to ensure monitoring of NF/NR outgoing leads during discussions for the 2007-2008 monitoring plan and the worksheets will be changed to reflect this.
To develop performance measures and indicators to accurately report NF/NR program outcomes, studies are underway/planned that include: subsection 152(7) assessments, NF/NR prosecution, and Statistical Services analysis of NF/N. This information will support a better and more comprehensive understanding of the effect of policies, processes and procedures on filing compliance in order to develop better strategic plans and priorities and will lead to improved performance measures and indicators. Initial results are expected by the end of fiscal 2007-08.
Working in collaboration with IRC and with Strategic Planning and Debt Management Research will lead not only to a better understanding of the effect of NF/NR activities, but also to the development of improved measurement tools and standards more reflective of what the program must and can accomplish. Initial measures will be developed during the course of fiscal 2007-2008.
NF/NR will develop national quality assurance guidelines, based on the package created in the Ontario Region, to be implemented no later than the third quarter of fiscal 2007-2008.
Introduction
The Non-Filer/Non-Registrant (NF/NR) program is mandated to help maintain the integrity of the Canadian tax system and protect the tax base by identifying and resolving non-compliance related to the filing of income tax and information returns as well as registration for the Goods and Services Tax/Harmonized Sales Tax (GST/HST).
Organizationally, the NF/NR program is positioned within the Trust Accounts Division (TAD) in the Taxpayer Services and Debt Management Branch (TSDMB). This program is one of four areas that the CRA committed to focusing on in the 2005-2006 to 2007-2008 CRA Corporate Business Plan. TSDMB has a strategic plan to support the CRA's overall compliance strategy as articulated in the Corporate Business Plan, and this plan includes strategies to address non-filers and non-registrants.
The NF/NR workloads are generated from a variety of sources, including referrals or leads from and to other program areas, regional or national identification projects, and CRA's mainframe tools such as the Systéme Universal Delpac System (SUDS). SUDS is a workload management tool with a variety of functionalities. Analysis of these sources allow for the research, contact and application of enforcement measures to help obtain compliance. Where appropriate and necessary, enforcement actions, including requests to file notices (TX11 and TX14), demand to file notices (TX14D) and tax assessments raised under subsection 152(7) of the Income Tax Act, will be issued to individuals and corporations. Referrals or outgoing leads may also be sent to other program areas within the Agency (i.e. Debt Management, Audit, and Enforcement) for additional compliance work.
The nature of the NF/NR program entails partnerships with other areas, both within TSDMB and in other branches of the Agency with specific compliance mandates, such as Compliance Programs Branch (the Underground Economy section in particular).
The Headquarters (HQ) responsibilities for the NF/NR program include:
- developing national guidelines, policy, procedures and training;
- providing input into the allocation of resources for program delivery;
- providing direction to the field; and
- monitoring program performance and recommending improvements when required.
In the regions, the NF/NR program is delivered in both Tax Centres (TCs) and Tax Services Offices (TSOs). In the TCs, the program is part of the Employer Services, Business Returns Division. In the TSOs, the program is part of the Debt Management Division.
The NF/NR units in the TCs are responsible for routine enforcement actions initiated by SUDS. This ensures TSOs only review complex accounts and take post-routine enforcement actions that include obtaining individual and corporate tax returns from the client and registration for a GST account where appropriate. Officers may also generate referrals in the form of leads to other work areas within the Agency (i.e. Debt Management, Audit, and Enforcement) for additional compliance work.
During the 2005-2006 fiscal period, the NF/NR program generated 934,671 individual, corporate and T3 trust returns, and registered 4,283 clients for GST/HST, with an estimated fiscal impact of $2.6 billion.
2005-2006 resource allocations for the NF/NR program consisted of $30.9 million in salaries for 674 full time equivalents (FTEs) and $2.1 million in operating and maintenance (O&M) costs.
Focus of the audit:
The objective of the audit was to assess the adequacy of the management controls in place to achieve program goals and objectives. This audit was included in the approved Corporate Audit and Evaluation Branch Business Plan for 2005-2008.
This program is one of four areas that the CRA committed to focusing on in its 2005-2006 to 2007-2008 Corporate Business Plan.
