Enforcement and Disclosures Programs Evaluation

Final Report

Corporate Audit and Evaluation Branch
October 2010


Executive Summary

Introduction

This report presents the findings, conclusions and recommendations of the Enforcement and Disclosures Programs Evaluation.

The issues pursued by this study were:

  1. To what extent has the Enforcement and Disclosures Directorate (EDD) been successful in achieving its mission and enhancing the Agency's efforts to address non-compliance?
  2. Does the Agency have a comprehensive approach to enforcement?
  3. To what extent do internal and external factors impact the ability of EDD to achieve its objectives?

Background

The Canada Revenue Agency (CRA) makes every attempt, through the provision of information and education, to assist taxpayers to voluntarily comply with their tax obligations. It also has the means to use both civil and criminal interventions on those who deliberately choose not to comply.

The CRA response to addressing the most serious forms of non-compliance is focussed within the EDD. The EDD is situated within the Compliance Programs Branch and tasked with a mission to deter, detect and correct tax evasion and non-compliance in the criminal economy.

The size of the “criminal economy” [Footnote 1] , the magnitude of tax fraud/evasion and the extent of criminal attacks on the CRA are all unknown. However, various indicators suggest that:

  • The criminal economy in Canada may represent billions of dollars in untaxed revenues;
  • Tax evasion/fraud is a serious problem; and
  • Increasingly, tax administrations are the victims of serious criminal attacks by organized crime and others.

The two programs within the EDD tasked with dealing with criminal non-compliance and the criminal element are the Criminal Investigations Program (CIP) and the Special Enforcement Program (SEP).

The CIP has broad based powers to investigate and gather evidence to support a prosecution of “tax evasion” or fraud. These powers are similar to the powers of any law enforcement agency with some limitations. During 2008-2009 with 453 full-time equivalents (FTEs), 199 full-scale investigations were referred for prosecution; 292 cases were prosecuted [Footnote 2] and 97% resulted in a conviction. Convictions resulted in almost $29 million in additional tax revenues, fines of just over $19 million, 42 prison sentences and 13 community services sentences.

The SEP conducts civil audits and undertakes other civil enforcement actions on individuals known or suspected of deriving income from illegal activities such as drug trafficking, fraud, prostitution and money laundering including motorcycle gang members and members of other organized crime syndicates. During 2008-2009 with 182 FTEs, SEP conducted 1,176 audits resulting in just over $101 million in assessments.

Two other programs within EDD that do not necessarily deal with criminal non-compliance or with the criminal element are the Voluntary Disclosures and Informant Leads Programs. The mandate of the Voluntary Disclosures Program (VDP) is to facilitate voluntary compliance with the legislation administered by the CRA by fostering and processing voluntary disclosures by non-compliant taxpayers and/or their representatives. The Informant Leads Program receives and processes tips or leads provided by the public regarding cases of potential non-compliance.

Evaluation Methodology

A range of data collection and analysis methodologies were used in conducting the evaluation study. These included: internal and external interviews; detailed questionnaires sent to three foreign tax administrations (New Zealand, Australia and the United Kingdom); document, literature and file reviews; data analysis; and consultations with EDD middle and senior management. The evaluation also relied on an advisory committee to provide expert advice at critical points during the evaluation.

Main Findings

Our evaluation of the EDD has identified that it is achieving results. Between 2004-05 and 2008-09, CIP contributed to the successful prosecution and subsequent conviction of almost 1,200 cases of criminal non-compliance. During the same period, almost 5,000 SEP audits of the criminal element resulted in the identification of over $428 million in federal tax revenues owing. However, the evaluation uncovered substantive issues that may be limiting the program's ability to achieve its mission of deterrence, detection and correction.

First, detection and referral of potential enforcement cases is largely occurring outside the EDD program in isolation of any comparative assessment against other cases. Selection or rejection of cases is office specific and not necessarily based on how those cases align to strategic objectives.

Second, with respect to deterrence, there appears to be little awareness on the part of the public about the Agency's enforcement capacity. Efforts to publicize convictions of prosecuted cases lack a proactive engagement of the media. The Agency has no knowledge of the take up rate of press releases relating to tax crime convictions. Although outside the Agency's direct realm of control, the average number of convictions resulting in custodial sentences for tax cases fall well below the average of other tax administrations and of white collar crime cases prosecuted in Canada. Data indicates that just over half of all fines levied by the courts with respect to convictions go uncollected. We found that over 85% of SEP assessments go uncollected. Further, there is no evidence that the Agency has a clear well publicized deterrence strategy that clearly links to a coordinated detection capability.

Third, although the EDD is accountable for program outcomes it lacks complete authority for program delivery. This has had an impact on partnerships, detection, case selection and the ability to achieve their mission.

Fourth, key to the success of EDD programs are the relationships with public prosecutions, law enforcement agencies, collections and audit. We found that each of these relationships is showing signs of strain or incompatibility directly impacting objectives achievement.

We also found that both the Informant Leads Program and the VDP perform review processes focussed on a taxpayer group that would normally be addressed by regular audit areas. Only a small percentage of leads and voluntary disclosures are referred to CIP or SEP. While analysis of leads and disclosures may be a source of “strategic and tactical intelligence”, the majority of cases are not among the criminally non-compliant or suspected to be in the criminal economy.

Overall, the Agency has a decentralized and somewhat disparate approach to enforcement and lacks a clear well articulated and operationally entrenched enforcement strategy. Shared ownership of objectives achievement is not clearly understood and managed and accountability with only limited authority has impacted the EDDs efforts to achieve its mandate. 

It is important to note that the issues identified in this report are not unique to the CRA. Within the last 10 years tax administrations in the United States, Australia and the United Kingdom have all confronted many of these same issues.  The Webster Report, commissioned by the U.S. Internal Revenue Service, identified concerns with the Criminal Investigations delivery model, communication strategy and partnerships with legal counsel.  In the United Kingdom, the HMRC examined and modified processes around the use of intelligence and broader enforcement powers.  The Australian Tax Office has also modified its delivery model and established a new partnership approach to deal with egregious forms of non-compliance with the introduction of Project Wickenby.

Recommendations

Based on the findings we offer the following recommendations:

  1. The Agency should determine the extent to which it wishes to strengthen its capability to pursue both criminal non-compliance and non-compliance in the criminal economy and then develop a comprehensive enforcement strategy.
  2. The EDD should engage internal and external partners in dialogue to discuss roles, expectations, impediments and responsibilities and seek solutions to the factors that appear to be negatively impacting partnerships.
  3. The Agency should review the appropriateness of the location of the Informant Leads Program and the VDP within the EDD.

This report also identifies a number of alternative structures and processes employed by other tax administrations, both domestic and international, that provide options to consider.

1.0 Introduction

Compliance Programs Branch (CPB), requested assistance from the Program Evaluation Division to assess the effectiveness of EDD in achieving its mandate. Program Evaluation Division responded by developing an Evaluation Framework that defined the scope and approach of the evaluation study. The framework was approved by the Agency Management Committee in July 2008.

The issues pursued by this study were:

  1. To what extent has EDD been successful in achieving its mission and enhancing the Agency's efforts to address non-compliance?
  2. Does the Agency have a comprehensive approach to enforcement?
  3. To what extent do internal and external factors impact the ability of EDD to achieve its objectives?

This report presents the findings of the evaluation of EDD programs.

2.0 Background

A well-functioning tax and benefit system is essential to a healthy economy, a sustainable infrastructure, and a strong democracy.” [Footnote 3]

Although unpopular, taxation provides government with the financial resources to ensure the ongoing economic and social well-being of its citizens. Canada's tax administration is based on self assessment and voluntary compliance founded on the principles of trust and fairness - trust that Canadians will honestly comply with their tax obligations and that they will be treated fairly and respectfully by the tax authority.

Canadians generally comply with their tax obligations. Studies have found that most Canadians comply to a greater extent when audit and enforcement programs are in place [Footnote 4]. Yet if the perceived risk of getting caught is low and the benefit is sufficiently material, other survey-based reports [Footnote 5] indicate that certain segments of taxpayers will avoid reporting and/or paying their fair share of taxes. There will always be people that deliberately choose not to play by the rules or otherwise engage in various forms of tax evasion, criminal non-compliance or outright fraud. It is this segment of Canadian society that, if their behaviour were left unaddressed, would undermine the integrity of the Canadian tax administration and erode the principles of self assessment and voluntary compliance.

