Dealing with Fraud 2

Dealing with Fraud 2

In the last article I discussed fraud schemes where outsiders try to take advantage of the business person essentially by pretending to provide a product or service that is overpriced or not delivered. This time I will consider some examples where the fraudster plays on the greed or a knee jerk response of the potential victim to avoid taxes.

One of the recent plays on both greed and lower taxes were the charity donation schemes. Designed to appear as charitable donations, in actuality, these schemes were fronts to earn huge revenues for the organizers and to return relatively small tax savings to the clients who were vulnerable to audits from CRA. The Canada Revenue Agency (CRA), quite properly, has taken aggressive action (with a lot of success) to close down these schemes, which relied to a large extent on the greed of individuals, often attracting taxpayers who had never previously made charitable donations. The promise was to receive tax refunds greater than the actual cash outlays to the “donation”.

In another less common tax scheme, tax preparation companies promised to reduce your taxes when they prepare your tax returns. They did this by creating a fictional company that has considerable business losses, which then were applied against your other income, resulting in large tax refunds. It is difficult to believe anyone involved was innocent in these schemes.

For some reason it seems the lure of lower taxes drives people to do silly things. In the case of the charity schemes, the potential profit was actually quite small compared to the risk. In the case of the phoney loss companies, it is just plain stupidity. In both cases, a good investment would probably have better results without the potential risks. The fake companies lead to huge penalties for fraud unless the taxpayers can convince the Canada Revenue Agency to believe they didn’t know they were filing fraudulent tax returns, a difficult task at best.

Some people do avoid paying their proper taxes and it is unfair that honest taxpayers carry the load. Some taxpayers get away with cheating, perhaps forever and some of the victims actually assist them by paying for sub-standard work, whether it is fraudulent tax returns or deficient construction.

Unfortunately ,it does seem that the CRA is more interested in chasing down the small taxpayer, an apparent reality that leads to less faith in the tax system. Despite claims by the Minister to actively chase down the off shore tax shelters of wealthy taxpayers, the truth is probably that relatively little is done by CRA because of the cost of actively chasing down sophisticated schemes. It is much easier to chase down the small unsophisticated taxpayer.

There are many other schemes, some legal some not to be careful about. Over the years, I have seen: investments in movies, with little chance of having a profit, realty investments that didn’t show a profit for decades, if at all. These were legal investments, but the savings on taxes was more than offset by the loss on the investment; realty developments with huge risks; unregistered financial investments; phoney science and technological investments, some even promoted by accounting firms. Several suggestions that I can make are:

  1. Understand the investment and use common sense;
  2. If it sounds too good to be true, it probably is;
  3. Seek advice from competent professionals and check credentials;
  4. Make sure the professional has liability insurance to cover instances of bad advice;
  5. As much as possible spread your risk;
  6. Be involved in your investments and ask questions.

I would rather make a profit and pay taxes than lose money and save a portion on taxes.
Terry Robert, B.A., C.M.A., C.G.A.

Please note that this column deals with details and circumstances in a general way and comments are meant solely as a guide. For your protection, a professional accountant is recommended and should be consulted before making any decisions regarding anything discussed in this column.