Voluntary Disclosure Beats Audit Exposure

Confession of past tax sins normally costs less than an audit which uncovers what you tried to conceal.

Tax returns that contain errors or omissions, accidental or intentional, are not uncommon. Do you know what to do if you discover an error in your tax return after filing it? Or if you went beyond errors and knowingly understated income on past returns or even failed to file tax returns for several years?

While many of us would prefer not to flag our errors for Canada Revenue Agency (CRA), it's always possible, and definitely best, to rectify material errors and move forward with a clean slate.

Established legislation, processes, and time frames govern how CRA handles errors and omissions. Regulations also address CRA's rights when it comes to assessing and reassessing tax returns.

Making Changes to Your Most Recent Tax Return

First, if you find an error on your most recent tax return that either increases or decreases your tax payable, you can make changes up to the later of one year from the filing deadline, which is normally April 30 (June 15 if you or your spouse are self-employed) or 90 days after issuance of the most recent Notice of Assessment or Reassessment.

Second, CRA normally allows a change that applies to a previous tax year if it has been less than 3 years since you received a Notice of Assessment or Reassessment for the tax year in question. CRA will usually make an adjustment if:

  • It is satisfied the previous assessment or reassessment was incorrect.
  • Any requested decrease in income is not based on "permissive" deductions such as capital cost allowance claims or tax reserves where you originally claimed less than the maximum allowable.
  • The application for a refund is not based solely on a successful court case appeal.

Whatever the situation, CRA prefers that you not file an amended tax return. You can visit the CRA website to make a change online or write to the tax center where you filed your return and explain the change(s) and include:

  • A completed Form T1-ADJA
  • Any additional information such as T4 or T5 slips and receipts
  • Your Social Insurance Number or Identification Number

Sometimes CRA will accept changes that fall outside of this 3-year "normal reassessment period."

Legislation introduced in 1991, known as the Fairness Package, gives CRA discretion to issue refunds (or reductions in amounts owing) to individuals or testamentary trusts that date back further. These amounts could include refundable tax credits (child tax credit, GST credit or provincial tax credits for example) or non-refundable credits or deductions (spouse or common-law partner amount or child care expenses for example) that have not been claimed.

Requests involving an increased claim for capital cost allowance or other "permissive" deductions where you originally claimed less than the maximum allowed will not be granted.

In this situation, too, submit a written adjustment request to CRA along with all pertinent information and supporting documentation. CRA's information circular, Taxpayer Relief Provisions, IC07-1 will provide some guidance.

Don't Wait for CRA to Contact You

While the Income Tax Act provides stiff penalties for deliberately failing to report income or claiming non-deductible expenses, CRA will permit you to resolve these issues without dire consequences if you come forward on your own.

CRA has a "voluntary disclosure" program that encourages errant taxpayers to come clean. If you make a complete voluntary disclosure, no criminal charges, such as for tax evasion, will be laid. And no civil penalties will be applied. You will simply need to pay the tax you owe plus interest.

A voluntary disclosure must indeed be voluntary, meaning you're not about to be, or are already, under audit by the CRA. It must also be complete, meaning you disclose all omissions. As well, a monetary penalty must be involved, and at least some of your tax information must be one year or more overdue. (The last requirement prevents taxpayers from using this avenue to avoid late-filing penalties when their returns are just a few months overdue.)

Note that your tax representative can make a disclosure on a "no names" basis under which your identity is withheld until all details of tax and interest to be paid are agreed on with CRA. And should you do a no-names disclosure and decide to walk away without completing the action, CRA will not use the information to track you.

Interest on taxes owing may be waived if considered "punitive" by CRA under the circumstances. One example: interest exceeds tax payable. For more details, see CRA's Voluntary Disclosures Program.

As mentioned earlier, CRA can also change your tax payable even if it's given you a Notice of Assessment confirming your tax liability "as reported." Should CRA subsequently decide your return was in error, it could recover additional taxes, interest and any penalties up to 3 years from the day the notice was mailed.

In a year requiring an adjustment for a carry-back amount such as the carry-back of a loss or business investment tax credit from a subsequent year, the time limit is 6 years.

These limits don't apply if CRA can prove fraud or misrepresentation, including cases of carelessness, neglect or willful default, or if you sign a waiver before the deadline.

Keeping up-to-date and knowledgeable with the Income Tax Act and all information disclosures can be daunting. Members with FBC can rest assured that we keep our systems and processes current with the latest Income Tax updates, specifically those that pertain to small business owners.

New members with FBC receive a free review of your past 3 years' tax returns. Let FBC take a closer look at your taxes before CRA does.

Every tax return prepared by FBC comes with our audit protection guarantee. If you're ever audited or challenged on a tax return prepared by FBC, we'll represent you - all the way to Tax Court if necessary. And, we'll cover the court costs and legal fees.

If you have errors or unreported income from past years, contact FBC for a free consultation to find out how FBC can help you move forward.  Call 1-855-378-3628, or email today.

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