In the planning phase, the audit team conducted a preliminary risk assessment of the NF/NR program. The assessment identified the following high risk areas:
- strategic program direction;
- linkages highlighted by the transfer of the program from CPB to TSDMB;
- the management and quality of leads referred for additional audit work;
- and measures in place to report on program performance.
Several other aspects of the control framework, such as training and procedures, were removed from the audit scope during the preliminary risk assessment because they were determined to be areas of strength. For example, on-line courses for field staff and a comprehensive on-line NF/NR operations manual exist to support the NF/NR program.
In addition, the NF/NR operations manual include comprehensive risk assessment criteria to support staff in their decision-making regarding leads received from other program areas of the CRA or external sources. Consequently, the management of incoming leads to NF/NR was determined to be low risk and not included in the audit scope.
The examination phase of the audit took place from April to September of 2006 in six TSOs in three regions as well as the NF/NR Section at Headquarters. The TSOs were representative in terms of office size and program results. Methodology included audit tests and individual and group interviews with management and staff.
The audit was conducted in accordance with the International Standards for the Professional Practice of Internal Auditing.
Findings, recommendations and action plans
1.0-Strategic Program Direction
The Special Initiatives and Compliance Liaison Section (SICL) was created in August 2005, to help coordinate efforts between TAD programs and related compliance efforts across the Agency. However, reviews of plans and meeting minutes between SICL and TAD, as well as interviews with management at HQ, established that NF/NR was not being integrated into these plans. SICL's roles and responsibilities for liaising with the Compliance Programs Branch (CPB) on behalf of NF/NR are not sufficiently specific. Parameters are not clearly defined to ensure that key discussions and decisions are formally documented and acted on to ensure that projects and compliance initiatives are co-ordinated between NF/NR and CPB.
The NF/NR HQ program has implemented a renewed focus on improving identification projects that identify non-filers and non-registrants who are not in the CRA systems and not under computer-controlled delinquent action. These activities are conducted at the local level using local intelligence and indicators. They cross program lines and are key to identifying hidden non-compliance i.e. UE. Currently, 20% of NF/NR funding is allocated to projects carried out in tax services offices. HQ has recently devoted significant attention to these through additional resources, information technology support and a dedicated activity code. As well, local project coordinators were appointed to support oversight and continuity, field visits were conducted by NF/NR to communicate and implement national procedures for consistency. HQ continues to develop and document roles and responsibilities to ensure that NF/NR project information is captured, communicated and analyzed at all levels for emerging trends.
Recommendation
The mandate for SICL should include NF/NR within TAD and in strategic partnerships (e.g. CPB). The mandate should also include a requirement to formally document key discussions and decisions for continuity and follow up, particularly with respect to projects to ensure these efforts result in the availability of national data reports that would allow HQ to adjust project focus year over year to target areas deemed to have the greatest risk of non-compliance.
Action Plan
Following discussions between the Manager of SICL and the NF/NR section, the mandate of the SICL section was revised to include coordination regarding the development and implementation of specific identification and compliance/enforcement projects, in conjunction with the Non-Filer/Non-Registrant, Examination and Taxable Benefit and Enforcement Programs Sections of the TAD, as well as the Compliance Programs Branch (CPB) and Accounts Receivable Division. Some projects will also involve partnerships with the provinces.
NF/NR will communicate the revised mandate to all stakeholders and post it on the TAD website by June 2007.
2.0 Program Management
2.1 Management of Outgoing Leads
Outgoing leads are referrals to other areas for additional compliance work. The generation of leads is an essential activity of the NF/NR program. Effective leads contribute to maintaining a level playing field for all taxpayers and support the CRA's efforts to combat the underground economy.
Audit tests performed in the TSOs visited concluded that leads prepared by NF/NR staff were clear, descriptive and supported by documentation when available. However, controls were not in place to:
- manage outgoing leads from creation to resolution;
- foster communication from leads recipients to NF/NR; or
- support HQ oversight on the quality of leads.
Based on observation and interviews, the SUDS Outgoing Leads option is not effective for managing or capturing the results of outgoing NF/NR leads. None of the six offices visited used the option for this purpose. Five of the offices did not use any leads registry to manage leads from origin to disposition; the sixth office used a locally developed registry to manage its leads. Lack of data on results of outgoing leads will result in lost opportunities to identify high risk areas of non-compliance in a timely manner and loss of revenue.