2.1 The Challenge

The challenge facing the Agency is twofold. First there are untaxed revenues within the criminal economy in Canada the size of which is largely unknown. A conservative estimate based on the following suggests that there are conceivably billions of dollars in unreported revenues.

Organized Crime, Drugs and Illicit Tobacco

  • Since 2003, the “Integrated Proceeds of Crime” (IPOC) Units of the Royal Canadian Mounted Police (RCMP) has obtained the forfeiture of more than $64 million in cash and property, with an additional $143 million seized and waiting for disposition.
  • In 2006, the estimated street value of drugs seized in Canada amounted to $2.3 billion.
  • Marijuana is an industry with estimated revenues of $5 billion to $7 billion a year in British Columbia (B.C.). There are an estimated 20,000 marijuana grow-ops in houses across the province.
  • During 2006-2007, the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) disclosed 193 suspicious transaction cases with a total value of $9.8 billion.
  • In 2008, the federal and provincial governments together lost an estimated $2.4 billion in taxes from illicit tobacco.

Second, tax evasion and criminal attacks on tax administrations are becoming increasingly complex and are growing. The following illustrate the potential magnitude of the problem:

Tax Evasion and Tax Fraud

  • Since 2007 the CRA has identified a growing trend in fraud perpetrated by unscrupulous tax preparers who were responsible for defrauding the tax system of tens of millions of dollars involving over 30,000 taxpayers.
  • Over a four year period (2001-2002 to 2004-2005) High Risk Analysis Teams (HRAT) within CPB at the CRA identified 1,900 cells claiming almost $31 million in fraudulent Goods and Services Tax/Harmonized Sales Tax (GST/HST) refunds of which about $15 million had been paid out.
  • The Ministère des Finances du Québec (MFQ) estimated tax evasion reduced revenues for the Government of Québec by about $2.5 billion.
  • The MFQ found the sectors with a tax evasion rate of more than 10% represented just over 20% of the Provincial gross domestic product (GDP) but accounted for 85% of tax losses.
  • Value added tax (VAT) fraud is a growing concern internationally and domestically. In 2005-2006 Her Majesty's Revenue and Customs (HMRC) identified fraudulent tax credits totalling £540 million; of this, HMRC was able to detect and prevent attempts worth £409 million, before they were paid out.
  • European VAT fraud is growing at an alarming rate - both in its quantum and its level of sophistication - to the point that it is today beginning to affect the accuracy of Member states' trade statistics. Estimates vary concerning the actual level of VAT losses, with figures ranging from €60 billion to €100 billion per annum for all Member states.
  • The Organization for Economic Co-operation and Development (OECD) estimated that annual VAT tax losses from missing trader and carousel fraud within the United Kingdom (UK) are between £1.1 and £1.7 billion.
  • The UK National Fraud Authority indicates that the highest single area of fraud loss in the UK is attributed to tax fraud, estimated at £15.2 billion - approximately 3% of total tax liabilities.

Various internal and external reports also indicate that tax administrations may be vulnerable to fraud not only perpetrated by unscrupulous taxpayers and tax preparers but by organized crime groups and terrorist organizations.

2.2 The CRA Response

The CRA endeavours to promote a level playing field where all taxpayers respect the principle of voluntary compliance and where non-compliance has known consequences. Recent research [Footnote 6] suggests that the principles of self assessment and voluntary compliance are respected when a tax administration adopts a responsive regulatory approach, striking a dynamic balance between deterrence and persuasion. The CRA uses, to a varying degree, a mix of service, education and enforcement to ensure compliance with Canada's tax laws, depending on whether taxpayers are willing to comply, do not succeed in complying, or choose not to comply. For the purpose of this study “enforcement” refers to both criminal and civil action taken to address criminal non-compliance and non-compliance within the criminal economy (see Appendix C - Glossary of Terms for definitions).

The CRA response to addressing the most serious forms of non-compliance is focussed within the EDD. The EDD is situated within the Compliance Programs Branch and tasked with a mission to deter, detect and correct tax evasion and non-compliance in the criminal economy. There are four programs within the EDD [Footnote 7]:

  • Criminal Investigations Program (CIP)
  • Special Enforcement Program (SEP)
  • Voluntary Disclosures Program (VDP)
  • Informant Leads Program

The functional responsibility of the Enforcement Program is centralized at CRA Headquarters, while the CIP and SEP are operationally delivered through 32 Tax Service Offices (TSO) across the country under the management of an Assistant Director of Enforcement (ADE) who reports to the respective TSO Director. The VDP and Informant Leads Program are situated within five regional processing centres. Each of the programs is dependent on relationships or partnerships with other divisions or branches and in some cases external organizations in the achievement of their objectives.

Program funding is transferred to each region which, in turn, allocates the resources based on regional priorities. Program production targets are negotiated between HQ and the Regions. Figure 1 presents the resource utilization of each of the programs during 2008-2009. The majority of EDD resources are dedicated to the CIP and SEP. Together these programs accounted for about 83% of total EDD direct FTEs and about 85% of direct utilized salaries

Figure 1: 2008-2009 Resource Utilization by EDD Programs

 

CIP

SEP

VDP

Leads

TOTAL

Direct FTEs

453

182

84

43

762

Direct Salary Costs ($000s)

$32,049

$12,907

$5,285

$2,700

$52,941

O&M Costs ($000s)

n/a

n/a

n/a

n/a

$3,303

Total Program Costs** ($000s)

 

 

 

 

$56,244

Source: EDD Program Statistics, CRA, 2008-2009
* Note: Total program costs do not reflect indirect salaries associated with support staff

The following sections provide descriptions of each of the four programs and their roles within the CRA.

2.2.1 The Criminal Investigations Program

The mandate of the CIP is to investigate suspected cases of tax evasion, fraud and other serious violations of tax laws.

Tax evasion is a crime punishable on summary conviction by a fine ranging from 50% to 200% of the evaded tax and up to two years imprisonment and conviction on indictment to a fine ranging from 100% to 200% of evaded tax and up to five years imprisonment.

Criminal investigations differ significantly from other Agency programs - CIP is the law enforcement arm of the Agency. As such, investigators must gather evidence that demonstrates, beyond a reasonable doubt, that a crime was committed (“actus reus”) and that the taxpayer knew that a crime was being committed (“mens rea”).

The roles and responsibilities of CRA investigators are largely different from those of their audit counterparts and are more similar to those of investigators in other law enforcement agencies. CRA investigators are empowered to obtain evidence by way of a judicially authorized search warrant or production order issued under the Criminal Code. Evidence can also be obtained through cooperation with third parties, by undertaking limited surveillance or with the assistance of wiretap evidence obtained through the cooperation of police authorities. Both the evidence gathered and the investigators themselves must stand up to the scrutiny of a criminal proceeding.

The CIP is dependent on the following partnerships and close working relationships with organizations both external and internal to the CRA in achieving its objectives:

  • CIP cases are prosecuted by and convictions sought through lawyers within the “Public Prosecution Service Canada” (PPSC) - an independent organization reporting to Parliament through the Attorney General of Canada.
  • The RCMP assists CIP investigators in the conduct of search and seizures of evidence to ensure the safety of the officers involved.
  • FINTRAC refers suspicious transaction cases to the CRA for further investigation.
  • Various CRA Audit programs refer audit cases for possible investigation where tax evasion is suspected.
  • Public Affairs Branch is responsible for ensuring press releases of convictions are appropriately drafted and distributed to the media.

During 2008-2009, 199 full-scale investigations were referred to PPSC and PPSC secured 292 prosecutions [Footnote 8] of which about 97% resulted in conviction. Convictions resulted in almost $29 million in additional tax revenues (“Taxes On Which Convicted”) or about $112,700 per conviction. The fines levied amounted to over $19 million, or almost $77,900 per conviction.

Figure 2 presents the numbers of completed full-scale investigations and cases accepted for prosecution, as well the prosecution and conviction rates from 2004-2005 to 2008-2009.

Figure 2

Source: CIP Program Statistics, Enforcement and Disclosures Directorate

On average, about 77% of completed full-scale investigations were accepted for prosecution by the PPSC between 2004-2005 and 2008-2009. At the same time, the conviction rate averaged about 95%. Convictions resulting from CIP investigations yielded the following average results between 2004-2005 and 2008-2009:

  • Over $32 million in taxes on which convicted or about $135,000 per conviction
  • About $16.2 million in fines levied or about $68,000 per conviction
  • About 29 incarcerations per year

2.2.2 The Special Enforcement Program

The SEP conducts civil audits and undertakes other civil enforcement actions, such as enforcing the filing of tax returns, on individuals known or suspected of deriving income from illegal activities. The program objectives are:

  • to reduce the accumulation of unreported illicit wealth amassed by these individuals, thereby limiting the financial ability to continue or expand illegal activities
  • to reduce tax non-compliance in the criminal economy

In contrast with voluntarily and contingently compliant taxpayers who generally have reasonable records available when they undergo regular audits, it's unlikely that individuals who are involved in illegal activities keep records of their criminal proceeds. Most transactions are likely of a cash nature to minimize tracking their revenues. Auditing these individuals is therefore very difficult and often requires establishing the net worth of the individual by comparing their standard of living to reported income.

