My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant and a partner with a National Accounting Firm in Toronto. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. The views and opinions expressed in this blog are written solely in my personal capacity and cannot be attributed to the accounting firm with which I am affiliated. My posts are blunt, opinionated and even have a twist of humor/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Monday, September 24, 2012

Should the CRA Reward Tax Snitches?

John Greenwood of the National Post recently wrote a two-part series contrasting how the Internal Revenue Service (“IRS”) and the Canada Revenue Agency (“CRA”) deal with income tax evaders and cheaters. In my opinion, the CRA should implement a "whistleblower program" similar to that of the IRS.

In Mr. Greenwood's first article titled, “UBS Whistleblower gets $US104-million award from the IRS”  he details the astronomical $104,000,000 settlement paid by the IRS to UBS whistleblower Brad Birkenfeld; whose detailed information provided the IRS with enough ammunition to cause UBS of Switzerland to pay the IRS a $780,000,000 cash settlement and to hand over details on thousands of U.S. citizens holding offshore bank accounts. As the Swiss have always protected their banking secrecy (bankers can be criminally charged for revealing a client’s identity), one can only imagine the devastating information Mr. Birkenfeld (who was sentenced to 40 months in prison and was only recently released) provided the IRS to cause the Swiss to breach their historical secrecy.

Mr. Greenwood in his article also discusses how the IRS uses financial rewards to catch tax evaders (the reward can be as high as 30% of the income tax collected) and then uses that information to prosecute and/or go after the tax evaders. In comparison, the CRA provides no financial incentive to step forward, and in some cases punishes the whistleblowers. Critics of the CRA suggest the agency rarely pursues tax fraud even when provided with detailed information and names.

In Mr. Greenwood’s second article,  he alleges that Mr. Birkenfeld provided the CRA with copious notes, even though Mr. Birkenfeld had no incentive to do so. When asked what it had done with this information, a spokesman for the CRA states "the agency does not comment on specific cases, and nor does it discuss investigations it may be conducting". However, it appears the CRA has yet to prosecute anyone criminally.

I suggested in one of my most popular blog posts titled Will I be Selected for a CRA Audit, that “there is nothing worse than a scorned lover, a business partner you have had a falling out with or a dismissed employee to trigger a CRA audit.” However, the aforementioned whistleblowers are typically snitching about “small potato” tax evaders and in some cases, they may be more concerned with being vindictive than in providing honest information. So how can the CRA find multi-million dollar business evaders?

Mr. Greenwood suggests that “the best way to infiltrate the greed business, is by greed itself” and by offering whistleblowers financial incentive to turn in their colleagues and clients.

The CRA would argue otherwise and states that 611 Canadian taxpayers have come forward under the voluntary disclosure program and declared income relating to offshore UBS accounts and that 531 of these cases have been processed revealing $109 million of unreported income.

Personally, I think Mr. Greenwood and the IRS have it right; financial reward trumps loyalty or morality. The only reason the CRA has 611 voluntary disclosures is because the IRS broke down the Swiss secrecy wall and this caused Canadians with Swiss bank accounts to become concerned that their information was not safe with the Swiss.

So, what type of person would snitch out a “tax evader” given that many people seem to condone tax cheating or evasion as a national pastime in both the U.S and Canada?

In this CNN Money article, titled Rat out a tax cheat, collect a reward, Tim Gagnon, an academic specialist of accounting at Northeastern University, suggests that “the most common informants tend to be dissatisfied middle-ranking employees in big companies”. Gagnon states that "I think it happens more in middle management than upper management, they're workers in the middle ranks who feel frustrated about what's going on and are not advancing or don't think they have a shot of moving up, because otherwise, it's hard to break loyalty."

Based on the discussion above, we know vindictive ex-spouses, former business partners and middle management employees fit the whistleblower profile, but how about my own kind, accountants?

Accountants know the most intimate financial details of their clients and even where their clients have hidden the details of an offshore account from their accountant; their accountant may have a sixth-sense and suspect possible evasion.

It is interesting to note that the first person to make a claim under the whistleblower program was an accountant in public industry, as detailed in this article. In this case, the accountant tipped off the IRS about a tax lapse his employer ignored and he received a $4.5million award.

