Internal Audit – Administered Activities Accounts Receivable Write-Offs

Final Report

Audit, Evaluation, and Risk Branch

January 2021

Executive summary

The Canada Revenue Agency (CRA) is responsible for collecting tax debts that are generated by administering various acts, including the Income Tax Act and Excise Tax Act. The CRA collects these debts on behalf of the federal, provincial, and territorial governments.

In order to effectively manage the CRA’s volume of outstanding debt, the Collections and Verification Branch may administratively write off or write down^{Footnote 1} accounts as uncollectible when it confirms that all avenues of collection have been pursued and exhausted.

There are 2 types of write-offs: non-recoverable and administrative. Statutes like the Bankruptcy and Insolvency Act and various statutes of limitations impact the collectability of outstanding debt. When debt becomes uncollectible due to these statutes, the CRA permanently removes it from its systems and determines the write-off to be non-recoverable. Unlike non-recoverable write-offs, administrative write-offs are retained in CRA systems and if they were to become collectible at a future date, the debt would be reinstated.

The objective of this audit was to determine whether sufficient and appropriate internal controls are in place so that the processes for writing off tax-related accounts receivable are efficient, effective, and consistently applied. The audit focused on the existing write-off process for accounts receivable for administered activities. It included all tax streams collected by the CRA. The internal audit team conducted a file review of write-offs from the 2017-2018 fiscal year. The Data Analysis Section of the Audit, Evaluation, and Risk Branch also reviewed 4 years of data related to write-offs from April 2014 to March 2018.

The use of administrative write-offs has allowed the Collections and Verification Branch to focus its efforts on more immediately viable accounts by removing accounts with low collectability from active inventories. This strategy is sound. However, the internal audit team found an absence of procedures driving timely reviews and approvals of write-offs because there is a lack of parameters defining what “timely” means. On the other hand, it was confirmed that approval processes for write-off submissions were documented and accessible. When the audit team further examined current processes, they found that data analytics and business intelligence could be better used to gather data from write-offs in order to improve collections and compliance strategies.

Finally, the audit team also identified an issue with the method used to calculate production dollars and units^{Footnote 2}. This method does not provide a representative measure of the use of write-offs in the Collections Program’s performance.

Summary of recommendations

The Collections and Verification Branch should review and update its procedures in order to increase consistency in the required documentation and processing of write-offs. This should also include controls to ensure that write-offs cannot be processed without appropriate approvals. Quality assurance processes should be updated to include these factors in their reviews.

The Collections and Verification Branch should also develop and implement parameters for what is considered a “timely” write-off. Developing and measuring timeliness can also assist the Branch in developing performance measures that better illustrate the impact that write off production has on overall program results.

Finally, the Collections and Verification Branch, along with other CRA branches, should systematically review and analyze write-offs in order to improve collections and CRA compliance strategies.

Management response

The Collections and Verification Branch agrees with the recommendations in this report and has developed related action plans. The Audit, Evaluation, and Risk Branch has determined that they appear reasonable to address the recommendations.

 

1. Introduction

The Canada Revenue Agency (CRA) administers the Income Tax Act, Excise Tax Act and various other acts. It is responsible for collecting tax debts that occur through the administration of these acts. The CRA collects these debts on behalf of federal, provincial, and territorial governments.

When a debt cannot be collected, it is considered an uncollectible debt. Removing uncollectible debt from active inventories allows the CRA to more accurately reflect the net realizable value of the total accounts receivables. The act of removing the uncollectible debt from inventories is referred to as a write-off.

There are two types of write-offs: non-recoverable and administrative. Section 25 of the Financial Administration Act is the authoritative statute allowing the Treasury Board to write off debt. The Debt Write-Off Regulations, 1994 outlines the conditions for writing off debts and stipulates who has delegated authority to approve write-offs. Other statutes like the Bankruptcy and Insolvency Act and various statutes of limitations impact the collectability of outstanding debt. When these statutes determine that debt is uncollectible, the CRA permanently removes it from its systems and determines the write-off to be non-recoverable.