SEP audits target individuals involved in drug trafficking, fraud, prostitution and money laundering including motorcycle gang members and members of organized crime syndicates [Footnote 9]. There is an inherent risk to the SEP auditor in auditing persons involved in criminality.

The SEP is dependent on the following partnerships and close working relationships with other organizations both external and internal to the CRA in achieving its objectives: 

  • The RCMP, municipal and provincial police agencies and FINTRAC for the detection and referral of audit cases.
  • Taxpayer Services and Debt Management Branch (TSDMB) is responsible for administering collections actions for SEP assessments.

During 2008-2009 SEP conducted 1,176 audits resulting in just over $101 million in “Tax Earned by Audit” (TEBA). Figure 3 presents the trends in key SEP audit results from 1997-1998 to 2008-2009.

Figure 3

Source: SEP Program Statistics, Enforcement and Disclosures Directorate

There has been fairly consistent year-over-year growth in TEBA averaging over 8% per year between 2004-2005 and 2008-2009. SEP TEBA reached $101 million during 2008-2009. At the same time, there was considerable year-over-year growth in TEBA per SEP audit, averaging 12% per year between 2004-2005 and 2008-2009 to reach over $115,000 per audit in 2008-2009.

2.2.3 The Voluntary Disclosures Program

The mandate of the VDP is to facilitate voluntary compliance with the legislation administered by the CRA by processing voluntary disclosures by non-compliant taxpayers and/or their representatives. The linkage between the VDP mandate and the Directorate's mandate to “deter, detect and correct, tax evasion and criminal non-compliance” is unclear.

The VDP is designed to encourage taxpayers to voluntarily make disclosures to correct inaccurate or incomplete information, or to disclose information not previously reported without penalty or prosecution and sometimes with reduced interest.

During 2008-2009, 11,390 processed voluntary disclosures resulted in almost $572 million in additional federal tax revenues, as well as about $38.6 million in additional “provincial tax” revenues. The penalties waived on accepted voluntary disclosures amounted to about $107 million during 2008. There was also about $86 million in interest waived as a result of accepted voluntary disclosures during this period.

2.2.4 The Informant Leads Program

The Agency cannot possibly identify every case of non-compliance; therefore, the Agency encourages Canadians, through the Informant Leads Program, to provide it with tips or leads to assist it in better addressing non-compliance.

The Informant Leads Program is delivered with support from CRA audit programs. Audit staff regularly work with the Leads units in reviewing leads obtained and selecting those for more in-depth examination.

There were 24,280 leads received during fiscal 2008-2009. Average growth in the number of leads received has remained flat from 1998-1999 to 2008-2009, though there have been fluctuations during this period.

3.0 Methodology

All of the following data collection and analysis methodologies have been used in the conduct of this evaluation to yield balanced and supportable findings.

  1. Interviews (internal to the CRA) - Individual and group interviews were carried out with 200 Agency management and staff from the EDD, Audit, TSDMB, Appeals Branch, Public Affairs Branch (PAB) and the Legislative Policy and Regulatory Affairs Branch (LPRAB) involved in or impacted by enforcement programs across the various Headquarter (HQ) branches, regional offices and TSOs.
  2. Interviews (external to the CRA) - Individual and group interviews were carried out with 150 representatives from external partners and other organizations with enforcement responsibilities (e.g. PPSC, RCMP, Ontario Securities Commission, Competition Bureau, Criminal Intelligence Services Canada and Ontario, Canada Mortgage and Housing Corporation (CMHC), Service Alberta, Ministère du Revenu Québec (MRQ), Insurance Bureau of Canada, Justice Alberta).
  3. Comparison to Other Tax Administrations (Domestic and Foreign) - Questionnaires were sent to three foreign tax administration (New Zealand, Australia and the United Kingdom) to gather information on their enforcement programs. Meetings with representatives from the US Internal Revenue Service (IRS) and US Department of Justice (DOJ) also took place in Washington. Interviews were also held with representatives of the MRQ.
  4. Document and File Review - Relevant documents and electronic media were reviewed including: Agency and EDD annual reports; EDD policies and procedures; Agency press releases; and, Memoranda of Understanding.
  5. Literature Review - An extensive review of over 150 reports, surveys, journals, studies and other literature pertaining to regulatory enforcement was carried out.
  6. Data Analysis - Program data was analyzed using descriptive statistics to identify trends, patterns, profiles and results. Program data files were linked to tax audit data, assessing data, objections and appeals data and “non-filer enforcement” data. Available data regarding white collar crime, tax evasion, fraud and other types of crime were also gathered and analyzed.
  7. File Review - A review of 208 CIP and SEP files was carried out at three TSOs.
  8. EDD Symposium - Broad consultation and discussions on draft evaluation findings was undertaken with EDD senior management, Assistant Directors of Enforcement and Regional Program Advisors during the May 2010 Enforcement and Disclosures Symposium. Additionally, presentations were made by three other tax administrations about their respective enforcement programs.

An evaluation advisory committee was also established to review evaluation plans, findings and conclusions and to offer advice. The advisory committee was comprised of senior Agency executives and subject matter experts who were selected on the basis of their skills, knowledge, and experience.

4.0 Study Limitations and controls

There are always limitations and constraints affecting the ability to evaluate programs. Nevertheless, there are controls that can be used to yield valid findings through gathering, comparing and contrasting information from a diversity of sources. We applied such a balanced approach in this evaluation to account for the following limitations.

  1. Data - We applied tests of data accuracy [Footnote 10] to ensure the accuracy of key fields, but did have difficulties estimating the success of collections efforts related to SEP assessments. We were able to obtain a table from TSDMB that presented the results of their assessment of collections success for the SEP. We found very limited data available on white collar crime (including fraud and tax evasion).
  2. Applicability of Comparisons to other Countries - Limitations of comparisons may result from differing societal attitudes towards taxation and tax compliance, socio/economic influences, the role of government and other factors.

5.0 Evaluation Findings

5.1 Informant Leads and Voluntary Disclosures Programs do not align with EDD mandate

As indicated earlier, the Informant Leads Program is largely a processing function that screens informant leads to determine if there is non-compliance with tax legislation. Cases that contain elements of non-compliance are referred to the relevant compliance program area for action. Almost three quarters of all leads are abandoned as they lack sufficient evidence of non-compliance. The vast majority of accepted leads are accepted by regular audit programs with less than 6% accepted by SEP and CIP (see Figure 4). Leads information can potentially serve as a source of intelligence about emerging trends in tax evasion and criminal non-compliance. However, given that the leads are primarily a source of information for programs outside of EDD, it may be better situated elsewhere.

Figure 4 presents the percentages of leads accepted by different areas within the CPB during the 2006-2007 and 2007-2008 fiscal years. There were about 22,000 Leads received during each of 2006-2007 and 2007-2008.

Figure 4

Source: Developed Using Leads Program Data from AIMS, Program Evaluation Division, CAEB

Like the Informant Leads Program, the Voluntary Disclosures Program does not appear to have clear linkages to the EDD mandate. The VDP promotes compliance with Canada's tax laws by encouraging taxpayers to voluntarily come forward and correct previous omissions in their dealings with the CRA. The process is largely dependent on an assessment of the facts and the self declared nature of the non-compliance; it is, strictly speaking, a verification process. In only very rare circumstances would a disclosure fall within the CIP or SEP workload. As can be seen in Figure 5 the large majority of VDP cases are accepted as filed.

Figure 5

Source: Special Aggregation Using VDP PowerPlay Cube, Program Evaluation, CAEB

Conclusion:  Both the Informant Leads Program and the VDP perform review processes focussed on a taxpayer group that would normally be addressed by regular audit areas. Only a small percentage of leads and voluntary disclosures are referred to CIP or SEP. While analysis of leads and disclosures may provide strategic and tactical intelligence, the majority of cases are not among the criminally non-compliant or suspected to be in the criminal economy.

