- Tax Amnesty Home
- » Tax Help
- » Avoiding the Tax Trap - Chapter 5 Sample
- » Tax Help
Tax Amnesty - Avoiding the Tax Trap!
The following is an excerpt of Chapter 5:GOVERNMENT REACTION – THE COMING TAX STORM
The massive growth in tax evasion is coupled with increased pressure on Canadian federal and provincial governments from internation-al bankers. As interest rates rise, the need to reduce national and provincial debts will force them to become more fiscally aggressive. In the past, politicians simply raised taxes or borrowed more to meet increasing obligations. Over the last 20 years we have seen the tax-and-spend results of this policy. Although annual budgets have become more or less balanced, national and provincial debts (except for Alberta) are still staggeringly high.When politicians attempt to borrow more money, international bankers will demand to know how it will be repaid. Since the amount of tax evaded is growing every year, a targeted strategy of increased collection and prosecution of tax evaders will have to be instituted. A wider, more far reaching tax net will easily bring in a larger catch.
WIDE GOVERNMENT POWERS
The state has already provided its revenue collecting arm with broad search-and-seizure authority. Some say it has too much power. Others fear it is not enough. In the Rossminster case 1 , Lord Denning effectively summed up the problem of balancing state power and citizen's rights as follows: "In the tax evasion pool, there are some big fish who do not stop at tax avoidance. They resort to frauds on a large scale. I can well see that if the legislation were confined, or could be confined, to people of that sort, it would be supported by all honest citizens. Those who defraud the Revenue in this way are parasites who suck out the life-blood of our society. The trouble is that the legislation is drawn so widely that in some hands it might be an instrument of oppression. It may be said that "honest people need not fear: that it will never be used against them; that tax inspectors can be trusted only to use it in the case of the big, bad frauds." That is an attractive argument, but I would reject it. Once great power is granted, there is a danger of it being abused. Rather than risk such abuse, it is, as I see it, the duty of the courts so to construe the statute as to see that it encroaches as little as possible on the liberties of the people of England."THE LITTLE GUY
It is normal for "the little guy" to shrug off the coming tax storm. The common refrain is "I am too small and only cheat a little on my taxes so why would they bother with me?" Think again! Put together, all the little guys represent a huge amount of uncollected tax. Because tax evasion is so rampant, both big and little guys (and gals) will be made examples of publicly so as to scare all the rest.AMERICAN REACTION TO TAX EVASION
If Canada, with a population of 30 million, loses $64 billion from domes-tic tax evasion every year, the United States with a population of about 300 million must lose at least US$640 billion annually. That doesn't count their offshore losses and taxes evaded from the proceeds of crime. Adding these amounts to the domestic tax evasion figure, the IRS must face about US $1 trillion in tax evaded each year.Unfortunately, the situation is not quite that simple. First, Americans pay much less tax than Canadians. Second, they do not have the GST to contend with. Many states do not even have a sales tax on services. Without a study of the American underground economy on which to base our conclusions, we have made a rough guestimate by taking 60% of the aforementioned $1 trillion. This would give US$600 billion in taxes evaded each year. In 2003, the IRS estimated unreported taxes averaged a little over US$1,000 for every person in America. Our figure comes to around $2,000 each. No one knows for sure. To be conservative, we will use between $450 and $500 billion of U.S. taxes evaded each year.
Since the IRS is already more aggressive than the CRA, adding more Internal Revenue agents might not produce as great a return in collections as in Canada. However, given the staggering size of their tax problem, it's no wonder that American reaction against tax evaders is ramping up. Their proactive approach is a sign of things to come in Canada. IRS methods of bringing in taxes will be applied here in the near term, in a some-what modified form.
THE JOHN DOE SUMMONS
Americans have already set the pace in the fight against tax evasion. Commissioner Mark Everson stated that the IRS has "ramped up its enforcement efforts, particularly for high-income individuals and corporations so that Americans know that when they pay taxes, their neighbours and competitors are doing the same."The IRS has stopped the decline in enforcement actions which began in the early Nineties. Assistant Attorney General Eileen J. O'Connor has warned: "If you participate in a scheme to defraud the IRS, you can wind up in federal prison, and will still have to pay taxes, along with interest and penalties." In 2003, the United States government filed many lawsuits to shut down promoters of abusive tax schemes. Federal judges have already jailed 28 of these conmen and conwomen.
