WHO ARE THE INCOME-TAX DODGERS?
Perhaps one in seven chisels on his income tax. But it’s becoming a dangerous game — revenuers are on the trail
Maclean's Ottawa Editor
NOBODY knows how many Canadians are defrauding the Government of income tax. One man of wide experience in the Income Tax Department recently made a personal guess that 10% to 15% of those liable to income tax are either evading it altogether, or paying less than they owe. But he admitted it was just a guess— there’s no way of telling.
Only one thing is certain: A great many otherwise honest citizens think it no sin to make a false tax return.
Last year, inspectors called on the president of a small midwestern firm. He’s a man of exceeding piety. His office wall was placarded with lofty precepts—“Truth is the Light of Our Way” and the like—and he held weekly prayer meetings for his staff. When the inspectors looked into the books of this godly soul, they found he owed $40,000 in taxes on undeclared income. He was charged, convicted and fined $5,000.
Most tax evasion is among self-employed people —owners of little companies, merchants, artisans, salesmen, doctors, farmers and so on. Not that these people are by inclination any less honest than their neighbors. But the worker on a wage or salary has no chance to conceal his income—it’s all reported by his employer and 95% of his tax is deducted at the source.
There are only two ways the employee can work income-tax fraud to any great extent. One is by holding down a second job in spare time (there was a lot of that during the war) or failing to report extra income such as tips. The other is by faking medical expenses or donations to charity.
Not long ago, the treasurer of a large city church was caught issuing receipts to himself for large donations that did not appear in the church books. In Montreal, an English-speaking Protestant in the West End attracted attention by reporting a large gift to a little French-Catholic church in the East End, a parish the average Protestant would never hear of. Investigation revealed that a certain chartered accountant had provided himself with whole books of blank receipt forms for parish churches. He was able to supply his clients with receipts for “charitable donations” up to any amount they thought discreet.
Those Fake Illnesses
MANY a medical receipt, examined by tax assessors, turns out to have been “signed” by a doctor who’d been dead for years. These, of course, need only to be recognized to be proven fraudulent. It’s harder to prevent the faking of medical expenses with a doctor’s collusion. In larger centres, the assessors notice a suspicious volume of receipts from the type of broken-down medical man who ekes out a living by issuing prescriptions to drug addicts. But it’s not easy to prove that these are fictitious.
These expedients, though, are difficult and dangerous. Only a tiny minority of salaried or wage-earning men will undertake such trouble and risk. For the self-employed, the concealment of income is fatally easy and much more prevalent.
Last year the Income Tax Department made a survey in a rich rural district of Ontario. Inspectors checked bank records, real estate transfers, etc., to
work out the approximate
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financial status of every farmer in the neighborhood. Then they compared their findings with the tax returns, if any, from the same farmers.
From that sample, they estimated that there were about 40,000 farmers in that district who were earning a taxable income but who had never made an income-tax return. For all Ontario, the estimate was about 100,000 such farmers. In 1946 only 5,500 Ontario farmers paid income tax at all. If the estimates are correct, then, tax defaulters outnumber taxpayers on Ontario farms by nearly 20 to one.
Up to now, the farmer’s laxity about his tax return has been to some extent the department’s own fault. The average farmer keeps no books; he doesn’t know his income or his expenses, or how to declare either one. Until lately, nobody ever gave him any help. His tax form was a bald, brief sheet that asked for few details and gave no explanations.
This year, the farmer is provided with a 42-page “Income Tax Guide and Farm Account Book” that gives him full information about income, deductible expenses, etc., and includes 23 pages of ruled ledger space for recording his receipts and expenditures.
Also, “teams” of assessors have been sent into the country to help the farmer with his tax return. This help is not always appreciated—there have been cries of “persecution” from some quarters.
How Much Do Doctors Make?
OFFICIALS are very emphatic in saying that they don’t accuse the average farmer of tax fraud. They do expect to find a lot of farmers who, through ignorance or carelessness, neglected to make returns when they should have done so. Except in the rare cases of deliberate fraud, nothing will be done about these people except to get a tax return from them and charge them the taxes they owe, plus interest.
