Sanjeey Khatter, like many Canadians today, was in the dark as to how to file his taxes. Therefore he took on a tax preparer to assist him with his financial needs. What occurred after was an unfortunate mixture of poor judgment and severe carelessness.
Sanjeey hired a man by the name of Muntaz Rasool, who led him to believe he could receive a greater tax refund than what was previously prescribed. However, when Muntaz began putting together Sanjeey’s 2008 tax return, he made up a large and fictitious business loss; on a business his client never owned. By claiming his loss in 2008, a request was made to apply net operating losses to the preceding year’s income (ie, a “carryback”) which would have made his taxable income from 2005 to 2008: zero.
Throughout this transaction, there were a few moments that should have roused suspicion in Sanjeey’s mind:
- The fee structure was out of the ordinary as it was 40% of the amount of any refunds received by the taxpayer.
- The amount of refund for his 2008 taxation year was $12,000 plus a child tax credit of approximately $3,500, whereas in the past he had never received a refund of more than $2,000.
- The tax preparer was not affiliated with any well-known tax preparers or accounting firms, indicating that he may not have been legitimate.
The CRA also followed up with Sanjeey, allowing for him to reassess his claims, yet he decided to blindly follow his tax preparer. In the end, the CRA did not allow the losses and imposed harsh penalties under subsection 163(2) of the Income Tax Act. Sanjeey was grossly negligent.
When are you grossly negligent?
You are grossly negligent when you act seriously careless or indifferent as to whether the law is complied with or not. There are many key takeaways in this case that can prevent you from facing such a circumstance resulting in harsh penalties.
The following are a few warning signs that may indicate further investigation is required by you as a taxpayer:
- CRA sends letters questioning claims made on your personal tax return.
- Tax preparer is charging you a percentage of your tax refund for their services. This may provide the tax preparer to maximize your benefit by falsifying information in order to receive a higher fee.
- The amount of tax refund for your current year is significantly different from prior years and there has not been a major change in the amount of income you earned from prior years.
The following is a list of lessons that you can take away:
- Do not blindly trust your tax preparer.
- Do not ignore any red flags – ask your tax preparer questions or directly communicate with the CRA to further inquire and address issues that need to be resolved.
- Have a basic understanding of what is being claimed on your tax return and always look over your final tax return to see if any amount(s) look like they are out of the ordinary before you sign it.
- When searching for a new tax preparer, do not solely rely on the recommendation of one colleague, ask for or check out other references.
The onus falls on you as a taxpayer to ensure that the information contained in your tax return is truthful. It is always a good idea to review your tax return before signing it, as you may be able to pick up on any obvious questionable errors as opposed to blindly trusting your accountant. This simple act will allow you to avoid any penalties that may amount to gross negligence.
The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.