Recommendation: The Agency should review the appropriateness of the location of the Informant Leads Program and the VDP within the EDD.

Management Response:

Agreed. We will undertake a review to assess whether the Informant Leads and Voluntary Disclosure Programs are best situated within the EDD.  This will be done in conjunction with a review of the Agency's enforcement mandate and development of an action plan (see management response to the second recommendation).

5.2 CRA Enforcement Programs Lack Strategic Direction

It is important to acknowledge that the Enforcement and Disclosures Directorate had developed a five year Strategic Direction document in 2007 that identified a number of the issues and challenges discussed in this evaluation report. A corresponding operational plan was developed. However, after the EDD requested the evaluation, further work on the initiatives contained in the plan were largely put on hold.

Over the last five years, CIP has investigated 740 cases of criminal non-compliance resulting in successful prosecutions. Similarly, SEP has audited 6,222 cases of tax non-compliance within the criminal economy and has raised $429 million in reassessments.  However, the existing processes and the operational framework are affecting the program in achieving its mission of deterring, detecting and correcting tax evasion and non-compliance in the criminal economy in a sustainable, strategic and coordinated fashion.

5.2.1 Detection and Case Selection

Detection is only one element of a multifaceted approach to enforcement that should not be considered in isolation; it must be examined within the context of referral and caseload selection and within the context of a deterrence strategy.

Detection and referral of potential enforcement cases occurs outside the EDD program. Approximately 92% of CIP cases are identified by audit programs and just over 70% of SEP cases are identified by external law enforcement agencies. Currently, detection and subsequent referral of potential enforcement cases is based on the merits of each case determined by the person making the referral and not necessarily based on how the case aligns to an overall enforcement strategy or against other files of merit.

Each office selects its caseload based on parameters and factors unique to those offices (e.g. workload pressures, performance agreements, size of case, collectability, chances for success) and largely in isolation of what other offices across CRA are doing or what cases they are selecting. Cases that could potentially represent significant criminal non-compliance can be rejected by a specific TSO enforcement group because of limited resources or other workload pressures.

Data and interviews suggest that offices are choosing smaller cases of a lower dollar value that do not necessarily represent the greatest risk. Figure 6 presents the percentage distribution of convictions resulting from CIP investigations by range of “tax on which convicted” by region. Convictions resulting in less than $100,000 in “tax on which convicted” accounted for 84% of all convictions. In all regions, with the exception of Quebec, just over 60% of cases result in “tax on which convicted” of less than $40,000. This supports the observations by some program staff that offices are choosing smaller cases that represent “quick hits”.

Figure 6

Source: Custom Aggregation Using AIMS Data, Program Evaluation Division, CAEB

An examination of CIP referrals demonstrates that potentially high-risk cases are disproportionately absent within detected workload. Figure 7 presents a comparison of referrals from high-risk audit areas with all audit referrals. The graph shows that an audit area such as tax avoidance is referring only 0.2% of its cases to CIP despite the fact that there is a higher likelihood of evasion in this population versus the general audit population.

Figure 7

Source: Custom Aggregation Using AIMS Micro-Data, Program Evaluation Division, CAEB

As Figure 8 indicates, SEP cases cover a range of criminality and are referred from a variety of sources. Our examination of SEP workload shows that there is little consistency from office to office in what constitutes a priority referral. In fact most offices focus on the potential TEBA [Footnote 11] an account represents rather than the nature of the criminal proceeds or the corresponding impact on criminality. TEBA has been identified as the measure of program success [Footnote 12].

Figure 8

Source: Estimated from a Survey of 16 Tax Service Offices, Program Evaluation Division, CAEB

Although the EDD has commenced with the development of an intelligence function, currently there is limited intelligence capacity to support case selection or serve other purposes. For the purpose of clarification, intelligence differs from risk assessment.  Intelligence is the product of a process that includes the collection, evaluation, and analysis of information.  “Tactical intelligence” identifies specific individuals or businesses that are known or suspected of serious non-compliance based on informant leads, police information, open source or other data that has been evaluated.  “Strategic Intelligence”, within the CRA, would be used to describe patterns and trends in tax evasion, tax non-compliance in the criminal economy, and serious non-compliance in the future.  Intelligence can be used to inform both decision making and risk management.

We found that other jurisdictions rely to a great extent on intelligence and risk identification for workload selection in order to best determine which targets will provide the greatest impact. See the section on detection in Appendix A for additional detail.

5.2.2 Deterrence

The Agency is a tax collection organization that works hard to encourage and foster voluntary compliance through education and information. It is also a law enforcement organization that must have, like most tax administrations, “a range of tools, graduated in severity, to deal with non-compliance” [Footnote 13]. Like any tax administration it “must not only have powers of credible enforcement, but must also communicate effectively its use of these powers. This 'aura' of power helps give the authority as an institution its credibility ... ” [Footnote 14]

Public opinion research suggests that:

  • there is little awareness on the part of the public about the Agency's enforcement capacity [Footnote 15];
  • tax practitioners believe the CRA is not doing enough to catch or prosecute tax evaders [Footnote 16] and that those engaging in non-compliant behaviour believe that the risk of getting caught for evading taxes is remote [Footnote 17].

Our evaluation found that efforts to publicize convictions of prosecuted cases lack a proactive engagement of the media. The Agency does not actively engage the media to generate interest in convictions of tax crimes other than through standardized press releases. Further, there is no monitoring of the extent to which press releases of tax convictions are receiving take up by the media.

Tax administrations in the U.S. and UK recognized that since deterrence is a critical outcome of criminal investigations, a better relationship between the media and the investigations organization was necessary. In early 2001 the Special Compliance Office of the UK Revenue introduced a revised press handling strategy and appointed press liaison officers in each of its regional offices to attempt to raise the profile of their work within the regional press and local Department newsletters, specialist and national press. Similarly, in 2001 the IRS Criminal Investigations Program introduced public information officers (PIOs) within designated offices. Their responsibility would be to liaise directly with the media on all criminal investigations emanating from those offices.

The severity of penalties is an important factor in deterring tax crime. Although outside the Agency's control, the relative frequency of custodial sentences for tax crimes fall well below the average of the other jurisdictions we examined and of other white collar crimes prosecuted within Canada. [Footnote 18]  Also, in 2008-2009 the courts levied approximately $20 million in fines associated with 257 convicted cases. Only 50% of these assessed fines were collected [Footnote 19] by PPSC.

The ability of the SEP to deter non-compliance in the criminal economy is dependent upon the auditor's ability to accurately assess tax owing in a timely fashion that ensures collection of any reassessments before the proceeds disappear. SEP auditors and collections data indicate that individuals undergoing SEP audits are adept at putting resources out of reach of the CRA and availing themselves of appeal provisions that offer average Canadians administrative fairness.

We found that a significant number of SEP assessments (approximately one-third) are resulting in objections to the Appeals Branch where the vast majority (83%) are being overturned. Based on a review of appealed cases by the SEP, the majority of overturned assessments are due to insufficient analysis and support for the assessment raised as a result of the audits [Footnote 20]. SEP auditors have indicated in interviews that they must often act quickly, using a net worth approach to determine taxable income in order to get to assets before they disappear, since there is a good chance that the taxpayer will appeal. SEP auditors have expressed that they feel constrained by policy, legislation and appeal provisions especially considering they are dealing with criminal proceeds.

Figure 9 presents the percentage of SEP gross assessments collected and the gross assessments collected per SEP salary dollar during 2004-2005, 2005-2006 and 2007-2008.

Figure 9

Source: Developed Using TSDMB Data and EDD Program Statistics

The graph indicates that more than 85% of SEP audit assessments go uncollected [Footnote 21]. In two of the three years examined, the assessed amount collected is not even equivalent to the salary cost of the SEP [Footnote 22]. Despite not collecting a sizeable portion of assessments, the CRA is still responsible for remitting to the provinces their share of taxes associated with the assessed amounts of the SEP audits - whether collected or not.

5.2.3 Correction

A mandate that includes correcting criminal non-compliance or non-compliance in the criminal economy is likely unsustainable [Footnote 23]. Our literature review and interviews with external law enforcement agencies has revealed that the concept of correcting criminal behaviour has been largely abandoned by law enforcement organizations in favour of “disruption” and does not factor into the mandate of other tax administrations investigations programs.

5.2.4 Delivery Model

EDD is a relatively small program responsible for a challenging mandate. The EDD delivery model aligns to the Agency's functional model. Enforcement has a presence in 32 TSOs. Its caseload derives largely from local sources. The functional responsibility of the Enforcement Program is centralized at CRA Headquarters, while the CIP and SEP are operationally delivered under the oversight of regional Assistant Commissioners and under the direction of TSO directors. This structure similarly applies to other Agency programs.

