Cross-Border Tax Audit: How the CRA and IRS Share Information

The CRA and IRS share taxpayer information routinely. The Canada-US treaty includes a comprehensive exchange of information provision (Article XXVII) that allows each tax authority to request and receive taxpayer data from the other. Beyond treaty-based exchanges, FATCA (the Foreign Account Tax Compliance Act) creates an automatic flow of financial account information from Canadian financial institutions to the CRA, and then from the CRA to the IRS. When both agencies have data on the same taxpayer, discrepancies between the two returns (or a missing return on one side) can trigger examination.

What information do the CRA and IRS share?

The information exchange between the CRA and IRS operates through three distinct channels.

• Treaty-based (on request). Either agency can request specific taxpayer information from the other for a tax examination. For example, if the CRA is auditing a Canadian resident’s foreign income, it can ask the IRS for copies of the taxpayer’s US returns, W-2s, 1099s, and other documents. The IRS reciprocates. Requests are made through the Competent Authority of each country.
• FATCA/IGA (automatic). Under the Canada-US Intergovernmental Agreement (IGA), Canadian financial institutions (banks, brokerages, insurance companies, mutual funds) report the following information to the CRA for all US-person account holders: name, address, US TIN (SSN or ITIN), account number, and year-end account balance or value. The CRA transmits this to the IRS annually. The IRS provides reciprocal data on Canadian-resident accounts at US financial institutions.
• CRS (automatic, global). Canada participates in the Common Reporting Standard (CRS), which is a global automatic exchange framework. Canadian financial institutions report non-resident account holders to the CRA, which transmits the data to the account holder’s country of residence. The US does not participate in CRS (it has FATCA instead), but the CRS data from other countries can surface information relevant to a cross-border audit.

What triggers a cross-border audit?

The CRA and IRS both use information-exchange data to identify cross-border discrepancies. Common triggers include:

• Missing return. FATCA data shows a US person has a Canadian bank account, but the US person has not filed a US return or an FBAR. The IRS computer matching program generates a notice.
• Income mismatch. The CRA receives data showing that a Canadian resident has US investment income (from a US brokerage), but the T1 return does not report the income. Similarly, the IRS sees NR4 data showing Canadian pension income paid to a US resident, but the 1040 does not report it.
• Large transactions. A sale of real property (FIRPTA withholding generates IRS reporting), a large RRSP withdrawal (reported on NR4), or a significant wire transfer (reported by the financial institution) can draw attention from either agency.
• Treaty claims. A taxpayer who claims treaty benefits (reduced withholding, residency tiebreaker position, treaty-based exemption from taxation) may be examined to verify the claim. Treaty positions disclosed on Form 8833 are flagged for potential review.
• Referral from the other agency. If the CRA audits a Canadian resident and discovers unreported US income or assets, it may refer the information to the IRS (and vice versa). This is a treaty-authorized exchange.

What happens during a cross-border audit?

A cross-border audit typically begins like any domestic audit: the agency sends a notice of examination or a request for information. The difference is that the examining agency may already have information from the other country, and it may request additional information through the treaty exchange.

For a CRA audit of a Canadian resident with US connections:

• The CRA may request copies of US returns, W-2s, and 1099s (from the taxpayer or through the treaty exchange).
• The CRA will verify that foreign income reported on the T1 matches the source documents.
• The CRA will check T1135 compliance for foreign property.
• If the audit reveals unreported foreign income, the reassessment includes tax, interest, and potentially gross negligence penalties (50% of the tax on the unreported amount under ITA 163(2)).

For an IRS audit of a US person with Canadian connections:

• The IRS may request copies of Canadian returns, T4s, T3s, and NR4s.
• The IRS will verify that worldwide income reported on the 1040 matches the source documents.
• The IRS will check FBAR and Form 8938 compliance.
• If the audit reveals unreported foreign income, the assessment includes tax, interest, and accuracy-related penalties (20% of the underpayment under IRC 6662) or fraud penalties (75% under IRC 6663).

Can I be audited by both agencies at the same time?

Yes. A CRA audit and an IRS audit can run concurrently on the same taxpayer. The two agencies do not coordinate their audit schedules (they are separate governments with separate enforcement priorities), but information discovered in one audit may trigger or inform the other.

• If both agencies are examining the same issue (for example, the sourcing of employment income between the two countries), the Mutual Agreement Procedure (MAP) under Article XXVI of the treaty is available. MAP allows the Competent Authorities of both countries to resolve a dispute about the interpretation or application of the treaty, including cases where both countries are taxing the same income. MAP is initiated by the taxpayer, not the agencies, and it can take 2 to 3 years to resolve.

How do I reduce audit risk?

Consistency between the two returns is the single most effective audit-risk reducer. Specific practices:

• Report the same income in both countries (in the appropriate currency). The FTC prevents double taxation, but both returns must show the income.
• File the FBAR and Form 8938 (or T1135) on time. Missing information returns are a primary audit trigger.
• Disclose treaty positions on Form 8833 when required. An undisclosed treaty position that saves tax is a red flag if discovered later.
• Keep documentation that supports the residency position, the income allocation between countries, and the FTC calculation. If audited, the burden of proof is on the taxpayer.
• File on time. Late filing draws attention and eliminates certain penalty defenses.

What should I do next?

If you are filing in both countries, make sure the returns are consistent, the information returns are filed, and the treaty positions are disclosed. If you receive an audit notice from either agency, respond within the deadline and consider whether the issue has cross-border implications that require coordination with the other return.

• FBAR vs Form 8938, the foreign account reporting obligations
• T1135 foreign income verification, the Canadian foreign property reporting
• When do I need Form 8833?, treaty position disclosure
• CRA Voluntary Disclosure Program, coming forward before an audit
• Streamlined Filing Compliance Procedures, the US catch-up program

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.