Make sure you hire the right person or company to prepare your income tax return.
According to the Canada Revenue Agency (CRA), 28 million people file income tax returns each year and of that number, 50% use tax preparers. Tax preparers can register with the CRA to use EFILE to transmit the completed return through an encryption technology that instantly acknowledges the tax return has been received.
So, what could possibly go wrong for the taxpayer? Unfortunately, not all tax preparers are honest. And, these less-than-honest ones take advantage of the fact that prospective clients believe the tax preparer:
- is an expert and will prepare the return better than they are able to do it themselves
- will find ways to get the maximum refund
- has the taxpayer’s best interest at heart
- is registered to EFILE tax returns and thus the CRA vouches for their integrity
Fraudulent Income Tax Preparers
Most income tax fraud relies upon the ability of the fraudster to:
- gather information about the taxpayer
- promise a refund for the taxpayer
- convince the taxpayer to have the refund sent to the tax preparer
- convince the taxpayer to pay by cash or debit card
- prevent the taxpayer from understanding how the refund amount was calculated.
Easy Access to Your Information
Information about the taxpayer is easy to obtain. Most taxpayers are asked for their last year’s tax return, which contains all the information required for the current filing. The taxpayer may also be asked for their account number, personal identification numbers and answers to security questions to make it easier for the tax preparer to access and manage a personal tax account.
Electronic filing has many benefits. On the positive side, it is faster and “paperless.” Unfortunately, the negative side means that it is easier for unscrupulous tax preparers to defraud the CRA. As long as the tax return is accepted electronically, the CRA will likely issue a computer-produced refund to the taxpayer. It is only later, after the system has set up audit thresholds and starts requesting information from the taxpayer, that the fraud may be revealed.
The dishonest tax preparer completes and prints the tax return based on the data provided by the taxpayer. The taxpayer assumes the tax preparer submits this return to the CRA. However, the tax preparer actually submits a different return on which the numbers have been changed to provide a refund, whether the taxpayer is entitled to one or not. Tax preparers have a multitude of ways to create a refund to be deposited into the tax preparer’s bank account. The fraudster can claim:
- higher expenses or lower revenue for sole proprietors who also receive T4 income. A loss from self-employment is applied against the T4 income to produce a reduction of taxable income and thus a refund of T4 income tax remitted by the employer. If the client is also a GST/HST registrant, the tax preparer may be able to obtain a refund in this area as well.
- a deductible RRSP contribution higher than that made by the taxpayer
- tuition fees or medical expenses higher than those paid by the taxpayer
- married or common-law status
- non-existent dependants
- excess or non-existent union dues
- charitable donations the taxpayer never made
- rental payments or property taxes in excess of the actual amounts.
Where Did the Money Go?
If the CRA refund is deposited into the tax preparer’s bank account, the preparer quickly removes it and disappears to parts unknown. If the refund is not deposited to the tax preparer’s account, the tax preparer may simply base their fee on a percentage of the falsified refundable amount. The taxpayer, elated by the high refund, gladly pays the exorbitant fee unaware of repercussions from the CRA when the fraud is revealed.
The taxpayer, not the tax preparer, is responsible for the accuracy of the information filed.
Recourse against a Fraudulent Tax Preparer
The taxpayer may mistakenly believe the tax preparer is ultimately responsible for the fraudulent tax return. This is not true. The CRA takes the position that the taxpayer is responsible for the accuracy of the personal tax return. On the signature page, just above the taxpayer’s signature line the words: “I certify that the information given on this return and in any documents attached is correct, complete, and fully discloses all my income” provides a reminder of the taxpayer’s responsibility.
Certainly, the taxpayer may have recourse against tax preparers who file fraudulent returns. Realistically, however, it may be impossible for the taxpayer to locate the fraudster and even then, the legal cost and time involved to sue may not be worth the expense.
A CRA Audit
Unfortunately for the taxpayer, the CRA may be tardy in requesting information from the taxpayer about reassessed years. Thus, if fraudulent filing has occurred over more than one tax year, the sudden emergency of having to respond to a reassessment covering several years will come as a shock to the taxpayer.
For the taxpayer the results of a CRA audit will create the following realities:
- Costs will be incurred to review the reassessments and address issues raised by the CRA.
- The new tax preparer will undoubtedly have to process a new tax return using the proper information in order to compare it to the fraudulent submission.
- The taxpayer will have to pay the taxes on the amended amounts and will have to repay the amounts refunded by the CRA based upon the falsified returns.
- Penalties and interest may be assessed.
Check Out the Tax Preparer
The majority of tax preparers are honest, hard-working individuals who strive to provide a service that will meet the requirements of the CRA. But, as in every occupation, there are those who will take advantage of the trust placed in them. In our high-tech world, relying on the Internet or hard copy to validate someone’s credentials is problematic. Anyone can design a home page, create or embellish qualifications and print a certificate establishing them as a qualified tax expert. None of the following individual checkpoints guarantees the honesty of the preparer, but collectively they may provide some assurance of the tax preparer’s credibility:
- Talk to your friends. They may be among the 50% of individuals who use a tax preparer. Find out how long they have used the service and whether there have been any major reassessments.
- Talk to people in business. Most use the same qualified professional to prepare their corporate and personal tax returns.
- Ask the tax preparer for credentials. CPAs are registered with the various provincial institutes and should be able to provide a licence or membership number. Don’t hesitate to contact the various provincial institutes to determine whether an individual is in good standing.
- Your tax preparer should be available year round. You want a firm or individual with a locally established presence. Online businesses allow data to be processed anywhere in the world. But, as a taxpayer, you should consider whether you want a virtual relationship in the Internet hinterland or a flesh-and-blood relationship with someone in your community with whom you can meet one-on-one to discuss tax issues.
- Ensure that you receive a complete and unabridged copy of your tax return, whether the return is hard copy or PDF.
- Review the tax return for reasonableness before you sign the T183, “Information Return for Electronic Filing of An Individual’s Income Tax and Benefit Return” that allows the tax preparer to EFILE your return. If you have qualms about the tax return, do not sign and ask for all data to be returned.
- If you are still uneasy about the tax preparer, but your return appears reasonable, request the tax preparer to EFILE the return while you wait for confirmation the CRA has received it.
- Never sign an unfinished tax return or a blank T183 or T1013 “Authorizing or Cancelling a Representative.”
- Do not provide permission for the funds to be deposited directly into the tax preparer’s account. Carefully read Part C of form T183.
- Always obtain a copy of your signed T183 form if you have doubts about the integrity of the tax preparer. The signed form will not prevent the individual from changing the form before transmitting the tax return but it will provide evidence the tax preparer misappropriated your funds.
Consider Using a CPA
Whether you are going to a tax preparer for the first time or switching to another, carefully vet the tax preparer’s qualifications. Tax time is stressful enough without the added risk of future problems with the CRA. Establishing a long-term relationship with a trusted tax preparer allows them to understand the changes taking place in your life and determine whether tax treatments are available to minimize the taxes payable while at the same time satisfying the requirements of the CRA.
The preceding article is reprinted from the February 2015 newsletter Business Matters with the permission of the Canadian Institute of Chartered Accountants. Business Matters is a bi-monthly newsletter, the full version of which can be obtained on request.
This post deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein.
Although every reasonable effort has been made to ensure the accuracy of the information contained in this letter, no individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.