The current delivery model poses certain obstacles to objectives achievement. First, distribution of staff fails to comprise critical mass to effectively achieve program objectives. EDD resources have been allocated following the same distribution patterns as audit (i.e. in proportion to regional populations) despite potential differences in compliance and risk levels. The average enforcement office is comprised of 6 SEP auditors and 14 criminal investigators reporting to an ADE. Some offices consist of as few as 1 SEP auditor and 5 CIP investigators.

Second, ad hoc workload referral and selection based on locally identified non-compliance is too limited to achieve regional or national priorities. Third, lack of understanding or appreciation of the enforcement role at a local level creates challenges in achieving program objectives. Fourth, participation in partnership arrangements and development of relationships are influenced by local decision making and this has been inconsistent with national program direction or established Memoranda of Understanding with partner organizations (see Section 5.3).

The fact that ADEs must respond to the expectations of both their TSO Directors and EDD HQ creates tension and potential obstacles in ensuring objectives achievement. Local ADEs are responsible to manage external relationships (local law enforcement, RCMP IPOC units, PPSC) that may significantly impact objectives achievement but which may not result in traditional success measures at the local office level.

There are also parts of the Agency engaged in enforcement-related activities that lack coordination, collaboration and communication with EDD. Examples include activities within the Charities Directorate, Tax Avoidance Program, Aggressive International Tax Planning Program, Non-Filer/Non-Registrant Program and High-Risk Analysis Teams.

Examination of other tax administrations' delivery models offers alternatives to the Agency's current program delivery model. Within the past ten years, the UK, Australia and US tax administrations have all adopted a centralized delivery model for investigations. All three have adopted a centralized approach that provides input to potential investigations cases before distribution to their regional offices to better address priority risk and intelligence criteria.

Figure 10 summarizes the key changes resulting from re-organizations of enforcement functions within the IRS, Australia Tax Office (ATO) and HMRC during the past decade.

Figure 10: Summary of Delivery Model Changes in Other JurisdictionsNS

 Source: Review of Survey Questionnaires from IRS, ATO and HMRC, Program Evaluation, CAEB [Footnote 24])

There are common aspects of all three re-organizations related to adopting a centralized management approach and the creation of a centralized intelligence and detection function.

See Appendix A for a more detailed discussion of the delivery models used within the IRS, ATO and HMRC.

Conclusion:  The Agency has a decentralized and somewhat disparate approach to enforcement and lacks a clear well articulated and operationally entrenched enforcement strategy. Shared ownership of objectives achievement is not clearly understood and managed. Accountability with only limited authority has impacted EDDs efforts to achieve its mandate.

Recommendation:  The Agency should determine the extent to which it wishes to strengthen its capability to pursue both criminal non-compliance and non-compliance in the criminal economy and then develop a comprehensive enforcement strategy.

Management Response:

Agreed.  We will develop an action plan to be presented at the Management Audit and Evaluation Committee in January 2011. The action plan will focus on the need to review the Agency's enforcement mandate and develop a course of action for Enforcement that would include objectives, initiatives and accountabilities related to key issues contained in the evaluation report.  This would consist of:

  • Determining the extent to which there needs to be a coordinated approach to enforcement. This will require meeting with all quasi-enforcement areas within the Agency as well as areas that affect or are affected by enforcement activities i.e. Collections, Appeals, Public Affairs;
  • Developing, through consultations with the regions, delivery model options - including assessing allocation of staff;
  • Determining how to ensure case selection aligns to enforcement priorities;
  • Strengthening the intelligence function;
  • Developing a broader publicity strategy designed to strengthen deterrence;
  • Building and strengthening partnerships

5.3 Partnerships with PPSC and RCMP Require Attention

5.3.1 Public Prosecution Service Canada

Both CIP and PPSC interviewees acknowledged that the relationship between CIP investigators and PPSC lawyers is strained. Rejection rates, personalities, lack of consistency and lack of training were all cited as contributing factors. Both lawyers and investigators agreed that the current relationship is affecting objectives achievement.

The quality of the partnership between the CIP Investigators, who are tasked with developing a case, and the PPSC lawyers who determine which cases should be selected for prosecution, can be assessed in a couple of ways. First, data from other tax administrations that track the number of “cases accepted for prosecution” can be used as a point of comparison to gauge the relative success of the Canadian partnership. Further, the perspectives of CIP investigators and PPSC lawyers can shed light on how partnership participants feel about it.

Many of the tax administrations with which Canada traditionally compares itself enjoy relatively high rates of case acceptance. In the IRS, for example, the percentage of tax related investigations rejected by the Department of Justice decreased from 5 percent in fiscal year 2003 to just over 3 percent in fiscal year 2005. The ATO has estimated their rejection rate between 5 and 7 percent.

Based on the relative proportion of cases accepted, the PPSC/CRA partnership appears less successful when placed in this comparative context. A review of CIP statistics indicates that the average percentage of referrals rejected for prosecution over the five year period between 2004-2005 and 2008-2009 was about 23%, ranging from a high of 27% in (2005-2006) to a low of 20% in (2004-2005). Approximately one-quarter of total investigation time (with a range of 12% to 59% depending on the region) was dedicated annually to these cases. In terms of hours invested, CIP investigations required an average of 2,073 hours of investigation time per prosecuted case to complete based on 2008-2009 data.

There may be several plausible explanations relating to the high levels of rejections that the CRA is experiencing (comparatively). A 2009 study of the HMRC Enforcement and Compliance business group concludes that “the Revenue and Customs Prosecution Office become involved in cases at an early stage and therefore, other than a few frontier referrals, all cases are adopted”. Involvement of legal counsel much earlier in the investigation process has been cited by all three tax administrations as a best practice that significantly affects the acceptance rate of cases by their respective prosecutorial bodies. Another factor, which came out of interviews with CIP management and staff, relates to consistency in what constitutes acceptable cases. An example is that in some offices cases referred from SEP to CIP are rejected due to potential issues pertaining to “Jarvis and Ling” jurisprudence whereas in others they would be accepted.

The majority of PPSC prosecutors interviewed expressed concern over the quality of investigative work completed by CIP investigators. Though they all felt that CIP investigators possess excellent accounting skills, PPSC prosecutors noted that cases have become more complex than in the past, especially criminal cases involving tax fraud. They emphasized the importance of training and the level of experience of investigators and commented that many cases are lacking the detailed investigative evidence to support a conviction.

Several human resource management factors may be contributing to this situation. On the one hand, minimal previous experience requirements and modest training may be contributing to a steep on-the-job learning curve. A review of staffing requirements for CIP investigator positions found that potential recruits do not require investigations experience or previous training. Once hired, successful candidates receive two weeks in-house training designed and provided by investigations staff (less than their international counterparts [Footnote 25]). Seasoned CIP investigators and representatives from other tax administrations commented that much of their learning has occurred with experience on-the-job and that it takes approximately five years to become proficient in the field of tax investigations. On the other hand, recent and projected turnover rates suggest that many CIP investigators have not, or will not be, in their positions long enough to develop the skills and knowledge required to consistently deliver consistently good cases to PPSC. Annual turnover in EDD field offices has been estimated by ADEs to be 15% to 25% and within the last year there has been a 50% turnover in ADEs alone. Retirement rates are also projected to remain high in the coming years [Footnote 26]. CIP interviewees have also indicated that lack of career path and classification levels lower than their audit counterparts is affecting turnover.

5.3.2 Royal Canadian Mounted Police

The Agency has two distinct MOUs with the RCMP involving EDD programs. The first deals with the involvement of CIP investigators as members of IPOC units. The second involves referrals to SEP from RCMP investigative units.

The IPOC MOU establishes the CRA involvement within the context of the creation of the IPOC program. IPOC is an inter-departmental initiative that brings together staff of various governmental organizations with mutually supporting programs into working units with the goal of identifying, assessing, restraining and forfeiting illicit and unreported wealth accumulated through criminal activities. [Footnote 27]  IPOC units operate under the control and responsibility of the RCMP through a designated Officer in Charge (OIC). Upon becoming team members of the IPOC unit, CRA criminal investigators are expected to provide audit assistance from the earliest stages of proceeds of crime (POC) investigations. The CRA investigator is principally responsible and accountable to the OIC and typically receives “supernumerary special constable” status (SSC). CRA investigators within IPOC units do not have access to CRA databases and can not disclose taxpayer information to the RCMP except under specific circumstances provided for under the Income Tax Act (ITA) and the Excise Tax Act (ETA).

