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Follow the Money – Addressing Canada’s Billion Dollar Tax Gap
By Carl Hammersburg, Manager, Government and Healthcare Fraud and Risk at SAS
A new study from the Conference Board of Canada gives our first estimates of the total size of the tax gap, and the news isn’t good. At a minimum, it’s an $8.9 Billion hole, but may be as high as $47.8 Billion annually, or nearly half a trillion dollars every decade. Comparing that to the federal deficit projected at $29.4 Billion in the 2016-17 fiscal year, closing that gap could make a significant dent or wipe it out completely.
Where do the problems come from? Largely, various forms of non-reporting and tax evasion, as well as use of shelters and tax havens in an inappropriate or illegal manner. But, errors play in as well. Utilizing international studies from the Internal Revenue Service (IRS) in the U.S. and the HM Revenue and Customs (HMRC) in the U.K. helps with both the estimation as well as likely sources. From the IRS, we learn that income reported by third parties on forms like the
T4 and T5 forms filed with the Canada Revenue Agency (CRA) on behalf of individuals result in a very high likelihood that the income will be reported. However, small to medium businesses and individuals whose income isn’t reported by a third party tend to have a much lower compliance rate.
So, we have an estimate of the size of the problem, as well as some causes. What can be done to address this yawning chasm? A few things:
- 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. The HMRC estimates these categories combine to add £6.5 Billion to the gap in the U.K. annually.
- Add resources – The good news is that the CRA has been actively taking steps here and the federal budget has ramped up efforts in recent years. Additional enforcement funding from the 2013 budget raised tax collections by nearly $1.6 Billion in 2014-2015. The 2016 budget further adds and enhances these efforts.
- Data sharing – Canada will be joining more than 90 other jurisdictions implementing the Common Reporting Standard from the Organization for Economic Co-operation and Development (OECD) by July 2017 and begin data sharing in 2018. This cuts down on tax havens and manipulation across borders.
- Analytics – Utilizing internal data and information from other partners and jurisdictions to determine the most likely returns that contain manipulation and potential fraud
Exploring analytics further as a methodology to make significant improvement is warranted. While the efforts to increase enforcement included hundreds of millions to gain billions, analytics help everyone in the organization 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 while reducing staffing by 40%. Based on early success, the HMRC is expanding on that program in 2017. Belgium used this same approach to detect value added tax (VAT) fraud rings, closing a €1 Billion gap by 98%.
Furthermore, analytics are critical to addressing filing of fraudulent tax returns to gain fraudulent refunds as part of identity theft schemes. Those schemes are growing daily, with 2016 setting yet another record for data breaches worldwide. That is a multi-billion dollar exposure to the CRA and isn’t even included in the tax gap estimate, as that isn’t part of taxes under-reported or paid but rather a fraud scheme to gain payouts. The IRS has turned to data sharing and analytics to address this issue as well, saving billions of dollars.
The provinces have a role to play as well, even in places where the CRA is collecting the Harmonized Sales Tax (HST). Ontario, for example, has already started down the path of addressing the underground economy and its’ impact on the tax gap, as well as preparing for the impacts of the Sharing Economy, represented by firms like AirBnB and Uber. Again, the impacts below the federal level aren’t included in the estimates, meaning billions more dollars are at risk throughout the country.
The estimates generated from the Conference Board give us a great place to start from and a way to begin the conversation and take the right steps to address the tax gap. The CRA plans its own comprehensive study in the years to come. But there is no reason to delay action. After all, that $29.4 Billion federal budget deficit isn’t going away on its’ own.
Carl Hammersburg is the Manager or Government and Healthcare Fraud and Risk at SAS, the leader in analytics. In his role Carl leads the team assisting government organizations in the use of analytics, process change and data sharing to eliminate tax evasion, the underground economy and abuse of social service programs. Prior to joining SAS, he spent 20 years in tax and healthcare audit, collection and anti-fraud activities in Washington State. Carl can be reached at Carl.Hammersburg@sas.com