Tuesday, 12 August 2008

Online Tax Filing: More Cheating or CRA Tightening the Noose?

Yesterday CBC published an article with the provocative title "Online tax filers more likely to cheat: report". The report refers to an internal Canada Revenue Agency review. Buried within the text of the article are two sentences, key in my view to separating the hype from the reality.
"Software users … demonstrate a significantly higher non-compliance rate as compared to non-software users," they concluded."
Then, "The agency also cautions that the definition of non-compliance is a tax-deduction claim that is rejected ..." by the CRA.

So the headline which brazenly accuses taxfilers of cheating can just as easily be stated as "CRA denies more expenses and deductions when you file online." One of the very first comments on the article on the CBC website is from someone who was asked to provide receipts and then had a claim initially denied, and only had it accepted after much arguing with CRA. One can imagine CRA applying stricter rules and being more prone to rejecting expenses when CRA knows that sending copies of receipts are not required to file online. Poor tax filers who have a claim rejected must ask themselves whether they really want to fight the bureaucracy for the sake of what might be a small claim and decide it isn't worth the effort, especially as it might cost them more in accountant's fees than the claim is worth. End result: the denied claim stands and CRA concludes that non-compliance rates are higher for online filers. It becomes a self-fulfilling prophecy!

What types of cheating exactly is CRA talking about anyhow? If you are among the vast majority who get tax receipts from an employer and who make an annual RRSP contribution, where is the opportunity to do the small cheating the article talks about? Political contributions? Medical expenses? I would guess it is rather amongst the self-employed who report their own revenue and calculate their own expenses, in which case the justification for an expense can become debatable.

Now, it would be naive to think that no taxpayers will push the limits and throw in dubious expenses, even ones they don't really believe themselves are justified. No doubt some cheating does take place.

At the same time, CRA never sees or knows about the expenses that other ultra-cautious people never report, but which may be legitimate.

Perhaps the solution is to play the CRA's game and to prepare the tax return using software then print it all out and send it on paper, receipts and all attached. Then they might find the extra costs of handling all the paper outweighs the lost tax revenue from online "cheating". Mind you, such net revenue vs cost calculations seldom drive decisions in government though they should.


George Wenzel said...

Honestly, it isn't that big of a deal to fight CRA over a deduction - no accountant required. It's always best to pay any taxes that are disputed, and then fight the matter through CRA's "objection" process, and then to the Tax Court of Canada. The chances are pretty good that you'll win, and if you do any disputed taxes that you paid will be paid back to you (with interest, no less). Of course, if you don't pay the taxes and then lose in court, you still have to pay them, with interest and penalties added on.

CanadianInvestor said...

Good on you George if you succeeded against the CRA. Was it an online return?

Michael James said...

I always like this sort of analysis where one can draw an alternate conclusion from a set of observations. Government workers treat online filers differently rather than online filers being different. Bravo!

Even if online filers actually do cheat more right now, the belief within the government that this is true could make it self-fulfilling in the future. I've filed online about one-third of the years I've paid taxes, but I've only been challenged on deductions after filing online. Each case was simple, though -- I sent in a copy of a receipt that was accepted.

Neil said...

I suspect the truth is somewhere in the middle. Online tax filers may not intentionally cheat any more than their paper counterparts, but while increased CRA vigilance with online filers may represent part of the increase, I suspect taxpayer incompetence is probably to blame.

Easy to use software that you can buy for $20-$30 has opened up the world of DIY taxes to many people who would never have considered doing their own taxes by hand. These are people who are bad at math, bad at accounting, and don't really know much about taxes, yet the availability of Quicktax has made them comfortable filling out the forms themselves...this leads to mistakes, which come up on the CRA end as non-compliance.

Honest and competent filers may have to produce receipts eventually, but in the end, if the deduction is legit, then it will be accepted in the end.

Anonymous said...

This differential tax return treatment is exactly what I have suspected all along. That's why I always send in the great wads of paper tax return. Who wants to waste their time arguing with CRA over eligible deductions?
Gail Bebee
Author of No Hype-The Straight Goods on Investing Your Money

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