The SEP MOU sets forth the framework for a relationship between RCMP Federal Investigative Units and CRA Special Enforcement Program. The purpose of the relationship is to address more effectively the accumulation of unreported illicit wealth amassed by those involved in earning income from illegal activities. The scope of this MOU is limited to the activities supporting the referral of information and documents by the RCMP Federal Units to SEP.

The evaluation identified that both MOUs are producing results where TSO Assistant Directors of Enforcement are actively engaged or have established relationships with RCMP investigative units. For example, in offices where SEP auditors are working with IPOC units in the capacity of SEP liaison officers (SLO's) data reveals that significant numbers of potential audit cases are referred representing substantial amounts of unreported income. Figure 11 identifies cases referred by IPOC to SEP that were subsequently audited.

Figure 11: Cases referred to and Audited by SEP

  IPOC Cases IPOC referred FINTRAC Cases TOTAL IPOC TEBA ($) FINTRAC TEBA ($) TOTAL ($) IPOC HOURS FINTRAC HOURS
2005-2006 99 46 145 3,150,271 4,239,331 7,389,602 8,025 5,438
2006-2007 191 5 196 11,484,391 93,514 11,577,905 13,674 156
2007-2008 154 23 177 10,535,136 1,060,515 11,595,651 14,475 2,558
TOTAL 444 74 518 25,169,798 5,393,360 30,563,158 36,174 8,152

Source:  2009 IPOC Review Project, Enforcement and Disclosures Directorate

These numbers represent only a small percentage of cases identified by IPOC units referred to and reviewed by CRA enforcement staff. In 2008 one IPOC unit alone identified and referred 401 cases to CRA representing approximately $138 million in “taxable equity”. Considering that IPOC units pursue only 10% of cases as active investigations there is considerable opportunity for the CRA enforcement units to tackle the criminal element through taxation of illegal proceeds.

While the majority of interviews with RCMP and CRA enforcement staff indicate support for existing relationships, all felt that there is much more that can be done to have a broader and more significant impact on criminality. Currently, there is a lack of consistency in approach from one TSO to another with respect to the level of participation in a partnership approach to dealing with the criminal element despite national MOUs and other agreements. A joint review of the IPOC program undertaken by the RCMP and EDD in 2009 found that CRA involvement as members of IPOC units has been decreasing over the past five years. Participation of CIP investigators in IPOC has dropped from 12 to just six. ADE's interviewed identified resource constraints as the predominant reason why resources were withdrawn from IPOC units. In offices where CIP investigators have been withdrawn, RCMP interviewees commented that it has had a negative impact on the achievement of IPOC objectives and results in significantly less referrals to SEP.

Another issue pertaining to the Agency's role as a law enforcement partner is its inability to share taxpayer information for intelligence purposes with other law enforcement partners. “Section 241” of the ITA and “section 295” of the ETA prohibit the sharing of tax information except in very specific circumstances. Our interviews with both EDD management and staff and external partners indicate that limitations imposed by these sections are negatively impacting a coordinated task force approach to crime reduction.

Although the limitations imposed by Section 241 of the ITA and Section 295 of the ETA are unequivocal, recent research suggests that Canadians are supportive of sharing of tax information in very specific instances:

“... in particular, there is support for information sharing in the face of serious criminal activity and for fair and proper administration of federal and provincial government programs, including ensuring only those who properly qualify for benefits receive them, alerting Canadians regarding their eligibility for government benefits, collecting debts, improving the effectiveness of tax and benefit programs, and ensuring compliance with tax laws” [Footnote 28]

Additionally, there have been recent changes to Section 241 permitting the sharing of a variety of information about charities to the RCMP, Canadian Security Intelligence Service and FINTRAC that would be relevant to investigations under the terrorist activity and facilitation provisions of the Criminal Code.

Conclusion: The findings indicate that there are opportunities to strengthen existing partnerships. Some of the factors are legislative, technical, procedural and operational while others are specific to communication, training and human resources.

Recommendation:  The EDD should engage internal and external partners in dialogue to discuss roles, expectations, impediments and responsibilities and seek solutions to the problems negatively impacting partnerships.

Management Response:

Agreed.  As noted above, we will develop a plan which will include objectives and initiatives related to building and strengthening partnerships.

Appendices

Appendix A - Enforcement Within other Jurisdictions

Detection

IRS

The 2000 IRS re-organization of the Criminal Investigation (CI) function created centralized Lead Development Centers to provide strategic and “tactical intelligence” and develop cases to the point that they can be referred to primary investigation. The IRS also established Fraud Detection Centers that work closely with CI field offices to develop criminal cases and stop fraudulent refunds. CI established a close working relationship with audit divisions that is geared toward specific market-segment taxpayers for the purposes of providing anti-fraud education and identifying appropriate fraud cases for referral. The relationship is reinforced through participation on the IRS Compliance Council.

ATO

The creation of the Serious Non-Compliance (SNC) Business Line by the ATO in 2006 placed a prominent emphasis on workload selection that is influenced by a risk and intelligence focus and priorities set under the SNC Line Delivery Plan. In 2007, the SNC established two new forums to help the transition from case based work allocation to a project based allocation. Under these new forums, the SNC identifies and allocates resources to work aligned to SNC's strategic risks.

The SNCI-Prioritisation Mode (an internal document) provides guidelines to SNC Intelligence officers on how to assess referrals using a range of internal and external systems and data sources. Referrals are given an initial priority rating based on the information at hand having regard to impact, leverage, priority, budget, duration, compliance effect and revenue at risk.

In addition the ATO moved from a more localized process of case selection to a more national case selection process.

“Appropriate case selection is crucial to SNC meeting its objectives. Successful case selection should be aligned with national strategic priorities and assist in maintaining and enhancing community confidence. Historically, a regionally focused process allowed significant variances in case selection across Australia. Over time regions have developed particular skill sets and cases were chosen to reflect these skill sets. The Tax Office must effectively leverage from the cases that are chosen under the compliance model to ensure the greatest impact in line with its national strategic objectives.

To address the regionally based focus of previous case selection, the Tax Office has revised its case approval process to greater reflect national and strategic priorities. Established in August 2007, the PMF was set up to, amongst other things, approve cases and programs following consideration at the regional level. The PMF endorsed National Case Selection Process only came into operation in September 2008.” [Footnote 29]

HMRC

During the re-organization of 2005, the UK HMRC created the Detection Directorate to centralize the detection and development of enforcement cases. The directorate includes a strategic and tactical intelligence function which identifies emerging trends and develops intelligence to support the detection and development of cases related to these emerging areas of non-compliance.

Deterrence

ATO

Within Australia, a 2009 Australian National Audit Office (ANAO) audit of the ATO's Management of Serious Non-Compliance emphasized the importance of measuring the deterrence impact of publicity and communications efforts. In response, the ATO has developed their Tax Evasion, Avoidance and Crime Communications Strategy and conducted research to establish baseline information to assess its effectiveness. The ATO SNC also measures their deterrent effect through examining trends in survey results about taxpayer perceptions about how well fraud and serious evasion risks are being managed. Trends in these perceptions are then examined in relation to deterrence activities (including publicity) to assess the effectiveness of these activities.

As part of their Tax Evasion, Avoidance and Crime Communications Strategy, the ATO has also put considerable effort into increasing awareness of the consequences of tax crime using the internet. They have developed an electronic publication of a quarterly e-magazine titled “Targeting Tax Crime” which is available on their website. [Footnote 30] The magazine explicitly describes the role of enforcement and the Agency's focus on tax crime.

HMRC

The UK HMRC also recognizes that more and better use needs to be made of publicity in influencing public behaviour and increasing levels of compliance and voluntary disclosure. This follows earlier criticism by a National Audit Office audit which observed that:

“... more and better use needs to be made of publicity in influencing public behaviour and increasing levels of compliance and voluntary disclosure. ... They could do more to publicise specific compliance activities, including the use of publicity in advance of compliance work in specific sectors, to heighten the perception that the likelihood of detection is high and encourage voluntary disclosure.” [Footnote 31]

HMRC is now beginning to publicize their compliance work through periodic briefings to the media, writing articles for the professional press and through press releases on, for example, certain projects. They are attempting to publicize specific compliance activities, including the use of publicity in advance of compliance work in specific sectors, to heighten the perception that the likelihood of detection is high and encourage voluntary disclosure.

