Prepared for the:
Public Affairs Branch
Canada Revenue Agency
FINAL REPORT
December 2007
POR#198-06
Contract #4655879191
Prepared by:
Sage Research Corporation
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Executive Summary
The non-compliance rate for NETFILEd returns exceeds that of returns filed using paper, Efile, or Telefile. Note that "non-compliance" in this context refers specifically to overstating deductions/credits. Further, the sub-population of paper filers who use software without the aid of a tax professional demonstrate a higher non-compliance rate than the overall paper non-compliance rate. While this number is still significantly less then the NETFILE non-compliance rate, it clearly shows that software users, be they electronic or paper filers, do demonstrate a significantly higher non-compliance rate as compared to non-software users and software users that involve a third party tax professional.
The overall purpose of the qualitative research was to explore potential links among taxpayer attitudes to compliance, the method of filing, and the use of computer software, as the previous quantitative study results were not able to do so.
Twelve focus groups were conducted October 24 - November 2, 2006, in six cities across the country. The participants were taxfilers who had used tax preparation software and who had claimed one or more of the credits/deductions on which non-compliance is relatively more likely to occur. The groups were divided between those who used tax software to generate a paper return and those who used tax software and NETFILE.
Research objectives included:
- Explore attitudes towards non-compliance -- particularly in the sense of over-stating claim amounts, the level of acceptance of non-compliance, and what drives these attitudes towards non-compliance. Of particular interest was whether any reported temptations to over-state claims are inherently tied to:
- The use of tax preparation software given the hypothetical tax calculation capacity of the software.
- The fact that when using NETFILE the taxfiler does not attach receipts for any of the claims.
- Explore the awareness of CRA programs to validate deductions and credits including issues such as their personal experiences, and their feelings about deterrence in general and specifically regarding overstating deductions and credits
Qualitative research (focus groups) was selected for this project since the purpose was to explore potential links between taxpayer attitudes to compliance, the method of filing, the use of computer software and declared compliance behaviour. Qualitative research is most useful in instances of examining causes behind attitudes, adding context to existing quantitative data, or exploring deeper concepts than can be addressed by quantitative methods such as surveys.
Factors Affecting Non-compliance among NETFILE and Tax Software Users
Many participants believed there is some latitude to overstate deductions/credits, albeit not wide latitude -- meaning that within a certain range of overstatement: (a) one is not likely to be caught by the CRA, and (b) if one is caught, the consequences are not that serious. This belief was important for the discussions, because it meant many participants believed there is some low-risk latitude to act on any temptations to overstate amounts that might occur because of use of tax software or NETFILE.
Participants generally believe the CRA looks for "large" changes in a person's tax return from one year to the next, and that the CRA has guidelines for what are "reasonable" claim amounts. Providing an overstated amount is not hugely different from what was claimed the prior year, or is "reasonable", then many participants felt the CRA would not detect this overstatement.
The following summarizes links between use of NETFILE or tax software and overstatement of deductions/credits that were mentioned by at least some participants. In general, the majority of participants found it much easier to link NETFILE to non-compliance than the use of tax software itself. These findings are presented in order of importance to the purpose of the study.
Temptation to overstate deductions/credits
- Use of NETFILE
- Many participants felt that not having to attach receipts creates a temptation to overstate amounts. And, as long as the overstatement is "small" and "reasonable", many believed one would get away with the overstatement.
- Some participants noted NETFILE does not require a signature, and suggested some people might be more hesitant to make false claims when they have to sign the return.
- Use of tax software
- Some participants pointed to the hypothetical tax calculation capabilities of software: the ease and speed of seeing the impact of a change in claim amount can lead to temptation to overstate.
- Some participants said there can be a more impersonal quality to using tax software that can lead to greater openness to temptation -- e.g., writing a false number by hand may feel more deliberate than typing it, or using a computer can have a more game-like quality.
Perceived likelihood of getting caught
- Use of NETFILE
- Only a minority of NETFILE participants had been asked for receipts, which contributed to a perception one is likely to get away with "small" and "reasonable" overstatements.
- Some participants suggested there could be a perception that the CRA does not scrutinize NETFILEd returns as carefully, because of a belief these returns are less likely to be looked at by a person.
- Use of tax software
- Some participants suggested there could be a perception that the CRA may scrutinize returns produced by tax software less carefully because the CRA might "trust" more in the accuracy of such returns.
Perceived seriousness if caught
Participants felt that even a small overstatement can have serious consequences if the CRA believes there was deliberate fraud. In this context, it is believed to be important to have some sort of excuse in the event one is caught. The most common excuses associated with use of NETFILE or tax software were:
- Use of NETFILE: "I lost the receipt"
- Use of Tax software: "Typo"
Error
- Use of NETFILE: Several participants suggested associated with use of NETFILE, some people may become less careful about storing/managing receipts, and hence more likely to estimate amounts.
- Use of tax software:
- There is a possibility of typos.
- Some participants suggested some software users may be less careful about double-checking their input because of the ease of using software.
Types of people using NETFILE or tax software
Most participants did not offer theories about how NETFILE/tax software might lead to overstating amounts based on the types of people who use these. But, one theory mentioned by some participants involved age: NETFILE/software users are perceived to be younger, and it was suggested that for whatever reason older people are less likely to put false amounts on a return than are younger people.
