If your prepared tax return looks too good to be true, it probably is

National Post

2016-08-12


If it sounds too good to be true, it probably is. While that maxim certainly holds true when it comes to investing, it’s also a warning reiterated recently by an Ontario Superior Court Judge in a sentencing hearing involving a fraudulent tax preparation scheme.

In June, tax return preparer Lawrence Watts, 62, who operated under the business name “Fiscal Arbitrators,” was sentenced to six years in a federal penitentiary and ordered to pay a fine of just over $149,000, equal to the net profit he made when he charged 241 Canadian taxpayers to prepare their fraudulent tax returns. Earlier this year, Watts was found guilty, by a jury, of fraud for reporting non-existent business losses, from non-existent businesses. These losses effectively eliminated the taxpayers’ tax liability for the then current and three previous calendar years. This resulted in taxpayers claiming substantial refunds of all the taxes paid in the three previous years and of the tax withheld at source by their employers for the (then) current year.

The taxpayers who testified at trial stated that they had not carried on a business, or incurred the losses reported on their returns nor had they suggested to Watts that they had incurred losses, saying “they did not know where the numbers on their returns had come from.”

The total amount of federal tax revenue that would have been lost had all of the returns been assessed by the Canada Revenue Agency as filed was a staggering $10.5 million, based upon the reporting of $64 million of non-existent losses. Luckily, however, the CRA caught on to the scheme and began to disallow the refund claims. The actual amount paid out in federal tax refunds, or otherwise credited to the taxpayers’ federal tax accounts, was $2.75 million.

The Crown argued that the motivation for the crime was “pure greed.” Watts objected, claiming that his “desire to earn a livelihood is not greed, and that what he was doing was providing ‘customized educational resources’ to his clients.” Both the jury and sentencing judge disagreed, finding that “Watts was motivated by greed, in the sense that he broke the law, in order to obtain a greater share of wealth than he was legally entitled to, based upon his actions.”

While Watts accepted “complete, full and unconditional responsibility” for the amounts stated in the tax returns, he maintains that he believed the statements made in the returns to have been true. The Judge rejected his argument, calling it “nonsense.”

At the sentencing hearing, the Crown argued “Mr. Watts has caused immense emotional and financial devastation for the majority of his clients, including 65 personal bankruptcies, resulting from their liability to repay the refunds received, and to pay administrative penalties.” While the judge accepted the fact that many of Watts’ clients were devastated, he said that “they must shoulder a large portion of the blame: It was a ‘money for nothing’ scheme that was just too good to be true.”

A good reminder for all of us.