Alternative Delivery Models

IRS

The IRS enforcement function was facing challenges during the 1990s that are strikingly similar to the situation currently at the CRA. Two significant reasons set the stage for the re-organization of the criminal investigation function. Firstly, the Restructuring and Reform Act of 1998 (RRA 98) set the groundwork for the IRS to re-design to serve taxpayers and tax practitioners more effectively and efficiently. Secondly, the Review of the Internal Revenue Service's Criminal Investigation Program, written in 1999 by Judge William Webster, made dozens of detailed recommendations, including the major structural changes described below. Recommendations from these reports led to a re-organization of the enforcement function in 2000. The following table describes the key changes resulting from this re-organization.

Overview of Key Changes in the IRS

  • Line Authority – The IRS CI has line authority through the Chief CI who reports directly to the Commissioner. The objective was to ensure that case management is the responsibility of professional law enforcement officials within the IRS.
  • Geographic Structure – CI territory offices were aligned with the boundaries of federal judicial districts. Centralized management approach was implemented to increase consistency in the application of CI compliance strategy.
  • Strategic and Tactical Intelligence – Lead Development Centers were established to perform “strategic and tactical intelligence” and develop cases to the point they can be referred to primary investigation.
  • Detection – Structural and process changes were made within the Operating Divisions to revive the referral program. Fraud Detection Centers were created to develop criminal cases.
  • Relationships with the Department of Justice –Counsel/Special Agent Team Counsel positions were created to be involved in CI cases from the very beginning to provide legal guidance and advice.
  • Partnerships with Operating Divisions – CI was set up to work closely with the four operating divisions. The relationship between CI and the operating divisions was reinforced through participation on the IRS Compliance Council. The relationship with Audit was re-aligned to focus on specific market-segment taxpayers.
  • Publicity and Deterrence – IRS CI Special Agents began to work as Public Information Officers. They began to serve as the contact point for all internal and external communication including issuing press releases.

Source: Summarized from “What Has Changed for IRS Criminal Investigation and Our Relationship with the Department of Justice” by Mark Matthews, p. 1, US Attorneys' Bulletin, Volume 49, Number 4, July 2001

The IRS CI re-organization also resulted in a modified program mandate to foster confidence in the tax system and compliance with the tax law. The re-organization focussed on achieving the mandate by: promoting the detection and prosecution functions through enhanced relationships and partnerships and the creation of a centralized risk and intelligence function; and, promoting deterrence through new direct CI responsibility for publicity.

ATO

In the ATO, a re-organization in 2006 created the Serious Non Compliance (SNC) business line. As noted earlier, the SNC was created as a separate business line (within the Compliance sub-plan) that places a strong emphasis on project-oriented cases developed primarily through a central internal risk, strategy and intelligence area. Decisions about SNC project resources are made largely by the SNC Program Steering Committee with representation from other parts of the ATO.

The re-organization also resulted in the SNC becoming the conduit between the broader law enforcement community and the ATO. Their work is undertaken in cooperation with other law enforcement agencies - often as part of a multi-agency taskforce.

HMRC

With respect to the UK HMRC, re-organization in 2005 created the Criminal Investigations Directorate and allocated criminal investigations powers to four HMRC Directorates. The following table presents an overview of the key changes resulting from the 2005 re-organization.

New Directorates Resulting from Key Changes in the UK HMRC

  • Criminal Investigations – Responsible for most criminal investigations
  • Internal Governance – Responsible for civil and criminal internal investigations
  • Detection – Responsible for detecting individuals and organizations trying to evade HMRC controls
  • Risk and Intelligence – Responsible for intelligence and profiling work


Source: Survey Response from the UK HMRC

The re-organization resulted in the complete separation of criminal and civil investigations. Like the CRA, HMRC is not responsible for criminal prosecutions. Detection and intelligence were again central components of the re-organization with the creation of the Detection and Risk and Intelligence Directorates.

  Training

HMRC

The UK HMRC training of new investigators covers 15 weeks of which 8 weeks are classroom designated followed by the remainder of the 12 months under a training assessment period. During this period new recruits are assessed against a personal training record. Other training requirements must be met during this period.

ATO

In Australia, employees primarily engaged in preventing, detecting or investigating fraud have to meet the required fraud control competency requirements for Government. Investigators new to the ATO (or existing staff without the qualification) are required to attain the Certificate IV in Government (Investigations) as a minimum standard, within 12 months of starting work. Successful participants are awarded the Certificate IV in Government (Investigations) through Charles Sturt University.

IRS

In the U.S., CI Special Agents are trained through four primary means:

  1. A formal 27 week comprehensive initial training program, of which 12 weeks focus on basic criminal investigation training, for all new Special Agents prior to beginning work in a CI field office
  2. A one to two year on-the-job training program, under the guidance of an experienced agent
  3. A Continuing Professional Education seminar every year in each District for all Special Agents
  4. A  two-week formal training program - Advanced Special Agent Training, for experienced agents

Appendix B - Examples of CIP and SEP cases

CIP Cases

Income Tax and GST Tax Evasion Case

A local business was a chronic non-filer. Following non-filer enforcement action, a review of the filed return led to the corporation and its owner being referred for audit. Non-Filer Enforcement recommended proceeding directly to a net worth audit. The net worth audit discovered assets and shareholder contributions that didn’t coincide with the corporate losses and low personal incomes declared on the tax returns. Additionally, the requested cash register tapes were said to have been destroyed. However, an analysis of deposits found cash and credit card deposits exceeded sales. A total income discrepancy of over $450,000 was found by the audit and the case was referred to CIP. CI investigators prepared and implemented a Search Warrant for the owner’s home where they found a large amount of cash and the business cash register tapes. An analysis of the tapes found that the cash register totals were rung off twice each day. The taxpayer only reported 1 of the totals in the sales journal. In one year, these deleted transactions amounted to over $400,000. The final factual unreported sales amounted to over $1.25 million. The initial trial found the taxpayer guilty of tax evasion for one half of the period the CRA charged him for. The judge calculated unreported income on his own amounting to almost $600,000 and income tax and GST owing of almost $175,000. The judge also applied a fine in the amount of 200% of the federal tax owing. The outcome of the trial was published in many local and regional newspapers. Both sides appealed the decision. The appeal resulted in the CRA winning. The business owner is currently awaiting sentencing.

Project Colisée

The CRA had been a full member of Project Colisée for two years. The Project was led by the Combined Forces Special Enforcement Unit (CFSEU), a joint unit working under the coordination of the Royal Canadian Mounted Police (RCMP), with the collaboration of the Sûreté du Québec, the Service de police de la ville de Montréal (SPVM), the Service de protection des citoyens de Laval, the Canada Border Services Agency (CBSA), as well as the Canada Revenue Agency.

On November 23, 2006, the partners of the Combined Forces Special Enforcement Unit, dealt a serious blow to traditional organized crime in the Montréal region. Over 70 persons were charged with close to 1,000 offences. The purpose of these charges was to tackle a major criminal organization on several fronts. Over 150 officers of the CRA executed 24 search warrants that day as part of seven on-going criminal investigations into tax evasion and tax fraud under Project Colisée. On November 23, 2006 the CRA issued assessments and seized certain goods, including two homes and investments over $4.4 million with a potential collection of $ 2.5 million. These investigations are on-going with the potential for over 40 follow-up audits and other criminal investigations into tax evasion and tax fraud on key players involved in this criminal organization.