The IRS requires all who have sold tax shelters to provide details of their clients. The big U.S. accounting firms have been specially targeted. As well, American tax authorities are using innovative policies such as the "John Doe" summons. These summons have been issued against VISA, MasterCard and American Express. Using this procedure, tax authorities can force Visa and the rest, under pain of continuous fines and possible prosecution, to divulge names of owners of offshore credit/debit cards who used them to access untaxed offshore income. IRS sources indicate the results are encouraging. Numerous prosecutions against tax evaders are being launched.
INFORMANT REWARD PROGRAMS
Once again, the United States is at the head of the pack. The IRS also uses a Reward Program under which informers are paid part of taxes recovered. The amount is based on taxes, fines, penalties and interest collected as a result of data provided by the informer. Names of individuals providing the information are kept confidential. Depending on how much the information helps in its tax investigation, the IRS pays informants between 1% and 15% of tax collected, up to a maximum of $2,000,000. By Canadian standards, this may not seem very sporting, but neither is cheating on taxes and forcing honest ratepayers to pay additional amounts to make up shortfalls. With such a staggering tax evasion problem, American authorities have to be more aggressive just to keep their underground economy even somewhat contained.CLOSE CO-OPERATION BETWEEN THE IRS AND STATE GOVERNMENTS
IRS and state officials use increasingly sophisticated document-matching programs designed to uncover non-filers.Tax officials are attacking the problem by working more closely together and exchanging more information.
Not to be outdone by the IRS, states such as California are actively searching for non-filers. The July 15th 2004 issue of the Wall Street Journal reported they have hit pay dirt. California officials said non-filers in 2002 included 865 millionaires, 1,458 accountants, 6,756 lawyers, 22,769 contractors and 20,473 doctors, dentists and other medical professionals.
New Jersey is stepping up efforts to find non-filers, and uses information- swapping with other tax agencies. It also pays close scrutiny to New York non-resident taxpayers with New Jersey addresses. New York state officials report, "great success" in co-ordinating non-filer projects with the IRS.
The American trend of state and federal officials working very closely together will be emulated in Canada. This has not always been the case. In the past, Revenue Quebec, for example, has not always inter-acted well with the CRA. Some say that's because of their nationalist pride. They, too, are financially strapped. Money will trump pride. Close co-operation will become the norm in future between Quebec and federal authorities.
INFORMANT REWARD PROGRAMS
Once again, the United States is at the head of the pack. The IRS also uses a Reward Program under which informers are paid part of taxes recovered. The amount is based on taxes, fines, penalties and interest collected as a result of data provided by the informer. Names of individuals providing the information are kept confidential. Depending on how much the information helps in its tax investigation, the IRS pays informants between 1% and 15% of tax collected, up to a maximum of $2,000,000. By Canadian standards, this may not seem very sporting, but neither is cheating on taxes and forcing honest ratepayers to pay additional amounts to make up shortfalls. With such a staggering tax evasion problem, American authorities have to be more aggressive just to keep their underground economy even somewhat contained.USE OF THE U.S. PATRIOT ACT
Regardless of where they live, U.S. citizens must pay tax, after allowable deductions, on world-wide income. Some Americans who reside abroad keep what they believe are secret offshore bank and investment accounts. To their surprise, the Secretary of the Treasury and the U.S. Attorney General can use provisions of the Patriot Act to subpoena information from any foreign bank doing business in the United States through correspondent banks. Foreign financial institutions that maintain correspondent accounts 2 in the United States must also keep records to identify owners of offshore banks. They must advise who is empowered to accept service by federal or state law enforcement officers. This procedure has been instituted to counteract "shell banks" set up to avoid payment of taxes. While there are some exceptions, reporting requirements are quite broad. Failure to comply with information requests can result in fines of US$10,000 per day and a requirement to terminate the correspondent relationship.BRITISH TAX PROBES
Not to be outdone by their American counterparts, British Inland Revenue officials have set up a special investigation unit to probe tax shelters and improper tax planning. In its Spring 2004 report, Inland Revenue says it aims to collect £1.6bn in extra taxes over the next three years. This is an attack on all fronts by the Inland Revenue. In living memory they have never been so aggressive. Legislation has been introduced to clamp down on improper tax planning. Authorities have been given all necessary resources to investigate more companies and individuals than was previously possible. The new Inland Revenue team set up to investigate improper tax shelters is called the Avoidance Intelligence Unit. It is staffed by senior tax investigators. Watch for some spectacular U.K. criminal evasion prosecutions in the near future.SWISS BANK SECRECY THREATHENED
To keep abreast of the United States, European union ministers have passed legislation, to force Swiss and other low or no tax jurisdiction banks to divulge information on their European Union clients. Effective measures to crack down on tax evaders are being finalized. Swiss banks and others will be required to collect taxes unless their clients can prove they have declared the revenue in their home countries. There is continuing fine tuning of the law but, as things stand, these tax measures will go into effect on January 1, 2005.At that time, interest payments will be subject to a withholding tax of 15% rising to 35% by 2011. Three-quarters of the money collected will come forwarded to tax authorities in the investors' home countries. If investors feel overtaxed, they can provide national tax authorities with relevant information and claim some tax back.
