Effective June 29, 2000, federal legislation termed “civil penalties” was enacted into law. The “preparer penalties” apply to a tax preparer, tax advisor or valuator or appraiser who makes, or participates in, assents to, or acquiesces in the making of statements on behalf of another person which could be reasonably known to be false.
The minimum penalty is $1,000 and can escalate substantially from there according to a formula. The legislation is not intended to apply to:
- Tax planning within the law
- Honest mistakes or oversight
- Differences of interpretation where there is bona fide uncertainty
“Culpable conduct” takes into consideration:
- The advisor’s experience with the subject matter and the client’s affairs
- Repeated offences
- The significance of the tax amounts avoided
- The blatancy of the transgression
“Good faith reliance” is a defense against culpable conduct where the information received is not on its face clearly false or unreasonable to a prudent person. A “Notice To Reader” communication does not absolve responsibility under this legislation.
Clerical services are not exposed to civil penalties but book-keeping services are. These penalties also apply to the employees of a tax preparer.
If a preparer commences a new engagement and learns of a previous misstatement, the situation should be addressed to the extent that it affects future filings prepared by the new preparer.
The following are examples of “forgivable” errors:
- An audit by CCRA discovers a large percentage of business expenses claimed cannot be substantiated with adequate documentation
- Honest recording errors occur
- Documentation exists to support enquiry into the reasonableness of a situation
The following are examples of “unforgivable” errors:
- Large items are reported without backup documentation
- Blatantly personal expenses are reported as deductions on an income tax return
- Salaries are paid to family members who are known to the preparer not to have any reasonable means to provide services, e.g. living in another jurisdiction outside the trading area of the business
- A taxpayer’s income seems low in the context of his living standard and the tax preparer has not enquired further into the plausibility of this
These relatively new laws forcefully enjoin tax preparers unwillingly into the audit process of the government. Lobbying against the law was too-little, too-late and so it goes!