SEP Cases

PROTECTED

Appendix C - Glossary of Terms

  1. Actus Reus - Actus Reus is a legal term describing the condition of carrying out illegal actions.
  2. Cases Accepted for Prosecution - Once the full-scale investigation is completed, it is referred to the PPSC for prosecution. The referral is reviewed by attorneys working for the PPSC to assess whether there is sufficient evidence of mens rea, sufficient tax potential, sufficient quantum of evidence, whether there are Charter of Rights and Freedoms issues and whether the investigation was carried out properly to yield a conviction. If the referral is deemed to meet these criteria it is accepted for prosecution by the PPSC.
  3. Contingent Non-Compliers - This term describes taxpayers that are currently compliant, but who would be inclined to be non-compliant if they feel there is a reasonable possibility they can succeed without being caught.
  4. Criminal Economy - Part of the underground economy where illegal activities provide a source of income. Examples of these types of activities include drug trafficking, prostitution and fraud, among others. Taxes are almost always never remitted in relation to these illegal activities. In some cases, taxes may be remitted when money from illegal activities is laundered through legitimate enterprises.
  5. Delinquent Actions - Federal Tax Increase - The federal tax increase resulting from delinquent action refers to the federal taxes assessed as a result of successful prosecution related to s.238 of the Income Tax Act requiring a taxpayer undergoing a SEP audit to file their return. The delinquent action is administered directly by SEP.
  6. Full-Scale Investigation - A CIP investigation proceeds through three stages. The first two stages assess the referral to determine if there is sufficient evidence of mens rea, sufficient tax potential, and sufficient quantum of evidence and whether there are Charter of Rights and Freedoms issues that would prevent conviction. When the case is found to meet these criteria, it proceeds to the full-investigation stage. At this stage, evidence is gathered and reviewed to develop the case for prosecution by the PPSC.
  7. Gross Negligence Penalty - A Gross Negligence Penalty is the most serious civil penalty administered by the regular audit function. This penalty is applied when the auditor finds there is evidence that the person knew there were issues with his tax affairs (it does not necessarily mean there is strong likelihood of tax evasion and mens rea has not been proven).
  8. IMET - Integrated Market Enforcement Teams (IMETs) are specialized teams that work in partnership with Public Safety Canada and the Public Prosecution Service of Canada to target financial crime and protect the integrity of the Canadian economy and its capital markets.
  9. IPOC - The Integrated Proceeds of Crime (IPOC) units within the RCMP have the goal to contribute to the disruption, dismantling and incapacitation of targeted organized criminals and crime groups. They do this by seizing criminal proceeds of crime including cars, houses, boats, among others.
  10. Jarvis and Ling Cases - The Ling v. Her Majesty The Queen and Jarvis v. Her Majesty The Queen Supreme Court of Canada cases were both successful challenges of CIP cases related to violations of the Charter of Rights and Freedoms. The challenge relates to the point within a civil audit where criminal activity becomes evident. At this point, the court judged that the civil audit must be ceased and a formal criminal investigation process must begin. As part of the formal criminal investigation process, the taxpayer must be notified by the CRA that he/she is under criminal investigation.
  11. Mens Rea - Mens Rea is a legal term describing conditions where there is evidence of “the guilty mind” associated with illegal activities. In other words, the illegal activity was wilfully carried out in full knowledge that it is illegal.
  12. Non-Compliance in the Criminal Economy - This refers to tax non-compliance among those involved in and receiving income from illegal activities.
  13. Non-Filer Enforcement - Non-filer enforcement is primarily carried out within the Taxpayer Services and Debt Management Branch (TSDMB), though the SEP program can also implement non-filer enforcement actions (called delinquent actions) in relation to a SEP audit. Non-filer enforcement activities within TSDMB use matching techniques to try and identify taxpayers that have not filed returns. Subsequent enforcement activities can range from sending a letter to the taxpayer requiring them to file their return to formal prosecution under s.238 of the Income Tax Act (ITA). Similar enforcement actions are carried out within the SEP program to require taxpayers audited under SEP to file returns.
  14. PPSC - The Public Prosecution Service of Canada (PPSC) reports to Parliament through the Attorney General of Canada. The Director of Public Prosecutions Act states that the Director of Public Prosecutions acts "under and on behalf of the Attorney General of Canada."
  15. Provincial taxes - When a SEP audit or a CIP civil audit is completed, federal and provincial taxes owing are identified and penalties and interest may be administered. Subsequent assessments and reassessments formally identify the federal and provincial taxes to be remitted. Under current Tax Collection Agreements (TCAs) established under section 7 of the Federal-Provincial Fiscal Arrangements Act, the federal government is responsible for transferring the provincial tax component assessed or re-assessed resulting from the audit while the responsibility for collecting the provincial tax lies with the CRA. The assessed amounts are transferred whether collections efforts are successful or not.
  16. Rebel Non-Compliers - This term describes a group that will be non-compliant with respect to their tax requirements irrespective of what consequences are in place.
  17. Risk Assessment - Risk assessment generally assigns a probability of an outcome of non-compliance occurring to broad categories of businesses or individuals. Strategic risk assessment generally assesses risks to the tax administration using an environmental scan, reviews of internal processes and anticipated strategic shifts in the future. The ATO SNC utilizes strategic risk assessment to identify key enforcement risks which, in turn, feed into the ATO strategic risk assessment used to identify priorities, allocate its resources and develop performance measures.
  18. s . 238 (ITA) - Section 238 of the Income Tax Act (ITA) describes the consequences for not filing a tax return. Under s.238, if the individual does not file their tax return, prosecution actions can be undertaken. If convicted, the individual can be liable to a fine between $1,000 and $25,000 or both a fine and imprisonment not exceeding 12 months.
  19. s.241 (ITA) - Section 241 of the Income Tax Act states that “Except as authorized by this section, no official shall (a) knowingly provide, or knowingly allow to be provided, to any person any taxpayer information; (b) knowingly allow any person to have access to any taxpayer information; or (c) knowingly use any taxpayer information otherwise than in the course of the administration or enforcement of this Act, the Canada Pension Plan, the Unemployment Insurance Act or the Employment Insurance Act or for the purpose for which it was provided under this section.”  Section 241 does not permit EDD to share taxpayer information with external enforcement agencies.
  20. s . 295 (ETA) - Section 295 of the Excise Tax Act is similar to s.241 of the ITA. Section 295 also prohibits the EDD from sharing GST/HST information with external enforcement agencies.
  21. Supernumerary Special Constable - An Investigator who has been appointed a supernumerary special constable by the Commissioner of the RCMP pursuant to paragraph 7(1)(c) of the RCMP Act. The special constable has the same powers conferred on regular members of the RCMP.
  22. Strategic Intelligence - Within CRA, strategic Intelligence would be used to describe patterns and trends in tax evasion, tax non-compliance in the criminal economy, and serious non-compliance in the future.
  23. Tactical Intelligence - Tactical intelligence identifies specific individuals or businesses that are known or suspected of serious non-compliance based on informant leads, police information, open source or other data that has been evaluated.
  24. Taxable Equity - Equity gained as proceeds of criminal activities that is identified as taxable income following a SEP net worth audit.
  25. Tax Evasion - Tax evasion describes the act of deliberately not paying taxes where there is evidence of both mens rea (the guilty mind) and actus reus (the illegal activity).
  26. Tax On Which Convicted - Tax On Which Convicted is a term used within CIP to describe the amount of taxes the taxpayer found guilty of tax evasion (as a result a CIP investigation) is required to remit to the CRA.
  27. TEBA - Tax Earned by Audit refers to the federal tax amount identified by an audit (including a SEP audit). In most cases, the results of the audit (including the TEBA amount) are referred for tax assessment or re-assessment which, in turn, results in a tax statement being provided to the taxpayer indicating the amount of federal taxes to be remitted to the CRA.

Appendix D - Example of an Agency Press Release for a Conviction of Tax Fraud

Brothers' tax evasion scheme nets each $59,444 fine

Surrey, British Columbia, May 6, 2010... Surrey businessmen, developers and brothers, Sohan Singh Dhesa and Nahar Singh Dhesa, were sentenced in Surrey Provincial Court on May 5, 2010, after pleading guilty to income tax evasion. The brothers were each fined $59,444 representing 75% of federal taxes evaded. Sohan Singh Dhesa and Nahar Singh Dhesa were also handed a 14 month Conditional Serve Order.

A Canada Revenue Agency (CRA) investigation determined that the brothers formed a family partnership and purchased two properties for development purposes. The partnership subdivided these properties and subsequently sold them to two nominees. On review, it was revealed that the individuals, who acted as nominees for the Dhesas, were never the beneficial owners of the lots. Most of the money the nominees received from the sale of the lots was paid to the Dhesas or their beneficiaries. In fact, it was determined that the Dhesas sold the properties to various third parties for more than the amount originally disclosed. In doing so, the Dhesa brothers understated taxable income in the amount of $334,565 for the 2002 and 2003 taxation years, and evaded federal taxes of $79,392 each.

When individuals are convicted of income tax fraud, they must still repay any amounts fraudulently received, plus interest and any civil penalties that may be assessed by the CRA. In addition, the court may fine them up to 200% of the refund sought and impose a jail term of up to five years.

Individuals who have not filed returns for previous years, or who have not reported all of their income, can still voluntarily correct their tax affairs. They will not be penalized or prosecuted if they make a full disclosure before the Agency starts any action or investigation against them. These individuals may only have to pay the taxes owing, plus interest. More information on the Voluntary Disclosures Program can be found on the CRA's website at www.cra.gc.ca/voluntarydisclosures.

The information in this news release was obtained from the court records.


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