The in-house accountant's tip netted the IRS $20million in taxes and interest from the company. The IRS paid the tipster, $3.24million, net of 28% for tax purposes. Nothing like giving a reward and then taxing back 28%.

Buy the way, if you ever get such a reward, you report the income on line 136 of your income tax return under "snitch income" and report the expenses relating to personal protection under line 236, under "bodyguards".

So, should the CRA go to a whistleblower program? Would you turn in your employer or client if you could receive 15-30% of the evaded taxes?

As a tax accountant, I have no issue in assisting people minimize their income taxes in a legal manner. However, I feel all Canadians should pay their fair (even if minimized) share of income taxes and I cannot condone tax evasion. That being said, I would have a hard-time becoming a whistleblower if I found out a client was evading income tax. I would feel that I was breaching the confidentiality of my relationship with the client and I would probably just fire the client. Nevertheless, whistleblower legislation of any kind would surely change the accountant/client dynamic.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

11 comments:

  1. The professional nature of an accountant and his/her responsibilities need to be better spelt-out. Either there needs to be far-reaching protection for the relationship (solicitor-client privilege) or definitive whistleblower protections.

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    1. Joe, you raise a great point, but obviously the IRS is attempting to take advantage of the non-priviledged relationship between CPA's and their clients. I also wonder if a lawyer breached priviledge for a massive award, is there anything preventing the award payment if the lawyer was willing to suffer the legal, professional and maybe criminal consequences?

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    2. Isn't there a law to the effect that one cannot profit from a criminal act? Presumably that would prevent a lawyer from accepting an award for breaching privilege, if it were indeed illegal for them to do so. Of course, the government could always legislate an exception, but I don't see that being a popular move...

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    3. Nathan, I think you are correct, but I am not 100% sure how breaching priviledge for personal profit would be treated criminaly. Maybe a lawyer reading can add their two cents

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  2. Where the hell do I sign up?!? For that kind of cash I'd sell myself to the Feds!

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    1. Typical of a Habs fan; turn on your friends or co-workers on a dime :)

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  3. Paying for snitches is a bad idea.

    I guess some people won't mind living in a surveillance society where your barber, waiter, doctor or accountant can at any time be an agent of the state. But I for one understand that in any free society people will sometimes get away with things. It's a price I'm willing to pay.

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    1. Hi Anon, yes, I get the big brother thing. But IMHO, most people are only happy to let other people get away with things when they are part of the group "getting away" with it, if not they are jealous and ready to bring them down. Just my cynical viewpoint.

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    2. Hey, I'm a cynic too, but you're being too cynical here.

      eg: I don't think either of us are pedophiles, and so we're not "getting away with it", but how would you feel if every computer technician started snooping your hard drive or email account looking to make sure you're not doing anything bad?

      We'd surely save many kids from harm by doing so, but in my opinion the price would be too high.

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  4. Not sure if I agree on this one. I find the reward system for whistleblowers a truly distasteful program and brings out the worst aspects of human behavior. We will become a nation of paranoid opportunists looking to make a buck by turning in our friends and neighbors. And I simply do not want to live in that kind of “Spanish Inquisition” like society.

    This may be naïve, but even at the age of 49 years, I do believe in a system based on the honesty and integrity of each participant even with the knowledge that at the same time there will be cheats and dishonest individuals taking full advantage of others. I realize this is not always the case, but in my own limited personal experience of running a small business for the last 18 years, whistleblowers are typically the obsequious, wormy types who lurk in the shadows of an organization, often passed over on promotions because they lack the skills or personality that warrants advancement. Are these the kind of people we want to reward?

    Interesting discussion though.

    Mike Shackleton

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    1. Mike, thx for your comment; with a handle such as yours, I thought you would be a snitch supporter (Kobe and Shaq Laker squabble)but I digress.

      I respect your opinion and others above share it. I also enjoyed the description of your typical whistleblower, very graphic and funny.

      I guess it comes down to; do you resent others evading tax while your pay your full shot or do you accept such, in order to not have your Spanish Inquisition.

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