How much will be collected? It may not be much. “I have 5,000 farmers in my riding,” said a rural M. P. from eastern Canada. “Seven paid income tax last year. If all the facts were known, probably 100 of them should have paid. The rest don’t make enough money.”
But tax evasion among the self-employed is often conscious and considerable. One chiropractor remarked to a friend of mine, “Why, I couldn’t afford to pay taxes on my whole income, at the rates they charge nowadays. I just put down a reasonable amount.”
Before the war, one western province was working out a scheme for health insurance. A big problem was remuneration of the doctors. The planners got confidential data from their provincial income-tax department, showing what doctors were earning in private practice.
When the scheme was published, there were howls from the medical profession at the “starvation wages” offered them. The planners went to some leading doctors and told them what had happened—that the remuneration under the insurance scheme was considerably higher than the doctors’ present income as declared by the doctors themselves.
The doctors’ reply was frank and blunt: “My
dear fellow, a doctor’s income-tax return is not an accurate guide to a doctor’s income.”
A few months ago, the Income Tax Department wrote to several of Canada’s leading associations of professional men. The letter suggested that each association send a memorandum to its members reminding them that if anyone had been remiss in his tax return, the wise thing would be to make a voluntary declaration and submit an amended return, which the department would accept.
One or two associations did so. Others wrote back to say, rather coldly, that their members had been no more lax about making returns than any other group and why single them out?
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Who Are the Income Tax Dodgers?
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What happens to people who misstate their income? Until recently, the answer has been “very little.”
Back in the early thirties, when banks first started to record the names of people cashing bond coupons, tax inspectors looked up some of those who had cashed coupons during the year. Not one of the first group investigated had declared the bond interest on his income-tax return.
A tax official took the matter up with Prime Minister R. B. Bennett. “What shall we do in these eases?” he asked. “Prosecute?”
Mr. Bennett slapped his desk indignantly. “Certainly,” he said. “They broke the law. They know better. Prosecute by all means.”
The tax man drew a typewritten list from his pocket. “Here are the names of people we’ve investigated so far,” he said.
There was a long minute of silence while Mr Bennett studied the list. When he finally looked up, he said: “We can’t do it. If we prosecute these people, we’ll shake public confidence in the financial leadership of Canada.”
The tax official did not smile. He had drawn the list with care—it contained some very big names—and he’d
got the answer he expected. “That’s all I wanted to know, Mr. Bennett,” he said and withdrew.
That decision apparently governed enforcement policy in the prewar years. The department got after these defaulters and any others it caught— and in the ordinary course of tax assessing, checking tax returns against other information, it did catch a good many. They had to pay up to the last copper—tax, interest and penalties. But the case was seldom pushed to the point of prosecution. Until halfway through the war, the Income Tax Department had no real enforcement branch at all.
Evasion Becomes Easy
In its day, that policy worked well enough. Income taxpayers were few— fewer than 300,000 in 1939—and only the rich paid substantial amounts. Their number was small enough to make them pretty clearly visible to the tax assessor who went over their returns.
Wartime budgets altered that. By 1942, individual income taxpayers numbered 1,781,000 and in 1946 the total was 2,400,000. The tax itself had increased to an enormous gouge out of even a poor man’s income. Deduction at source guaranteed that the wage earner and the salaried man paid their share,to the last nickel. Tax evasion by others, who still had opportunity,
began to look like an offense not merely against the Government but against the great majority of Canadians, who were carrying their end of the load willy-nilly.
At the same time, opportunity and temptation to evade taxes multiplied. Hundreds of little firms whose bookkeeping was rudimentary waxed suddenly fat on war contracts and began handling hundreds of thousands of dollars’ worth of business. Shortages made buyers eager to co-operate in concealing cash sales or magnifying costs. Evasion was easy, detection difficult, temptation enormous—many a man saw the chance to make himself rich for life.
So, finally, an enforcement unit was set up in the Income Tax Department. At first it didn’t have much backing. When the present head of the branch took over in 1945, his staff for all Canada was six people—four officers and two stenographers. He collected another dozen officers by 1946, but the pay was so low he couldn’t always get the type of man he wanted. Except for the director, only two men in the branch made as much as $50 a week.
