Whose side is your tax accountant on anyway? - 3.9 out of 5 based on 54 votes

( 54 Votes )

 

Accountant may be forced to reveal facts.

Financial Post - Personal Finance: - Tuesday, April 6, 2004

With the annual tax deadline looming, many Canadians are hiring accountants to help minimize their tax burden. But legislative changes have forced accountants to be less aggressive than they used to be. And if you end up in a dispute with the Canada Revenue Agency (CRA), information divulged to your accountant could be used against you. Unlike tax lawyers, you cannot rely on a basic principle of accountant-client confidentiality, says Paul DioGuardi, QC, former tax counsel to the CRA and Department of Justice.

 

In a major audit or civil assessment, your accountant could become the CRAs "best witness against you" warns DioGuardi, who has 38 years experience in the murky waters of Canadian tax. The Supreme Court of Canada confirmed in a case involving accounting firm KPMG that there is no such thing as accountant's privilege, DioGuardi says. This is not well known by lay people. Clients who deal with accountants only at tax time may be under the mistaken impression the relationship is a sacred trust like the one between lawyers and clients (perhaps taking their cue from legal shows on television). But client-lawyer confidentiality is unique. And while DioGuardi picks on accountants, the same lack of confidentiality applies to most other professions, including financial planners and bank managers, says Anthony Ariganello, president of the Vancouver-based Certified General Accountants Association of Canada.

Advertisements for DioGuardi & Company LLP have been running in major business dailies. (See www.effectivetaxsolutions.com.) One is headlined "Undeclared income? "The body copy explains that "before you are caught we can negotiate a no-name (anonymous) settlement with the tax authorities ... Tax lawyer-client confidentiality assured. Unlike us, your accountant cannot offer this legal protection and can be forced to give evidence against you..." DioGuardi warns taxpayers to "beware if your accountant is questioned by an investigation agent [of the CRA], particularly if you receive a notice from the CRA or provincial tax authorities and you know that the returns you filed contain either understatements of income or overstatements of deductions." Since conversations are not protected, "you should not have any further discussions with your accountant on the facts of your case" until you have consulted a lawyer. While it may initially be just a civil audit, CRA agents are trained to be on the lookout for fraud and to refer potential abuses to their Criminal Investigation Division. Because of the lack of privilege, "your accountant may be forced to tell the CRA or provincial tax authorities what you have told him/her."

The CGA's Ariganello doesn't dispute what DioGuardi says. The accounting profession is bound by its own code of ethics. Where compelled by law, disclosure of confidential client information is required, he says. An accountant "won't disclose confidential information as a result of his professional or business relationship" but "the shield is pierced" if the law requires disclosure, Ariganello says.

For those whose tax liability has become almost unpayable ($175,000 or more), DioGuardi also helps clients avoid bankruptcy. He warns bankruptcy trustees are in the same category, as accountants. Unlike tax lawyers, "bankruptcy trustees represent your creditors (the tax collector). Since their fees are partially result oriented, the more tax you pay, the more trustees earn. We have no such conflict of interest".

Besides the confidentiality issue, other developments have also undermined the trust between accountants and their clients. A few years ago, the Department of Finance pushed through its agenda of civil penalties for tax advisors, despite the objections of some accountants and tax professionals. The government has always had recourse to criminal prosecutions of wayward advisors who mislead clients on overly aggressive tax strategies. But it also sought to increase civil penalties to bypass the time-consuming route of criminal prosecution, says CRA spokeswoman Colette Gentes-Hawn. Even when it was just under the proposal stage, industry observers warned that civil penalties threatened to drive a wedge between tax advisors and their clients. After all, tax interpretation involves many grey areas. The new higher civil penalties make advisors (including accountants) liable for 50% of the amount of tax sought to be avoided, so their natural response may be to make recommendations less aggressive than may have been the case under the earlier regime. Where in doubt, the natural inclination of tax professionals is now to fall on the side of greywhite, rather than the grey-black some clients thought they were hiring them for.

The ability to gain access to a myriad of items also gives the CRA a powerful weapon which can jeopardize a taxpayer's case, a fact of which the CRA is well aware. In a contentious case, it often issues a broadly worded "requirement letter" asking for everything from tax planning memos to emails to notes. A recent case established the CRA can ask for previously documented information. My own take on this? Your accountant is not your buddy. Honesty is always the best policy, but you won't go too far wrong by considering your accountant to be loosely aligned with the CRA. Talk and act accordingly.

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