Everyone makes mistakes. I always tell my kids that if they've done something wrong, I'll be less angry if they're upfront about it right away than if I discover it myself later on.
Notice I said "less" angry. That doesn't mean they get off scot-free. The Canada Revenue Agency has the same approach when it comes to taxpayers who forget to disclose their full income. The CRA will still hold them accountable for what they owe, but may be more forgiving when it comes to slinging fines from its arsenal.
Income omissions happen all the time in the hospitality and construction industries, says Cleo Hamel, senior tax analyst at H&R Block. Tips are underestimated or cash payments are overlooked. As long as the error is less than a year old, you can file an adjustment and will only be subject to the interest charges on the taxes owing from the higher income. Quick action lets you escape tax penalties.
Sometimes, however, it takes us a little longer to realize our omissions. So for those who have crossed the one-year grace period, the CRA has a voluntary disclosure program. The key is to disclose the income before the CRA notices it's missing because once the taxman is on to you, it's too late.
And what if the CRA has noticed your mistakes and brought them to your attention? Is there any reprieve? "It depends on the severity of the case," Ms. Hamel says. She suggests that anyone who has received notice from the CRA should still try to file a waiver.
"It's all discretionary on the part of the CRA. They'll decide whether they're going to agree or not," says Ms. Hamel, adding, "I've seen them do it in some cases."
Here are some more tips from Ms. Hamel on how to avoid costly tax penalties:
1. Come clean. You can use the voluntary disclosure program to correct your previous tax returns by completing form RC199. You will still have to pay the taxes owing, but the CRA may waive interest for taxation years preceding the three most recent years. Disclosures made under the program are protected from penalties and prosecutions. To qualify, disclosures must be voluntary, complete and involve at least one penalty.
2. Don't wait. Promptly dealing with a tax mistake is the key to avoiding bigger fines. If the CRA has already initiated action against you, it is too late to use voluntary disclosure, and resolving your case will be more difficult and expensive.
3. Don't ignore the CRA. If you receive a letter from the CRA, follow the instructions and respond. If you fail to respond, it will only become a bigger issue or involve a larger penalty. Keep the lines of communication open. The CRA wants to know you are aware of the problem and want to deal with it.
4. Get advice. If you are unsure whether the voluntary disclosure program applies to your case, you can discuss the situation anonymously with a CRA agent or speak to your own accountant.
5. Ask for relief. If you have made an honest mistake, you can ask for help. You have the option of filing a form for the waiver of penalties and interest. Again, acting quickly improves your chances. Even if penalties cannot be waived, the CRA can offer certain payment options on balances owing.
6. Pay the bill. Even if you disagree with your tax assessment or plan to apply for relief, you need to pay your bill first. "The CRA doesn't stop charging interest just because you're challenging it," Ms. Hamel says. "The good thing is if you win in the end, you will get the money back."
7. Make an objection. If you completely disagree with the CRA's assessment of your tax return, you can file a Notice of Objection. The CRA will review your case and may change its mind.
If you feel you are being treated unfairly by the CRA, you can also ask the taxpayers' ombudsman to review your case. The office cannot cancel a tax bill or change tax policy but is meant to ensure the CRA upholds the Taxpayers Bill of Rights. Call 1-866-586-3839 or visit oto-boc.gc.ca for more information.
Got a question on taxes?
Join us online for a live discussion with Cleo Hamel, Wednesday at noon (ET) on Globe Investor's Tax Centre.