That was all changed at the beginning of last year, when the department began to take enforcement really seriously. Establishment of the enforcement unit was raised to 140 officers, instead of 19. Pay now ranges between $2,400 and $4,800, with the director’s salary above that again.
So far, the establishment has not been filled; recruiting for it is still going on. But the Intelligence Branch does have about 50 officers for all Canada. Also, enforcement has received a great stimulus from the expansion, reorganization and salary improvement in the whole Income Tax Department.
Montreal and Quebec, because of language and kindrpd difficulties, run their own enforcement. It’s handled there by 40 or 50 men who aren’t called intelligence officers at all, but “special assessors.”
A good deal of income-tax fraud is detected by the assessors, the skilled men who, make the final calculations of the tax you owe and who deal with any special problems or discrepancies that are met in checking income-tax returns. In 1939 there were only 368 of these men in the department. A year ago there were 1,200. Now the total is just under 2,000, out of the 9,000 workers of all kinds that the department employs.
80 Prosecutions, 79 Convictions
As a result of all this expansion and upgrading, there have been about 10 times as many prosecutions for tax evasion in the past three years as there had been in the whole previous history of the department. Several men have gone to jail—a punishment that inspires more dread among the respectable than any amount of fine. But fines, too, have multiplied; the total amount levied in 1947 was 3 times that collected in 1946 and ran to nearly a quarter of a million dollars. Back taxes collected through prosecutions ran to a million dollars last year, double the previous year’s record which in turn had been much greater than that of 1945. And the actual prosecutions represented only a tiny fraction, about one in a thousand, of cases investigated in which substantial arrears were recovered.
The department makes a policy of never going into court until it feels absolutely certain that it can convict —in the first 80 prosecutions laid by the present enforcement group, only one ended in acquittal. They are looking only for deliberate, wilful fraud. If
there is any possibility of innocent error, even when they may feel a bit sceptical of the taxpayer’s good faith, they give him the benefit of the doubt.
It’s the intent rather than the amount that counts. If a man “forgets” to declare $50 of incidental income, they’ll generally take his word for it that the mistake was innocent. But if he forges a false medical receipt for $50, the triviality of the amount won’t save him.
In the main, though, the investigators hunt for bigger game. They are after the man who has knowingly and wilfully set out to defraud the Government of substantial sums.
How to Cheat Ottawa
Income-tax frauds fall into a fairly simple pattern. Commonest is the concealed sale—the head of the company will sell a consignment of goods either for cash or for a cheque made out in a false name and divert the money to his personal account.
In a recent case in Ottawa, this scheme was elaborately set up. The Ottawa firm supplied a Toronto customer with a set of false vouchers, printed with the letterhead of a nonexistent company. Cheques were made out to this fictitious corporation and the cheques were then cashed by the customer himself at his own bank, with a forged endorsement. Periodically, the president of the Ottawa firm would go to Toronto with an empty suitcase and bring back the cash in $50 and $100 bills. By the time they were caught, these people owed the Government $47,000 in undeclared taxes.
You may wonder why any customer would co-operate in this dangerous
game. The answer is, the goods were scarce. He was willing to connive at tax fraud, in return for an ample supply of goods at special prices.
Another standard evasion method is to pad the company’s costs. Two firms' in Central Canada worked this racket together. Each gave the other a supply of blank invoices. Each would make out, on the other’s invoices, bills for large purchases that were never made. Cheques would be issued for these amounts; they’d be endorsed by the firm to which they were made out, but then returned to be cashed by the firm that issued them. Since neither company showed these transactions as receipts in its own books, the fraud went undiscovered for a long time.
How do the income tax detectives catch these tricksters?
Many are caught in the ordinary process of assessing. Their tax returns don’t check with their books, or the assessor runs across some unexplained item that rouses his suspicion. All business records are open to the Income Tax Department, and their men have good memories. But probably the majority of tax evaders are still betrayed by informers.
In every mail, the Intelligence Branch gets a few letters denouncing somebody for tax dodging. Most letters are anonymous, though some are signed. Or the information may come over the phone; sometimes the informer even calls at the office.