In order to effectively manage the CRA’s large volume of outstanding debt, the Collections and Verification Branch may administratively write off or write down^{Footnote 3} accounts as uncollectible when it confirms that all avenues of collection have been pursued and exhausted. Considerations for determining if a debt is uncollectible include the following:

• There is no reasonable prospect of recovery.
• The debtor cannot be located.
• The debtor cannot pay.

Once a write-off or write-down is proposed, the delegated authority approval matrix determines who will authorize the action. For values less than $250,000, the decision is made regionally by management and the Uncollectible Debt Review Committee of the Tax Services Office. If the dollar value of a write-off is over $250,000, the submission moves to Headquarters: first to the Collections and Verification Branch and then to the Finance and Administration Branch for the Chief Financial Officer’s approval. Finally, if the amount exceeds $500,000, the proposal is presented to the CRA Commissioner for approval. The key steps of the write-off process are outlined in Figure 1.

Figure 1: Write-off process

The administrative write-off or write-down amount is then removed from active inventory, but retained in CRA systems, and considered resolved for reporting purposes. The Crown maintains the right to collect and the debtor still has the obligation to pay. Unlike non-recoverable write-offs, if the account were to become collectible at a future date, the debt would be reinstated.

2. Focus of the audit

2.1 Importance

This audit is important because a review of the write-off process confirms whether controls are in place and working as intended to ensure the consistent and timely application of the write-off provisions. Timely removal of uncollectible debt from active inventories allows the CRA to manage collections accounts more efficiently. The dollar amounts written off in the last 4 fiscal years can be found in Figure 2.

Figure 2: Write-off amounts

In addition, the audit provides the occasion to assess strategies aimed at improving overall compliance through information garnered from write-offs. As a result, this would support the PROTECTED.

This internal audit was included in the Board of Management (Board) approved 2018-2021 Risk-Based Audit and Evaluation Plan. The Assignment Planning Memorandum was approved by the Management Audit and Evaluation Committee on June 26, 2019.

2.2 Objective

The objective of this audit was to determine whether sufficient and appropriate internal controls are in place so that the processes for writing off tax-related accounts receivable are efficient, effective, and consistently applied.

2.3 Scope

This audit was conducted at Headquarters as well as in the Western and Ontario regions. The audit covered the existing write-off process for accounts receivable for administered activities. It included all tax streams that the CRA collected from.

This audit did not examine:

• the collection and disposal of Canada student loans by the Government Program Collections section due to a Spring 2020  audit by the by the Office of the Auditor General of Canada of this  area
• the allowance for doubtful accounts as reviewed by the Office of the Auditor General of Canada as part of its annual audit of the CRA Financial Statements – Administered Activities

The Data Analysis Section of the Audit, Evaluation, and Risk Branch reviewed write-off related data from April 2014 to March 2018. In addition, the internal audit team conducted a file review of individually written-off accounts from the 2017-2018 fiscal year.

2.4 Audit criteria and methodology

The audit criteria and methodology can be found in Appendix A.

The examination phase of the audit took place from July 2019 to October 2019.

The audit was conducted in accordance with the International Standards for the Professional Practice of Internal Auditing, as supported by the results of the quality assurance and improvement program.

3. Findings, recommendations, and action plans

The Collections and Verification Branch agrees with the recommendations in this report and has developed related action plans. The Audit, Evaluation, and Risk Branch has determined that these action plans appear reasonable to address the recommendations.

3.1 File review and monitoring

3.1.1. Approval processes for write-off submissions are documented and accessible. However, files are inconsistent in documenting the uncollectable file review and approval by the proper authority according to the approval matrix.

The internal audit team noted that the review and approval process for write-offs is outlined on the Collections and Verification Branch’s internal webpage. The general factors to consider when reviewing accounts as well as the processes for submission within the Tax Services Office to their respective Uncollectible Debt Review Committee are clearly defined. Also, the Delegation of Authority Matrices – Uncollectible Debts, on the Collections and Verification Branch webpage, clearly outlines the levels of management with delegated authority to approve write-offs.