In all offices visited, formal agreements regarding criteria for leads generation, timeliness standards for working leads, and the provision of feedback from Audit to NF/NR did not exist. Five of the six offices did not provide current criteria regarding leads generation on a regular basis to their NF/NR sections. The NF/NR sections were not informed of tax recovery potential to help improve the effectiveness of outgoing leads and to ensure that they met or surpassed the risk assessment criteria for acceptance into Audit's inventory banks.
Quality monitoring for leads is currently limited to ad hoc efforts by local NF/NR management. There is no national quality assurance program for leads or any systematic involvement by HQ to demonstrate that leads generation is effective in terms of enhancing compliance and revenue. While TSDMB's Continuous Improvement and Quality Assurance Section (CIQAS) began including NF/NR in some site visits in 2006, this effort cannot be relied on to provide effective national oversight for all sites in a timely manner, especially considering that CIQAS only covers some offices each year and NF/NR is only included in some of those reviews.
Recommendations
HQ should develop and implement a national leads registry to ensure a level of consistency nationally for the management of outgoing leads information.
HQ should establish and communicate roles and responsibilities for analyzing and communicating the results of leads.
CIQAS monitoring of NF/NR should include the appropriateness and quality of outgoing leads.
Action Plan
NF/NR in HQ will work with Integrated Revenue Collections (IRC) to ensure a facility exists to ensure consistency for the handling of lead information. IRC has an implementation date of 2010. In the meantime, by June 2007, HQ will advise the field to individually monitor and follow up outgoing leads.
HQ will develop and communicate to the field roles and responsibilities for analyzing and communicating the results of leads through updated guidelines and possibly workshops that will be conducted by September 2007.
HQ will consult with CIQAS to ensure monitoring of NF/NR outgoing leads during discussions for the 2007-2008 monitoring plan and worksheets will be changed to reflect this.
2.2 Availability of Data
SUDS uses the Platinum Report Facility (PRF) computer software package to produce management information, reports and statistics. The SUDS Reports & Statistics option is not used to its maximum potential by field managers because the report function is not user friendly and accessing reports is difficult. Based on observation and interviews, PRF is a complex system with limited training support. In addition, there is a lack of awareness of its capabilities.
To address the challenges field users have experienced with PRF, the Performance Reporting & Budgeting Section in HQ provides program results monthly by posting program information from the PRF reports as spreadsheets on the TAD website. However, the spreadsheets do not fully meet the needs of field management in terms of information on inventories, individual production, project files, and leads.
HQ has also been creating reports from the PRF library upon periodic request from individual field managers. This support is not addressing the root issue, that the intended users of the system are not able to use it. Therefore, the use of SUDS as a management tool to facilitate program delivery is not maximized.
Recommendation
HQ should ensure that field managers are provided with adequate training and support to obtain the SUDS Reports & Statistics that they need.
Action Plan
HQ will provide guidance to field managers (team leaders) on reports and statistics by arranging for an experienced and knowledgeable officer to develop clear instructions for obtaining statistics from PRF by September 2007. In addition, because PRF reports can be complicated to retrieve, HQ will enhance the library of the most utilized reports.
2.3 Sharing Best Practices
Sharing best practices within an organization is an effective method of ‘knowledge management', a process of capturing and sharing collective expertise to fulfil an establishment's mission.
For the NF/NR program, best practice sharing was dependent on ad hoc efforts, primarily by individual field offices. The Vancouver TSO Revenue Collections website, in particular, has a well-developed ‘Best Practices' section with significant, relevant content.
Formal, national guidelines for sharing best practices did not exist and the audit found that HQ was not fully leveraging the possible benefits of spreading practices across the 37 tax services offices. Although CIQAS communicates best practices identified during their field office visits to Debt Management divisions, visits specifically to the NF/NR sections are relatively new and not all offices are included in every field visit.
Recommendation
HQ should formalize the national sharing of best practices, e.g. on the TSDMB or TAD website.
Action Plan
HQ has a process and facility in place to share best practices on Identification Projects (IP screens) that they have been rejuvenating; however, along with that HQ plans to enhance the HQ website with the assistance of Vancouver TSO NF/NR to ensure that all best practices are promoted and shared across the country in a formalized fashion by September 2007.