The informer’s motives vary. Some hope to get a reward—the Government does pay rewards in some cases, though invariably a much smaller one than the informer thinks he deserves. There is no fixed rate; the reward has to he approved by the Treasury Board, a
notoriously penurious committee of the Cabinet and they seldom pay more than a couple of hundred dollars.
Another informer may be a publicspirited citizen, wanting to help the Government catch a man who is shirking his duty. But oftenest, his motive is pure spite. Whatever it is, if his information is correct the department will act on it.
A few years ago, a merchant died and left the business to his wife. She’d never liked her husband’s head bookkeeper; when she took over the business, she fired him. The disgruntled bookkeeper came down to the Income Tax office.
“If you go to the store,” he said, “you’ll find a set of books in the office. Those are the ones the old man kept for the tax inspectors. Then if you go down cellar, you’ll find another set of books. Those are the ones showing a high inventory, that he kept for the bank when he wanted to borrow money. But if you go to his home, and look in a horsehair trunk in the spare bedroom, you’ll find the real set of books that show how much money he made.”
The inspectors did as he told them and found everything as he said. They couldn’t prosecute—the culprit was dead—but they did collect a whacking lot of back taxes.
Similar grudges, hundreds and thousands of them, lead the tax sleuths to their quarry—tales by divorced wives, abandoned mistresses, envious or spiteful neighbors. An amazing number inform against their own families, brother against brother or father against son.
Sometimes information is turned up by sheer accident. Witness a recent case in the Middle West:
A local salesman spread the word among farmers in his district that he could help them with income tax—if they let him make out their returns, and paid him a fat commission, they’d get off with a much smaller tax. The salesman was working with a group of men actually employed in the Income Tax Department. They split the commissions he got from the farmers and they put through without challenge all the returns that the salesman gathered from farmers.
It seemed a watertight scheme and it worked for quite a while. But finally they struck a deal with a wealthy old farmer whose tax for the year should have run to about $10,000. He paid them $3,000 by cheque, $2,000 to be paid to the Government and $1,000 commission.
The old man had a suspicious nature —he was afraid they might just run off with his $3,000, and leave him still liable for the whole tax. Ten days went by and still he hadn’t got any receipt from the Income Tax Department (they often don’t go out for weeks). Finally his patience gave out, and he wrote to the Inspector of Income Tax to this effect:
“I paid my tax on such and such a date. I paid it by giving a cheque to Mr. A. (the salesman), but Mr. B., your local tax assessor, was present and he’s a witness that the money was paid. Why haven’t I got my receipt?”
The thing looked queer—why should a farmer pay his income tax by cheque to a salesman? Investigators were puton the case and they turned up the whole scheme. The salesman was interviewed as he arrived home from a tour round the district; in his suitcase they found dozens of half-completed income-tax returns.
Investigation is still going on in this case and no charges have yet been laid.
But several men in the department | have been dismissed and L isn’t ended yet.
That’s an example of the nastiest kind of tax fraud, from the Department’s point of view—the kind that depends on collusion with the tax staff. Officials don’t like to talk about it, but obviously there must always be the danger of corruption. The average tax assessor gets about $200 a month. He may turn up information that would cost the taxpayer hundreds of thousands and his good name to boot. The taxpayer’s in a position to offer a very substantial bribe, if the assessor will just “fail to notice” some little irregularity in the books.
In a department that has swelled from 1,349 to 9,479 in eight years, it stands to reason that a certain percentage of crooks and weaklings will be picked up. But their course is not as easy as it looks. Newcomers are carefully watchedIf a man starts to drink a lot, if he suddenly finds himself able to buy a car, if he dresses expensively and finances a lot of night life on a 32,000-a-year salary—his bosses know what has happened and he doesn’t last long.
Bribery Is Dangerous
Anyway, it’s very risky for a taxpayer to offer a bribe. You might happen to hit on a crooked assessor who would take it. But you’re much more likely to hit on an honest man who wouldn’t and nothing enrages them more. They’ll dig into your accounts with the vigor of outrage and if they find anything, heaven help you.