This new tax law has been agreed to in principle by Andorra, Liechtenstein, San Marino and Monaco. The Swiss are dragging their heels but will likely follow suit.
Query: If the Americans, Brits and Europeans are fast closing in on their tax evaders, can Canada be far behind?
TAXING OFFSHORE DIGITAL NETWORKS
To date, offshore wealth created by using digital networks is not subjected to full (or any) taxes. This is rapidly changing. To protect their cash flow, politicians will have to provide the CRA and other agencies with the financial and manpower resources needed to tap this enormous source of tax revenue.With such a windfall available even less aggressive legislators are authorizing tougher tactics to bring in money to fill depleted treasuries. The demands on the public purse never let up, including political pres-sure for increased and better health care services, the rising costs of security against terrorism and keeping our rapidly disintegrating infra-structure repaired. The only realistic alternative is raising taxes. For politicians that's an unpalatable scenario since overtaxed Canadians will either vote them out of office or increase their level of tax evasion. After all, even in Canada there is a limit to what people will take from their governors. Remember: "The higher taxes go, the sharper the voter grinds his axe." — Anonymous proverb.
THIRD PARTY PENALTIES FOR ACCOUNTANTS/FINANCIAL ADVISORS
For years, within the envelope of the small amount of operational funds allotted them, CRA investigators have been working hard to catch tax evaders. Some time ago, they instituted an Underground Economy Initiative. They also redirected some field-auditors into areas where evasion is high. It wasn't enough. The thrust is now to add to these initiatives and use new ways of catching those who fail to comply.The CRA is increasing pressure on accountants and financial advisors to reveal information on clients suspected of tax evasion. The advisors risk being fined personally for failure to co-operate. These third party liability penalties are punatively high, 50% of the amount of tax the client sought to evade.
Improper tax planning is also under heavy attack. If these persons suggest to clients a way of reducing taxes that could be construed by the CRA as counselling tax evasion, advisors can be subjected to criminal prosecution. It could be something as simple as an accountant pressing a client to pay his wife a salary, even though the accountant knows full well that she has not worked a day in her life and never will. He knows the sole purpose of this sham is to split income and reduce tax. While a prosecution in this scenario will, realistically, never occur, the law casts a wide net and it could conceivably catch the advisor. Meanwhile, what really works is fear of the possibility, remote as it may seem, of such attacks. Government may yet regret being so aggressive. There will be short term gains in tax collection but at the risk of destabilizing accountants' and other advisors' tradition-al role in encouraging tax compliance.