However, during a file review of 405 write-off accounts, the internal audit team observed that the amount of information in the Automated Collections and Source Deductions Enforcement System diaries for accounts submitted to be written off varied among collections officers and regions. The audit team also noted that a significant portion of referrals to team leaders and managers were not recorded or were recorded in an unclear manner. Because of the different levels of detail in the files, it was not always clear if the individual approving the write-off had the authority to do so. This was especially true when the approving authority was acting and the acting employee was not noted in the Automated Collections and Source Deductions Enforcement System diary.

Recommendation 1

The Collections and Verification Branch should review, update, communicate and monitor and report on adherence to its procedures in order to, increase consistency in the required documentation for the approval of write-offs and ensure that approvals are in accordance with the proper delegated authority guidelines.

Action Plan 1

The Collections Directorate will undertake a review of the administrative practices for the processing of uncollectable debts in order to:

• Reinforce the use of existing resource material.
• Close any gaps that are resulting in local procedures that do not align with the intent of the national procedures.
• Establish more uniform procedures to be followed by all TSOs in order to ensure consistency.

Target date: November 2021

3.1.2. There are no write-off procedures driving timely reviews and approvals of accounts to be written off by management.

During the file review, the internal audit team found that the average time taken to review and approve accounts for write-offs within the different thresholds varied widely. Upon further research, the audit team found no parameters for management to define what is considered “timely” for the review and approval of write-offs, other than insolvency. Insolvency is a financial state where a person or corporation can no longer pay their debt obligations on time or when the debts are greater than the value of their assets. The insolvency program is different than regular workloads due to the nature of bankruptcies that, by law, allow debt to be forgiven. The insolvency program developed a target for timely write-offs in the referral process for team leaders and managers. For other programs, there are no such parameters that define what is timely for the review and approval of write-offs. As a result, the internal audit team was unable to determine how many of the files that they examined were reviewed and approved in a timely manner. However, the team noted that the review and approval times took an average of 84 working days.

Similarly, the Collections Quality Assurance Section who conducts quality assurance reviews to promote quality improvement, looked at approval timelines during the 2018-2019 fiscal year. Due to the format of the current systems in place, it was extremely difficult for the quality assurance team to obtain an accurate measurement of how long write-offs actually took. Instead, they had to rely on diary notes, if available, in order to determine the referral date. Based on the Collections Quality Assurance Section’s national results from the uncollectible reviews conducted in 2018-2019, the average time for write-off approvals was approximately 97 days, which is fairly consistent with the 84 days that was uncovered by the internal audit team.

Parameters that determine what is considered timely could drive the review and approval process, limiting the amount of time a proposed write-off can sit with local management. Write-offs that sit within inventories for prolonged periods of time waiting for review and approval are delaying the collector’s ability to proceed to collections accounts with actual potential for recovery.

Recommendation 2

The Collections and Verification Branch should develop and implement parameters for what is considered timely for preparing, reviewing, and approving a write-off for each approval threshold and report on the results at least annually

Action Plan 2

Our systems do not allow the program to monitor timeliness in an automated fashion. However, Collections Directorate will:

• Analyze the processing times for uncollectable debts to determine what is a reasonable timeframe for completion of the write-off for various stages of the process.
• Once established, the timeliness will be incorporated into the Collections Quality Assurance Section reviews.

Target date: November 2021

3.1.3. Existing controls do not ensure that write-off submissions have received the appropriate approvals before the write-offs are electronically processed.

Write-off submissions that require review by the Tax Services Office’s Uncollectible Debt Review Committee must include a review of the write-off submission’s T1520 form. Once approved, the T1520 is stamped and signed by the 3 reviewers from the Uncollectible Debt Review Committee. For files under $250,000, the Uncollectible Debt Review Committee Coordinator is the individual who ultimately removes the write-off account from the electronic system. During the audit team’s file review of T1520’s, some forms without the appropriate approval stamp and signatures were found, even though the write-off was processed.

