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OTTAWA — Canadians who file their income-tax returns electronically are more likely to cheat, a newly released report suggests.
An internal analysis by the Canada Revenue Agency found that individuals who sent their tax returns through the Internet — the so-called Netfile option heavily promoted by Ottawa — were more likely to understate the amount of taxes owed.
The “program analysis estimates the non-compliance rate to be higher on Netfile returns vs. the other filing methods,” says the internal report from last September.
The department analyzed random returns from the 2005 taxation year, which were filed in 2006, estimating that about 15 per cent of returns were non-compliant. That translated to about $569-million in taxes owed but not declared.
But closer examination showed that Canadians who sent in paper returns — attaching their receipts — were more likely to comply with tax laws.
The Netfile option does not require that receipts be provided, though they must be kept for possible inspection later by the tax agency.
The report cited focus-group testing from 2006 that found that the exemption from providing receipts with the electronic return appeared to increase cheating.
“The participants demonstrated a perception that not having to attach receipts to the return creates a temptation for electronic filers to overstate their claims for deductions and credits,” says the document.
“They believed they would not be caught as long as the overstatements were relatively small.”
The report also found that Canadians who use tax software to prepare their returns appear to be more likely to cheat.
Analysts examined tax returns that were filed to the agency on paper, separating them into those prepared with the help of tax software and those prepared by hand.
“Software users . . . do demonstrate a significantly higher non-compliance rate as compared to non-software users,” they concluded.
That finding was also supported by focus-group tests, which suggested that the ability of the software to quickly calculate potentially bigger tax refunds provided a temptation for many filers to understate their taxes owed.
The heavily censored report was obtained by The Canadian Press under the Access to Information Act.
Key statistics were removed from the document, the agency said, because releasing the information might impair tax investigations.
The agency also cautions that the definition of non-compliance is a tax-deduction claim that is rejected, but does not necessarily mean the filer intended to cheat.
As of May this year, about 4.2 million Canadians filed their 2007 returns via the Internet using special software, an increase of almost five per cent from the year before. The agency has promoted the service as more efficient, with refunds in as few as eight days.
Professional tax preparers can also file their clients' returns electronically using Efile, which also does not require receipts. Nine million such returns were filed by May this year, a nine per cent increase.
The report noted that non-compliance rates were lower for Efile returns.
The agency also offers touch-tone telephone filing for returns that have no complications, which is also receiptless but is declining in popularity with just 478,000 using the service this year.
Altogether, receiptless electronic filing increased by more than seven per cent this tax season, and has outstripped paper filing with 14 million returns compared with 10 million received on hard copy.
A spokeswoman said the Canada Revenue Agency has the tools to rectify the compliance problems with Netfilers, but would not be specific.
“While our random sample results do suggest a higher non-compliance rate for individuals who use the Netfile method of filing their return, we are confident that we have the necessary risk assessment and claim review mechanisms in place to suitably address the situation,” Beatrice Fenelon said in an e-mail.
