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The Canada Revenue Agency identified $1.185 billion from audits of small and medium-sized enterprises (SMEs) last year, said CRA officials speaking at the Canadian Tax Foundation’s Ontario Tax Conference held in Toronto in late October.

For fiscal year 2018-19, the CRA found $625 million from audits of small businesses, and $560 million of audits of medium-sized businesses, said the CRA during an audit update panel at the conference.

The average amount identified per small business audit was $137,000, and per medium-sized business audit was $338,000.

The figures, which include tax and penalties, refer to amounts identified but not necessarily collected, the CRA said. The CRA applied gross negligence penalties in 28% of small business audit cases and in 8% of medium-sized business audit cases. The CRA defines small businesses as those that earn up to $4 million in gross income in a year, and medium-sized businesses as those that earn from $4 million to $250 million.

Over the previous three years, the CRA completed 7,700 SME audits per year on average (5,900 audits of small businesses and 1,800 audits of medium-sized businesses), the CRA said.

The audience of tax practitioners heard CRA officials detail the SME audit process and provide guidelines on how best to facilitate an efficient audit.

CRA officials said the agency has several ways of obtaining information for an SME audit: by applying the CRA’s regular inspection powers; by issuing a request for information (RFI) to either the taxpayer or a third party, such as a bank; and by securing a compliance order via an application to the courts if the information is not provided voluntarily.

Last year, the CRA issued RFIs in 39% of small business audit cases and 7% of medium-sized audit cases. In 2016-17, the CRA issued RFIs in 24% of small business cases and 4% of medium-sized business cases.

The increased use of RFIs in small business cases is directly linked the CRA’s increasing use of indirect verification of income (IVI) tests and techniques, which are used when a taxpayer’s books and records are deemed inaccurate, inadequate or unreliable.

IVI tests and techniques may include analyzing a taxpayer’s bank deposits; assessing a taxpayer’s approximate net worth over time; examining the source and application of income; and looking at whether a business’s operational ratios roughly align with industry norms.

The CRA said the most recent common audit issues or areas of concern were unreported income, capital transactions, corporate reorganizations and restructurings, ineligible expense claims, and related-party transactions.

“What we’re seeing really is the CRA auditing the wild west, the frontiers of unreported income,” said Brandon Hodge, a partner and business advisor in the tax services group with MNP LLP in Markham, Ont., and one of the panelists during the conference session. Hodge said it appears the CRA has recently been focusing on cryptocurrency transactions, real estate “flipping” and the underground economy in general.

Clarification: A previous version of this article identified dollar amounts as having been recovered by the CRA. In fact, the CRA has identified the amounts as recoveries, but they have not necessarily been collected by the CRA.