Tough tax penalty raises fairness concerns
CBC – Mon, 9 Apr, 2012 5:16 AM EDT
Most people know that if they file their personal tax return after the deadline, they’ll be assessed a penalty – five per cent of the amount owing, along with one per cent a month in interest. If they don’t owe any tax, there’s no penalty. But each year, tens of thousands of Canadians are hit by something they may not have known even existed – the “repeated failure to report income” penalty.
The flaws in relying on automation to identify
‘non-disclosure’ or a failure to report income; A case study and cautionary true tale:
A Credit Union amalgamated with another one, and merged systems; resulting in computer glitches which generated near-duplicate interest income slips in error for a number of account holders. The slips were only very slightly different – by less than 1.
Only one version of the near duplicates was actually sent out to the account holders – which they duly used to report the interest income. But both versions went out to the CRA.
Many months later, the CRA matching program (August) picked up that only one of the ‘set’ of slips had been reported, and it became up to the taxpayer to investigate the matter, and eventually to prove to the CU and the CRA that there was a small discrepancy between what the sole slip said, and the 2 versions of the ‘slips’ that the CRA had been sent – and what the taxpayer had received. The initial contacts with the CRA all were met with insistence by their representatives that the matching program was correct, and that the taxpayer was wrong. After all, a computer can never be in error. In the meantime, the taxpayer faced a substantial bill (dated December) and demand for immediate payment based on the ‘unreported’ income, plus interest accrued – within a deadline of days – since the CRA notice had been stuck in the Canada Post Christmas backlog (delivered therefore, weeks later, in January).
Only after requesting – and waiting for months for a copy of the slips in question as they appeared on file with the CRA; the taxpayer could prove that there existed two near-duplicate versions.
After contact by the taxpayer, and faced with the slight discrepancies between what the CRA copy of the slips said, and the sole version received by the account holder, the CU identified and corroborated the error, and officially notified the CRA, but the CRA – while acknowledging the official correction by the issuer, wouldn’t correct the taxpayer’s account, or release the withheld refund – without a formal request in writing by the taxpayer – despite agreeing with and acknowledging that the problem was the issuance of duplicate records from the CU – and based in a computer error. Although the taxpayer’s situation was not contested, and despite the CRA initial insistence that they couldn’t act without the official CU notice and correction – once they possessed that, they still would not initiate a correction without a formal request from the individual.
The CU issued an acknowledgement of the error in writing to the account holder – for their records, only after they requested one.
So, the question is, for the purposes of the story above – does that instance of computer generated error still stand today, on the taxpayer’s CRA account – appearing as an instance of ‘underreporting’ or ‘failure to report’? The onus fell entirely on the taxpayer to identify the nature and source of the problem, ask the CU to corroborate it and issue a correction, and to request that the CRA then act on the subsequent official CU correction – even after they acknowledged that they possessed it.
This is why it is so important to have checks and balances – and controls on simple mindless enforcement – and no investment in judgement and personnel. Otherwise the imbalance of power and knowledge becomes so skewed that the individual is hopelessly outmatched.
CRA errors in their matching program are all too common and the story above is correct that the only way the Canadian tax authorities will act to correct their error is by formal request in writing; if one must proceed to the Appeals division, there’s generally a four to six month wait for a response, given Appeals is generally backlogged. While the percentage of CRA errors in this regard is not large, it’s not insignificant, and – as above – causes a large effort of time and energy on the individual and/or their advisors. The IRS has a similar matching program and reports from the US accounting community are beginning to indicate the fisc in the US is getting revenue from people who just don’t know how to proceed, or figure for the trouble to pay the amount anyhow . . . I’m curious as to how this is shaping up in Canada also.
Aut, If understood corrcetly, Willful penalty in my case is much more than 25% VD penalty. I am not sure whether the below calculation is correct. Please feel to correct me if anything is wrong. Assume my offshore account is $30,000 for 2008, $66,000 for 2009 and $86,000 for 2010.So the NON willful penalty under the mitigation will be $11600. [$5000 for 2008 (even though my total amount is $30,000 I have 7-10 different account and for each account I have to pay $500 as penalty. The funniest part is most of these account not even have $200 in balance. ) $6600 for 2009 (10% of the Maximum amount)]I believe I don’t have to pay anything for 2010 as there is no violation.Now the Will full penalty is 50% for each year and it is $48000($15000 for 2008 + $33000 for 2009)Now VD penalty is Case 1: $21500(25% of $85,000) if they include 2010. Case 2: $8250(12.5% of $66,000) if they exclude 2009.
Are you referring to US or CDN taxes? If US, have you entered OVDI?
You call this tough? CBC hyperbole.