In addition, once committee approval is received, the Uncollectible Debt Review Committee Coordinator could write off multiple files and there is no formal review by the regions to ensure that only approved write-offs are processed. The onus is on the regions to review the file to ensure that it was written off electronically.

Conversely for files approved by the Headquarters’ Uncollectible Debt Review Committee, the Finance and Administration Branch conducts a reconciliation exercise after the write-off is electronically written off in order to partially mitigate the risk of processing unapproved write-offs.

 Recommendation 3

The Collections and Verification Branch must ensure that write-offs cannot be processed without appropriate approvals.

Action Plan 3

The Collections Directorate will undertake a review of the administrative practices for the processing of uncollectable debts and will:

• Reinforce the use of existing resource material.
• Close any gaps in local procedures that do not align with the intent of the national procedures.
• Establish more uniform procedures to be followed by offices to ensure consistency.
• Establish a process where the proper delegated authority must clearly identify themselves in the account diary, including their job title and whether they are substantive or acting in that capacity.
• Incorporate a sampling of accounts into the Collections Quality Assurance Section review to monitor.

Target date: November 2021

3.1.4. National quality review activities have identified potential efficiency, effectiveness, and inconsistency issues, however do not specifically outline criteria for reviewing write-offs for inconsistency.

The Collections Quality Assurance Section is mandated to conduct quality assurance reviews and promote quality improvement in the delivery of the programs administered by the Collections Directorate. The section’s roles and responsibilities are clearly outlined on InfoZone, the CRA’s internal website. The national review program is also supported by Quality and Program Assurance Officers at all Tax Services Offices.

The guide that the Collections Quality Assurance Section uses to review write-offs focuses on the importance of verifying that all collections avenues were exhausted and identifying any write-offs that were preventable. However, consistency within the application of the write- off process is not a criteria within the guide. Without having clear criteria regarding the quality of the write-off file, the Collections Directorate cannot be assured that all gaps in file quality are being identified and assessed.

Recommendation 4

The Collections and Verification Branch should review its write-off procedures and develop consistent steps that must be applied. Quality assurance should incorporate a review of these required steps in their reviews.

Action Plan 4

The Collections Directorate will undertake a review of the administrative practices for the processing of uncollectable debts and will:

• Reinforce the use of existing resource material.
• Close any gaps in local procedures that do not align with the intent of the national procedures.
• Establish more uniform procedures to be followed by offices to ensure consistency.
• Incorporate a sampling of accounts into the Collections Quality Assurance Section review to monitor.

Target date: November 2021

3.2 Data analytics, business intelligence and reporting

3.2.1 The Collections and Verification Branch is not using or reporting data gathered from write-offs to improve collections and compliance strategies.

In 2019, the Organization for Economic Co-operation and Development published a report entitled Successful Tax Debt Management: Measuring Maturity and Supporting Change. This report was written as a resource for tax administrations to use when assessing and improving their strategic approaches towards tax debt management. An advisory group of tax administrations from 6 countries, including Canada, developed a tax debt maturity model tool. The model defines 5 levels of maturity: emerging, progressing, established, leading, and aspirational. When this model is applied to the strategic principle of dealing with debt not likely to be recovered, the lower end of the spectrum is defined by manual, ad hoc processes and decisions. On the mature end, the write-off processes are described as automated processes, and decisions are based on a wide range of sources and data analytics.

The internal audit team found that the Collections and Verification Branch is using data analytics and business intelligence to become more efficient and to increase collectability of collections accounts. However, the branch is not using data analytics and business intelligence to determine:

• factors that might cause an account to be written off
• indicators within write-offs that could predict their eventual outcome
• the ideal time or situation to write off an account

All three of these involve the horizontality of the collections process and result in increased workload and write-offs.

