Tax season is in full swing. As we and the Canada Revenue Agency (CRA) work out what our obligations to the public coffers are, a question remains—why is there a multi-billion-dollar hole where there should be revenue to pay for federal programs?
That hole is politely called a “tax gap.” And the difference between what we owe and what the government collects has a profound impact on the lives of all Canadians.
The latest estimates from the CRA show a $4.9-billion gap in GST and HST collected, and an $8.7-billion gap in personal income taxes.
Both of those numbers are based on studies released in 2017, looking back to tax year 2014 to allow time for audits and collections to take place. The data represents “domestic” issues only, not including the impact of all those fun offshore tax havens loved by the truly wealthy. As we know all too well from the “Panama Papers” scandal, those offshore havens hide significant wealth and dodge billions of dollars in taxes annually. These international shelters cost public coffers another $800 million to $3 billion in tax revenue every year, according to a 2018 study.
Add that to revenue foregone from GST/HST and personal income taxes, and our gap has become $14.4 billion to $16.6 billion a year.
That is enough to wipe out deficits, reduce taxes or expand much-needed programs and infrastructure investments. And the CRA admits those are conservative estimates. The Conference Board of Canada believes the number is as high as $47.8 billion per year.
Analytics to Fight Tax Fraud
Challenges, opportunities and the value of tax fraud analytics
How can the federal government address this yawning chasm?
- Simplify the tax code – Some of the tax gap is the result of legitimate errors and failure to take reasonable care in preparing and reporting. Her Majesty’s Revenue and Customs (HMRC) in the U.K. estimates these add £6.5 billion to the gap in that country annually.
- Add resources – The CRA has increased investment in enforcement staff, unlike the U.S. Internal Revenue Service, salvaging billions in lost revenue in the last few years.
- Share data – Canada joined more than 90 other jurisdictions implementing the Common Reporting Standard (CRS) from the Organization for Economic Co-operation and Development (OECD) in 2017 and began data sharing in 2018. This cuts down on losses through tax havens and manipulation across borders.
- Apply analytics – Internal data and information from other partners and jurisdictions can help single out returns that contain manipulation and potential fraud.
Analytics has the potential to significantly close these revenue gaps. Increasing enforcement efforts pays off in the billions, but analytics embeds best practices in the entire process—everyone in the organization can work smarter, not just harder. The HMRC utilized this approach extremely effectively in the U.K., with a 2014 report showing an additional £2.6 Billion collected in a year. Based on early success, the HMRC has expanded that approach.
Belgium wisely used this same approach to detect value added tax (VAT) fraud rings, closing a €1 billion gap by 98%. A similar scheme is expanding in Canada, with fictitious businesses and transactions being created to commit GST/HST fraud. In one example, an experienced CRA staffer caught it through some personal knowledge and the now-convicted schemers made the error of borrowing names from 90’s sitcom Seinfeld. A better approach would have identified the changes over time as a significant outlier and raised a red flag earlier.
Analytics are critical to the detection of fraudulent returns filed in connection with identity theft schemes, another multi-billion-dollar exposure not included in the CRA’s tax gap numbers. Those schemes are growing daily, with 2018 setting yet another record for data breaches worldwide. The IRS has turned to data sharing and analytics to address this issue as part of their Return Review Program (RRP), with estimated losses of $7 billion averted last year alone.
The provinces have a role to play as well, even in jurisdictions where the CRA is collecting HST. Ontario, for example, has gone down the path of addressing the underground economy and its impact on the tax gap, while preparing for the impact of the Sharing Economy, represented by firms like AirBnB and Uber.
Investing in technology and processes that ensure taxes are fairly reported and collected can have a huge return on investment. That’s a better plan than rummaging through every sofa in Canada looking for change between the cushions to fund programs.
What are the top three things tax agencies should know and do about analytics for tax fraud prevention? And what can tax agencies do differently (and better) today than just a few years ago? This discussion summary from the International Institute for Analytics explores the challenges, opportunities and value of tax fraud analytics. Read it here.
About the AuthorCarl Hammersburg manages the SAS Government and Healthcare Risk and Fraud team and has been with SAS since 2012. Prior to that, he spent 20 years in anti-fraud activities for Washington State’s exclusive workers’ comp insurer, the Department of Labor and Industries. In 2004, Carl formed that agency’s comprehensive fraud program, covering tax and premium audit, claim investigation, provider fraud and collections. Data sharing and investigative partnerships with other State and Federal agencies, as well as driving public availability of information and awareness served as cornerstones to the anti-fraud activities of the program. During his stewardship, audit and investigative activities doubled and outcomes tripled, based on a focus on data mining and predictive analytics that improved efficiency and case selection. Program success under Carl’s leadership resulted in awards from two successive Governors of Washington State.
- Reimagine marketing: Today, tomorrow and in times of disruptionPutting the customer first has never been more important than it is now. One way marketers can prepare for the new reality is to look at each step in the marketing process (the marketing lifecycle) and map martech capabilities into the lifecycle, based on what you are trying to accomplish with each step.
- Respond, recover and reimagineDisruptions to our lives happen regularly, though most are not as far-reaching as the COVID-19 pandemic. Whatever their nature, it’s helpful to have a plan for how to exit disruption still on your feet and in the game. Learn about the three-phase approach SAS recommends for mitigating widespread disturbances.
- Tread carefully with customer data platformsThe potential benefits of customer data platforms are significant, but CDPs are by no means a silver bullet. Follow these three steps to avoid disillusionment.