Once convicted of failing to file returns, individuals and/or corporations must file all outstanding returns and pay all taxes, interest, penalties assessed by the Canada Revenue Agency (CRA) and Court fines.

In order to avoid an audit or investigation by the CRA why not file delinquent returns and report previously undisclosed income under the Voluntary Disclosure Program?  Provided the CRA has not taken action or initiated an investigation, the taxpayer is eligible for this Program, which makes it possible that only the taxes and interest owing will have to be paid.

From May 2000 to December 2008 Ms. Forde was employed as a telephone agent with the CRA. She abused her position, fabricating tax returns by accessing individual taxpayer accounts maintained by the CRA. A total of 178 personal income tax returns were prepared and filed, using the personal information of 57 taxpayers, 39 of whom were deceased. Based on these returns GST credits and provincial tax credits in the amount of $85,654 where issued and deposited into bank accounts under the control of Ms. Forde.

Despite the CRA’s monitoring mechanisms, it is clear that during the period in question one employee was able to commit fraud. Fortunately, this particular fraud was discovered and a severe penalty was imposed.

A telephone agent with the CRA from May 2000 to December 2008, Ms. Forde accessed  individual taxpayer accounts which were maintained by the CRA.  Using the personal information of 57 taxpayers, of which 39 were deceased, she prepared and filed 178 personal income tax returns.  Based on the information in these tax returns the CRA issued GST credits and provincial tax credits in the amount of $85,654.  These funds were deposited into bank accounts which were controlled by Forde.

While the CRA has measures in place to prevent fraud by their employees, it is clear that the system was not perfect during the period mentioned above.

The CRA’s Voluntary Disclosure Program allows individuals to file outstanding tax returns and/or report any income not previously reported without penalty or being prosecuted, if the taxpayer makes a full disclosure prior to the start of any action or investigation by the Agency. By filing under the Voluntary Disclosure Program the taxpayer may only be responsible for taxes owing, plus interest.

In order to be eligible for this program, you must be a first-time home buyer or using the withdrawal to buy or build a home for a disabled related individual.

If you do own the home before the withdrawal, it cannot be for more than 30 days. And if the home is not yet purchased or built, you have until October of the year after the withdrawal to have the home bought or built.

This home MUST be used as a primary residence and NOT a rental property. If the CRA finds that you have withdrawn from your RRSP to purchase a rental property, they will add the withdrawal to your income and you will pay additional taxes as if the HBP were income.

It is not enough to have a pre-authorized mortgage to use the HBP. A written agreement must be in place that details the purchase offer or a contract with a builder or contractor.

As well as paying fines imposed, individuals or corporations charged with failing to file tax returns must file their returns and pay all taxes owing, plus interest. They may also be required to pay civil penalties as assessed by the Canada Revenue Agency.

There is an avenue available to correct tax affairs. Under the Voluntary Disclosures Program a taxpayer can file outstanding tax returns and/or report any previously undisclosed income without incurring a penalty or suffering prosecution, if the Canada Revenue Agency has not already initiated any action or investigation. Any taxes owing and interest on the outstanding taxes must be paid.

CRA made several request for the missing tax returns before serving notice demanding that the returns be filed. Failure to comply with the requests resulted in charges being laid. All of the outstanding returns have now been filed. CRA takes delinquent filers very serious. It is always advisable to file all tax returns on time and stay off CRA’s radar.

• Sales of more than $20,000 and at least 24 sales transactions in any of the calendar years 2006, 2007 or 2008, (irrespective of membership in eBay’s PowerSeller program); OR
• Sales of more than $100,000 in any of the calendar years 2006, 2007 and or 2008, regardless of the number of sales transactions.

If the seller meets the above conditions, then the following information will be handed over to CRA:

• full name,
• user id,
• mailing address,
• billing address,
• telephone number,
• fax number,
• email address, and
• the selling prices of the items.

This is the second court order that eBay has received from the Canada Revenue Agency. In November 2008, after lengthy litigation with CRA, eBay was required to hand over the information of members who held PowerSeller status in 2004 and 2005.

CRA announced on July 30, 2009 that they will aggressively audit Ebay sellers commencing September 2009. If CRA has not commenced an audit on an Ebay seller, then they can apply under the voluntary disclosure program to bring their taxes up to date without criminal prosecution or penalties.

If a voluntary disclosure has not been done and CRA commences an audit, there can be severe penalties, prosecution and interest charges. Time is quickly running out for Ebay sellers who have not done a voluntary disclosure to properly reflect their taxes.

In my office we have already commenced doing voluntary disclosures for Ebay sellers. Once a voluntary disclosure is made, the taxpayer has 90 days to amend their returns and properly reflect their Ebay sales. I usually prepare the voluntary disclosure in my first meeting with my clients and send it immediately to CRA. From this point on, the taxpayer is protected from penalties and prosecution. My clients usually will have peace of mind from the moment I send the disclosure to CRA. Most people tell me that they have not been able to sleep at night for years knowing what they were doing was illegal.

The deal will provide the IRS with thousands of long-sought account names. UBS has an estimated 52,000 accounts of US customers. The 4,450 accounts being provided to the agency were the ones most suspected of containing undeclared assets.

Revenue Minister Jean-Pierre Blackburn asked Finance Minister Jim Flaherty to consider legal changes that would make it easier to investigate tax-avoidance cases in the same way the United States does.

If you have a foreign bank account that earns income and you have not reflected this on your tax returns you can be subject to criminal prosecution, penalties and interest. CRA has an agreement with the IRS to share information.

If you apply under the voluntary disclosure program to CRA before they initiate an audit, then criminal prosecution and penalties will be waived.

If the books and records are inaccurate and sloppy, then CRA can undertake a net worth audit and will examine the life style of the taxpayer and their family. The CRA auditor will reconcile the income reported on the income tax returns for the family to the standard of living in the household. If CRA cannot find all of the personal expenses then they will use statistics Canada averages for a family of a particular size. For example, if a family of five pays cash for their groceries during the year, then CRA will determine what a family of five consumes a year in groceries.

Years ago, I had a client that was audited and CRA used the net worth audit technique on them. CRA even estimated the consumption of family alcohol and cigarettes. In my discussions with CRA, I informed them that my client did not drink or smoke. Consequently, these numbers were dropped in their audit calculations.

When CRA completes a net worth audit, the onus is on the taxpayer to prove them wrong. If the taxpayer disagrees with the findings on the audit, they can go to the Tax Court of Canada to dispute the audit findings. The problem is that the taxpayers has to prove their lifestyle expenses and if they cannot, then they will not be successful in court and the process will be very expensive.

It is imperative to keep copies of personal expenditures if you are in a cash business, because if CRA performs a net worth audit it will usually be very expensive for the taxpayer. CRA will take the difference between the income that they calculated for the family based on lifestyle and they will deduct this from the income reported on the personal income tax returns. The difference will be taxable and subject to severe penalties and interest charges. Therefore it is important that if you are in a cash business that you maintain excellent books and records.

If you are in a cash business and have not declared all of your income, then you can apply under the voluntary disclosure program to avoid penalties and prosecution. This program is only available before CRA commences an audit investigation.

Visit my website for more information or assistance on the voluntary disclosure program.