PERSONAL LIABILITY – BANKERS, ACCOUNTANTS, FINANCIAL ADVISORS AND STOCKBROKERS
If tax evasion is suspected, bankers, stockbrokers, accountants and financial advisors are forced, by the threat of a potential personal liability, to report the identity of their clients and details of their transactions to the CRA. Such far-reaching laws effectively align accountants, bankers, stockbrokers and other financial service providers with the CRA forcing them to act against the interest of their own clients. These same clients are usually unaware that being too open with their financial advisors and accountants has become a risky proposition.TERRORISM AND BIG BROTHER GOVERMENT
In response to threats of terrorism, Parliament passed the Proceeds of Crime (Money Laundering) Act. It contains measures to detect and deter money laundering and has created a mandatory reporting system for suspicious financial transactions and cross-border movement of currency. It is clear that anti-money laundering legislation can extend to tax offences. The law provides for intelligence to be shared between the CRA (Customs), the RCMP and the CSIS. Under American pressure, Canada's border security has been intensified. Close checks are kept on everyone's travel. These facts are entered in government computers and information is made available for use by tax enforcers.Before long, using the excuse of protecting citizens from terrorism, we will be required to have a new Canadian resident card. It will be biometric and include fingerprints, specimen signature, photo and a magnetic strip providing personal information.
USE OF COMPUTERIZED TRACKING SYSTEMS
Canada has announced it will introduce biometric e-passports. This opens the door to wide circulation of data in a vast international, techno-logically assisted, surveillance system. Already, when crossing the border, names can be cross-checked in government computers to see if travelers have ever been convicted as tax evaders. Soon they will be able to cross-check to verify if all your tax returns have been duly filed. Daily we are being subjected to, virtually unfettered, intelligence gathering. Information is being banked and shared, when required, among those in authority.Using advanced technology, Big Brother knows who you are, where you are going and where you have been. He can easily cast his tax net beyond our national borders and, in co-operation with other countries, track down your every fiscal and physical movement.
It will get worse as time goes on. Canada is firmly fixed in American minds, as, in the words of, one U.S. congressman a "Club Med for terrorists". Our knee-jerk reaction to such comments is to continually upgrade security and information sharing.
If there is another terrorist strike in North America, all our privacy rights could disappear overnight. The terrorists will have won, as we then be living in a national security state. Even if it never happens, the excuse of acting to prevent such an attack has irrevocably changed our formerly open society. We accept state intervention more readily now than in the past.
ALLIANCE WITH POLICE AND OTHERS
The customs arm of the CRA hunts down tax evaders by working directly with CSIS, the RCMP, and indirectly with the IRS, the FBI, British Inland Revenue and tax officials of other countries. They use powerful laws originally designed to catch terrorists and money launderers. These laws give them wide powers and access to shared information. We predict their list of weapons against tax evasion will soon include an Informant Reward System like the one already being used by the IRS. The CRA will also use the Canadian equivalent of the U.S. "John Doe" summons to force credit card companies such as Visa, MasterCard, American Express and bankers to divulge the names and addresses of customers who use encrypted international bank/credit cards.Foreign and Canadian banks in tax havens will be under heavy, increasing pressure to provide the names of persons using their facilities. Some bankers, accountants, financial advisors and lawyers are being criminally prosecuted for counselling or assisting clients to commit tax evasion, money laundering or other crimes. These initiatives will intensify as the need for tax revenue increases.
HOW GOVERNMENTS WORK TOGETHER
The following case illustrates how sharing of information works. The taxpayer, a European parent corporation, had subsidiaries in Canada and the United States. The European parent also controlled a subsidiary in a tax haven. American tax officials knew the tax haven affiliate was buying goods from the American corporation and selling them to the Canadian corporation. They also knew the tax haven affiliate was making large profits on each transaction. Through a simultaneous examination process, the IRS discovered the tax haven affiliate was also buying Canadian goods and reselling them to the American corporation, making a substantial profit. Canadian and American audit teams exchanged information from the accounting books and records of each taxpayer, invoices representing both sales and purchases of goods, contracts, financial reports and other relevant information. The two groups worked closely together and calculated a proper arm's length price for the goods. As a result of their international non-compliance, the companies were subjected to heavy taxes and penalties in both countries.SHARING OF INFORMATION
The 9/11 terrorist attack has increased sharing of information between states. To extend its international reach, Canada has signed the Convention on Mutual Administrative Assistance in Tax Matters. The Convention provides an international framework for governments to combat tax evasion on a global scale.Greater co-operation between governments and the development of closer links with the police constitutes a serious problem for tax evaders. The old rules have irrevocably changed. In times past, the Canadian fiscal system was based on an undertaking that information given to tax authorities would never be used for other purposes. In Quebec, this is clearly no longer the case. Revenue Quebec can legally pass any taxpayer information it collects over to police. This allows Quebec's tax officials to act as an informal police force without worrying about any Charter of Rights restraints that normally surround police investigations. Revenue Quebec also has access to all government databases that store their "clients'" personal information. Legally, this information can be passed on to their new police partners.