The internal audit team noted that other sections within the Collections and Verification Branch, such as the Collections Quality Assurance Section as well as the Program Risks and Analysis Section, had looked into factors like the timeliness of write-offs and the impact of factual assessments. But, this was not done using data analytics or business intelligence. In alignment with the Organization for Economic Co-operation and Development’s position on effective and efficient tax debt management, data analytics and business intelligence should be used to improve write-off processes and to identify CRA compliance strategies that are unsuccessful, leading to files being written-off. Resources can then be concentrated on viable compliance strategies that generate accounts, instead of being spent on collecting accounts with little to no collectability.

Recommendation 5

The Collections and Verification Branch, along with other CRA branches, should establish a procedure to periodically review, analyze and report on write-offs to improve both collections and CRA compliance strategies.

Action Plan 5

In order to improve the collections process, the Collections Directorate will complete a review of write-offs greater than $250K where a component of the debt was the result of a compliance action.

The Collections Directorate will share the results of the review and establish a recurring Write-Off Feedback Loop with our compliance partners in the Collections and Verification Branch and the Compliance Programs Branch to support their review of the potential impact of write-offs on compliance strategies.

Target date: November 2021

Following the first report, the Collections Directorate in consultation with all the various compliance programs will look at broadening the selection of files to be reviewed to ensure a more holistic approach (i.e. to sample write-offs of lower dollar values as well). The proposed plan for this review will be tabled at the Collections and Compliance Executive Steering Committee (CCESC) to seek support from the relevant program areas.

Target date: June 2022

3.3 Performance measurement

3.3.1. The method for calculating production dollars and production units does not provide a representative measurement of program goals and objectives.

Performance measures play an important role in guiding the policies and behaviors of those executing the work. Although there are no explicit write-off targets, the Reporting Section of the Resource Allocation and Monitoring Division publishes monthly performance results of each Collections tax program in the measurements of production dollars and production units. Write-offs processed (production units) are equivalent to dollars collected (production dollars) in current performance measures.

Prior to each fiscal year, the Collections and Verification Branch establishes a target for tax debt resolved and the program’s actual results are compared to this predetermined target. The annual tax program production commitments were achieved and exceeded for the last 3 years. Tax program production for fiscal years 2018-2019 was reported at 103.6%, for 2017-2018 at 109.3%, and for 2016-2017 at 100.2%.

An uncollectable account can be written off at any time, as seen in the variance reported in finding 3.1.2. Write-offs can also be stockpiled to be written off at a later date, such as during downtime over the holidays or during fiscal year end to resolve budgetary issues. When tracking direct time spent on write-offs and write-downs, increases are usually seen in the third and fourth quarters of the fiscal year. Performance commitments can be easily achieved if the program can control its results by stockpiling write-offs and writing off accounts as needed to meet production targets. The absence of meaningful and measurable performance goals is a disincentive to improving the program.

Another consequence of deferring write-offs is that they remain in active inventory. A collector could instead write off the uncollectible account to allow a new and potentially collectible account to enter into their inventory. Deferring write-offs can add to aging and might incur an opportunity cost of not collecting on actionable accounts. Inefficient inventory management makes the program less effective in addressing the most time-sensitive and appropriate files.

Recommendation 6

The Collection and Verification Branch should develop and report on performance measures with the goal of reducing delays in the write-off process and calculate the impact on the overall program production results.

Action Plan 6

The collection process is very different from one account to another and a definitive identification of a write-off is initially determined by the officer. This determination is based on judgement and knowledge of the officer and requires several layers of review to validate their recommendation to write-off.

For the health of the collections workload and avoid delays that impact overall production, it is necessary to transition quickly from the collection process to the uncollectible process, while continuing to balance the priorities of the collectible accounts in the inventory of officers. The current collections systems do not allow the program to monitor in an automated fashion the potential identification of a write-off at the officer level. However, the Collections Directorate will:

• Analyze and determine what is a reasonable timeframe for completion of the write-off at the officer level from the when confirmed as uncollectible to submission for initial approval.
• Once established, the timeliness will be incorporated into the Collections Quality Assurance Section reviews.

