Updated: Sun, 12 Dec 2010 09:23:29 GMT | By Dean Beeby, The Canadian Press, thecanadianpress.com

Taxman seeks overhaul of charity receipts after scams



OTTAWA - The Canada Revenue Agency is considering big changes to the way charities issue donation receipts after internal probes found widespread scamming, newly disclosed documents show.

Standard paper receipts now issued by charities are too easily faked, forged or finessed to cheat the federal treasury out of millions in taxes.

So some agency officials are proposing tougher rules requiring charities to electronically track and account for their receipts, to help the taxman flush out fraudsters.

"Electronic filing of data — as opposed to filing relevant information on paper — is the most flexible environment in which to deal with ... fraudulent tax receipting," says an internal paper.

The agency's review of the current receipt system follows two internal probes that since 2006 have uncovered widespread fraud, especially among small tax-preparation firms that offer clients fake donation receipts as an extra service.

"There is growing evidence that the charitable donation tax-receipting system is open to extensive abuse," says a draft paper from the agency's charities directorate, dated April this year.

The two probes "uncovered significant non-compliance in the area of tax-receipting abuse."

The heavily censored draft paper and related documents were obtained by The Canadian Press under the Access to Information Act.

Project Trident, so named because it focuses on the three related areas of tax-preparer fraud, charity-related fraud and identity theft, was launched in the fall of 2006.

The Canada Revenue Agency, which publicized the initiative last year, says there have been 27 convictions so far, 21 of them involving tax preparers. More than $2.7 million in fines have been levied, along with jail terms.

An internal report says Project Trident in 2008 "identified 66 tax preparers associated with 132,000 tax returns and false tax deductions with an estimated tax at risk of $216 million."

A second, unpublicized probe was launched in 2006 to investigate a single charity suspected of more than 1,000 fake donation receipts. The identity of the charity has been removed from the released documents.

But the initiative quickly snowballed as numerous other charity scams came to light, involving dozens of tax preparers. In 2009, this second probe — run by the Suspicious Activities Working Group, or SAWG — intercepted more than $9.8 million in fraudulent or suspicious refund claims.

The small working group reviewed 4,104 suspect income-tax returns in 2009 and found almost 40 per cent contained fraudulent charitable donation claims — worth an average $3,166 refund for each fake claim.

The scammers were sometimes brazen, setting up new charity frauds even while under investigation for old ones. Some fraud artists branched out into false child-care tax receipts or bogus disability claims.

"Some charity directors involved in the fraud were changing the objects of the charities they were setting up as fronts, from religious purposes to those for relief of poverty," says the internal paper.

It concludes the problem lies largely with tax preparers who file their customers' income-tax forms electronically. Charity receipts need not be provided for electronic submissions to the CRA, though they must be produced later if requested by the agency.

"Most detected suspicious activities involved tax preparers using electronic filing channels," says the document.

"Typically, they would provide fraudulent receipts to their clients as a matter of practice, permitting them to falsely claim deductions.

"Fraudulent tax preparers would either completely counterfeit charitable donation tax receipts without the knowledge of the charities in question, or would obtain receipts for inflated amounts for their clients in collusion with specific charities."

The names of charities and tax preparation firms have all been removed from the released documents.

The current receipt system is described as a "weakness." The paper's extensive proposals to fix the system are censored entirely, but released sections indicate officials are examining a revamp of the paper-receipt system to allow for electronic tracking and reconciliation.

A spokesman for the agency declined to provide details of any changes being considered.

"The development of such a review system would represent significant costs to the CRA and require significant time to implement," Noel Carisse said in an email response to questions.

"While the CRA will continue to modernize and improve its processes and systems, it is premature at this stage to provide any specifics on how any system would operate."

One issue facing the agency is that many charities are small and poorly staffed, making an electronic filing regime a daunting prospect, says the internal paper.

Carisse said Project Trident and SAWG will continue through 2011, and that 85 tax-preparer cases are currently being investigated, of which 31 involve in alleged charity fraud.

The Canada Revenue Agency provided the internal documents to The Canadian Press, eight months after receiving the request under the Access to Information Act — and four months later than the legislated deadline.

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On the web, brief descriptions of 18 cases in which Project Trident secured convictions:

http://www.cra-arc.gc.ca/gncy/trdnt/ptc-eng.html

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