If you haven’t declared all your income and paid tax on it, there are only two things to do.
One is to go down to the income-tax office in your district and make a voluntary declaration. You won’t get any promise of immunity—nobody has power to pledge the Crown to condone a breach of His Majesty’s law. You will get a sympathetic hearing. If you really come clean, tell the whole story, and if your confession is genuinely voluntary and not a last-minute attempt to head off discovery, the department will not as a rule recommend prosecution. The delinquent pays his tax, plus interest and penalty and goes home.
Last December, a fairly well-to-do citizen came into the Intelligence Branch at Ottawa. He told them he’d been making cash sales from his inventory and concealing the income therefrom. Tax assessors had been investigating another company with which he did business and that scared him enough to stimulate his uneasy conscience.
This man made no bones about his guilt, no defense. “I’m a cheat,” he said. “Nobody’s to blame but me and I llave no excuses. I just saw a chance to get rich quick, by keeping money I owed to the Government.”
He was in bad shape as he made his confession—hands and face twitching, couldn’t hold a cigarette between his fingers—and before the interview was half over he was in tears. There wasn’t the slightest doubt that he’d broken the law. But the department had had nothing on him—he wasn’t under investigation or even suspicion. They didn’t prosecute. He submitted an amended tax return, paid the extra taxes with interest and penalties, walked out a free man and a stillrespected citizen. Nobody outside the department knows his name.
On the other hand, nobody gets off scot-free by a deathbed repentance.
A man who comes scurrying in to “confess” just before he would have been caught anyway, is wasting his time.
In Ottawa not long ago, a tax assessor was going over the books of a prosperous merchant. He found one or two things that weren’t quite clear—-he wasn’t suspicious, just puzzled. He asked for some further information and the merchant said it would be made available in a day or two.
As soon as the assessor was out of the office, the merchant ran to his lawyer. His firm had been concealing income in huge amounts, a total of nearly three quarters of a million. The lawyer advised him to go to the Income Tax Department and make a clean breast of it, which he did.
But the income tax people wouldn’t take an amended return from this man. His business had not been suspected, true, but the information requested by the assessor would have revealed the fraud. This “confession” was not genuinely voluntary and the department wouldn’t accept it as such. They prosecuted and one man went to jail.
A real “voluntary” declaration, though, generally brings the repentant tax defaulter immunity from court action. That’s one alternative for those who have made false returns. The other is to sit tight, say nothing, and hope they’ll never catch you. Maybe they won’t—they can’t catch everybody. But they have a lot in their favor. They have all the time in the world—10, 20 years hence they can still prosecute. They have access to all kinds of information. And they’re learning a lot—they’re more skilful now than they were three years ago and they are still improving.
Don’t fool yourself that you can stop
them, once they start. Every kind, of pressure has been tried; up to now, none has worked.
Many people who get into a tax jam run first to their lawyer, then to their business association, then to their pastor. When those “character witnesses” have refused to co-operate or have tried to co-operate and failed, the defaulter often runs to his M.P. In the past, some M.P.’s have tried to call off the income-tax dogs. There are even cases when cabinet ministers have called on their colleague, Dr. J. J. McCann, to plead some individual’s case.
To be fair to the politicians, most of them will only appeal on genuinely compassionate grounds and an appeal on those grounds may be accepted no matter who puts it. But income tax authorities insist nobody has ever got out of prosecution for a real, indefensible fraud, no matter who’s friend he may fancy himself to .be.
This annoys some people. One M.P. was so enraged by the implacable attitude of the Inspector of Income Tax that he delivered an impassioned speech in the Inspector’s office.
“You,” he wound up, shaking a finger under the Inspector’s nose, “you are one of those iron-hearted bureaucrats who are trying to place the heel of Stalin on the neck of our people.”
It makes a funny story for the Inspector’s repertoire. The case was prosecuted just the same.
“We know we’ll never catch them all,” an enforcement officer says, “but we do think we can, sooner or later, catch all the big fellows. Big money is hard to hide. Then if we do miss some of the little fellows, it won’t matter much to the Treasury.” ★