What Quebec tax sleuths do by law, Federal tax investigators do by stealth. In our tax law practice, we see an ever increasing number of cases where provincial or federal police have unsuccessfully tried to prosecute someone criminally. They turn all their documents over to the CRA. It then issues assessments and, by using police- generated information, commences criminal, tax evasion prosecutions.
SHARING OF INFORMATIONTAX SCORPIONS
Tax Amnesty is an important adjunct to the heavy hand of government. Hundreds of years ago, Colbert, a French Minister of Finance, portrayed the art of taxation as "extracting the largest number of feathers from the goose with the least amount of hissing". The balance between being too harsh and too lenient in tax collection efforts is important. This balancing act has long historical precedents going back to the Old Testament.It may appear to many that taxes and the Bible have little in common. In reality, in addition to its religious connotations, the Bible is a textbook of 4,000 years of history. In 1 Kings 12, an early tax revolt was recorded. It vividly demonstrates why a gentle hand on the ship of state's tiller – something akin to a Tax Amnesty – is preferable to force in keeping order. In the Bible story, the Israelites came to the crowning of King Rehoboam with a list of tax complaints.
1 Kings 12:4. "Thy father made our yoke grievous: now therefore make thou the grievous service … lighter, and we will serve thee." Rehoboam, with deplorable lack of judgment, laughed at this speech and threatened to make their taxes even heavier.
1 Kings 12:11. "And now whereas my father did lade you with a heavy yoke, I will add to your yoke: my father hath chastised you with whips, but I will chastise you with scorpions."
As a result, Israel erupted in fury. Their tax rebellion forced the King to flee.
Tax Amnesty programs are important because they represent the gen-tle touch that is sometimes needed to govern successfully. Our own rulers may not heed this lesson and try Rehoboam's approach. Those who can foresee the coming tax storm should consider correcting their tax problems now rather than waiting till later when the rules may no longer be so beneficial.
THE AMERICAN APPROACH
Americans also have a compliance initiative. In our view, it is much less effective than its Canadian counterpart. First, they do not accept "no name" negotiation. Second, an applicant wishing to participate in their compliance program is not protected and can be criminally prosecuted even after coming forward voluntarily. Finally, even if the disclosure is accepted by the IRS, there can still be delinquency related penalties. We believe the American approach is somewhat short sighted and does not fully achieve the goal of encouraging tax delinquents to come forward. We think adopting a, Canadian style, Tax Amnesty program would substantially increase the tax take from America's huge underground economy.TAX AMNESTY
The coming Government tax assault is a major event which will happen sooner than anyone anticipates. Those with cause to fear should seriously consider coming in from the cold. It is the smart thing to do in an increasingly dangerous fiscal situation. A negotiated settlement to obtain Tax Amnesty must be commenced before you are caught, not after. Our best advice is to do it while the amnesty program, is still available, in its present form.There is already heavy pressure on the CRA to make Canada's amnesty rules more like their less friendly American counterpart.
LAWYER-CLIENT PRIVACY
Under the existing Canadian and provincial government amnesty policy, we tax lawyers can negotiate a settlement on a no-name basis and have it agreed to in writing before divulging the taxpayer's name. We do this using our legal privilege of lawyer/client confidentiality. Accountants have no such legally protected confidentiality privilege. Knowing they can be forced to give the client's name, they may just file back returns and ask for the amnesty policy to apply.In our opinion this is not a wise course of action because, before knowing the outcome, the client's identity is exposed to the CRA. It is akin to the taxpayer saying, "Here I am. Do what you want with me!" There is an obvious advantage in holding one's cards close to your chest during such negotiations.
When dealing with tax authorities, always remember the dictum: "In general, the art of government consists in taking as much money as possible from one class of citizens to give to another." — Voltaire