In addition, CIQAS reports on best practices following their monitoring visits.
3.0 Program Measurement and Monitoring
3.1 Program Measures and Indicators
Historically, the NF/NR program reports on units of production and dollars assessed, measures that provide a reasonable gauge of activities or effort. However, the program also needs performance measures and indicators related to program outcomes and results in order to provide a complete performance picture and support strategic decision-making.
Outcome measures and indicators to assess the impact of NF/NR's actions, such as gauging change in non-filer behaviour, are not in place. While this may raise the challenges typically faced when quantifying or estimating non-compliance, the development of strategic measures would contribute to more informed decision-making, and the ability to present a more complete picture of the NF/NR program's contribution to the Agency's corporate priorities. Such indicators would also help align activities to achieve the desired results and inform investment decisions. The NF/NR program shows a relatively significant fiscal impact from its efforts, therefore a full and detailed understanding of its impact is particularly important.
Recommendation
Performance measures and indicators should be developed to report on the efficiency and effectiveness of the overall program in terms of outcomes to support strategic decision-making for the Agency.
Action Plan
Compliance Research Section, CPB, conducted a study on subsection 152(7) assessments. Debt Management Research Section, TSDMB, plans on a study regarding NF/NR prosecutions in 2007-2008. Statistical Services Branch is working on a statistical analysis of NF/NR, which they hope to complete in 2007-2008. In addition, NF/NR met with the Debt Management Research Section in January 2007 to link them to the bottom up reporting (Identification Projects) which will assist in the development of additional indicators.
The IRC Team has set up a Performance Measurement group to assist in the development of indicators and the Budget and Statistical area has been representing NF/NR at IRC meetings. IRC has a target date of 2010.
3.2 Quality Assurance
Quality assurance activities provide evidence that tasks are performed effectively and ensure high-quality production. National guidelines for quality assurance to monitor the quality of NF/NR activities undertaken in the field were not in place. Monitoring for quality has been limited to ad hoc efforts in each local office or region. Furthermore, results of the informal quality assurance activities in the field were not communicated to HQ for national analysis to identify opportunities for improvement in terms of economy, efficiency and effectiveness.
Consequently, NF/NR in HQ and the regions may not be able to identify and address deficiencies in a timely manner to improve the overall management and delivery of the program. The NF/NR program was added to the responsibilities of TSDMB's CIQAS Section during the 2005-2006 fiscal year. However, monitoring visits to the NF/NR sections in the field offices do not have the frequency or scope to provide annual, national assurance for all sites in a timely manner.
The Ontario Region had developed regional quality assurance guidelines to ensure consistency and continuity in its TSOs. These guidelines have been shared informally with some regions.
Recommendation
National quality assurance guidelines for regions should be developed and communicated.
Quality assurance results should be used to support management at all levels in their decision-making.
Action Plan
The Ontario Region was contacted during the fourth quarter of 2006-2007 for a copy of their Quality Assurance guidelines and measures will be taken to adapt them to NF/NR and the national guidelines by December 2007.
In addition, additional resources will be provided to CIQAS in fiscal 2007-2008 to ensure that more of the field visits include a review of the NF/NR program.
Conclusion
Overall, the NF/NR program has the management controls in place to achieve its key program objectives.
The NF/NR programs needs greater support from the SICL section to ensure its activities are integrated into broader compliance plans and efforts.
Additional opportunities for improvement were identified that should help facilitate and improve program management and delivery. The management of outgoing leads should be improved to track leads from creation to final disposition, including feedback to the originators. A forum should be available to share best practices on a national basis and to communicate identified efficiencies in a timely manner. NF/NR should support the field with regard to monitoring activities related to quality assurance by establishing national guidelines for consistency. Training and support for managers on SUDS Reports & Statistics option need to be strengthened to ensure that this tool is used to its maximum potential.
The existing program performance measures are sufficient to assess routine program activities. However, NF/NR needs to develop performance measures and indicators to accurately report program outcomes, in order to provide a complete performance picture of its portfolio to support strategic decision-making for the Agency.
NF/NR concurred with Internal Audit's findings and recommendations and have prepared actions plans to address the identified areas of improvement and strengthen the delivery of this program.
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