Target date: November 2021

The Collections Directorate, with assistance from the Research and Innovation Lab within the Service, Innovation and Integration Branch, will develop a performance indicator to address the recommendation.

Target date: June 2022

3.3.2 Tools and resources are made available to Collections Officers for the achievement of performance targets. There is also evidence that performance indicators are reviewed and adjusted as required.

The internal audit team found that Collections Officers were provided with tools and resources to help them achieve program performance targets. Collections and uncollectible debt manuals are available to the regions and are posted on CRA’s employee portal (InfoZone). Each region may also use its own internal process to outline how delegated authorities review and approve write-off referrals, such as adding an additional review by the Resource Officer or Complex Case Officer.

The internal audit team also found that the Collections and Verification Branch piloted a generator to facilitate writing T1520s in 2018. The desired outcome of the generator is to ensure consistency in the narrative of the T1520, which provides account details and explains why the debt should be written off. The Collections and Verification Branch also developed a payroll reconciliation to facilitate account analysis for the purpose of collecting payroll debt.

As a result of the 2018-2019 annual reviews, the Collections Quality Assurance Section worked with Quality and Program Assurance Officers to develop a new local quality review tool. The tool is meant to help the Quality and Program Assurance Officers and local management intervene earlier in the life of an account so that they can identify directors’ liability issues and respond to them before the account becomes uncollectible.

With respect to reviewing and adjusting performance indicators, the audit team found that Headquarters of the Collections and Verification Branch produces monthly reports to monitor the number of write-offs and advise the regions of their inventory.

For statistical purposes and to assist management in managing collection workloads, the Resource Allocation and Monitoring Division publishes numerous Excel-based reports on InfoZone.

The Program Assurance Section tracks multiple performance indicators on a weekly, monthly, and annual basis. These indicators allow management to track progress toward objectives, forecast program output and identify potential risks.

The Collections Directorate reviews accounts held in inventory for more than 5 years, which are considered aged accounts. The directorate has issued a written commitment to reduce the aging inventory size to below 15%, which is included in a planning document. 

4. Conclusion

The objective of this audit was to determine whether sufficient and appropriate internal controls are in place so that the processes for writing off tax-related accounts receivable are efficient, effective, and consistently applied.

The use of administrative write-offs has allowed the Collections and Verification Branch to focus its efforts on more viable accounts by removing accounts with low collectability from active inventories. However, the internal audit team found that write-off procedures are ineffective in driving timely reviews and approvals of write-offs. Procedures could be improved by defining what is considered “timely”. The audit team also found that data analytics and business intelligence were not being used to gather data about write-offs in order to improve collections and compliance strategies.

Additionally, the audit team identified an issue with the method used for calculating production dollars and units; this method does not provide a representative measure of the use of write-offs and, ultimately, of the program’s performance.

Overall, the internal audit team found that while approval processes, program monitoring and resources to achieve performance targets are in place, there are opportunities to improve the efficiency, effectiveness, and consistency of the write-off process. 

5. Acknowledgements

In closing, the Audit, Evaluation, and Risk Branch would like to acknowledge, recognize, and thank the Collections and Verification Branch as well as the Finance and Administration Branch for the time dedicated and the information provided during the course of this engagement.

6. Appendices

Appendix A: Audit criteria and methodology

Lines of enquiry

Based on the Audit, Evaluation, and Risk Branch’s risk assessment, the following lines of enquiry were identified:

Methodology

The methodology for examination included the following:

• data analysis to identify and understand trends within the full population of T1, T2, and GST/HST write-off workloads; program statistics and production targets were reviewed for trends in performance reporting
• documentation and file reviews to verify that write-offs are completed and approved according to documented processes and procedures and that they are done efficiently and effectively
• file review of 405 write-off accounts from 2017-2018, which was a random sample
• interviews with select management and staff at Headquarters and in the regions to confirm adherence to guidance documentation 

Appendix B: Glossary