National Post from Toronto, Ontario, Canada • 13

in Ine C12LJ. Mian Second Section Pages 13-20 August 15, 1964 Current paid circulation about 105,000 copies When the T-Men knock it's time to talk They are 99 certain of what they will find and most tax dodgers will admit their guilt. Here's how the little-known fraud squad operates "By the time we got him he was withholding thousands every year. He told us he just couldn't stop. It is amazing how often we find this kind of situation." Until now, expense-account tax dodgers have largely escaped the attentions of the fraud squad.

The assessors branch usually handled inflated or unlikely expenses claims. But this may be changing with the new Ottawa' emphasis on cracking down on expense-account living. If, as many observers predict they will have to, the tax officials decide to draw up more specific expense regulations that make clearer what is and isn't allowed, the fraud squad inevitably will be brought in to do some crosschecking on the more unlikely looking returns. It should be quite an incentive to tot the line. the court through the maze of documentary evidence, explaining the points.

By this time the investigator frequently knows as much about the accused's business affairs as he himself does. Are there any patterns to tax-dodging in Canada? "Tax-dodging and alcoholism have a lot in common," Hauch believes. "Like the man who takes a little drink one day, a bigger one the next, we find many tax dodgers start small and just can't seem to stop. "I remember one man we investigated who burst into tears as we searched his office. He told me he had started years ago by withholding one payment from his tax return, saving a few dollars in tax.

The next year he tried withholding a little more. By CLIVE BAXTER OTTAWA In the next few days somewhere in Canada a tax dodger is going to get an awful shock. There will be a knock on his door and in will come an investigation team from the Department of National Revenue's fraud squad accompanied by an RCMP constable. They will be polite and businesslike. Armed with a search warrant from the Exchequer Court they will ask to see the taxpayer's records.

It probably will be fairly early in the morning because the fraud investigators like to have a full day before them to do their digging. The taxpayer can be sure that he is in deep, deep trouble. By the time the fraud squad strikes it is 99 certain what it is going to find in only a handful of cases has it ever been wrong. Most tax dodgers are so shattered by the arrival of the squad they just sit quietly and admit their guilt. More than one, lucky enough to have the necessary liquid ingredients at hand, has got slowly drunk as the agonizing day wore on.

The Special Investigations Section of the Taxation Division of the Department of National Revenue to give the fraud squad its formal title is one of the least known and most efficient of all federal enforcement agencies. It now has 224 -investigators based at the main taxation offices across Canada. They are a remarkable breed of men: part accountants, part detectives. Most have worked their way up through the taxation division and are expert at reading a balance sheet and picking, phony bookkeeping. They know their way through the byways of business.

The average investigator earns around $7,500 annually, putting him somewhat above the police level. The top men in lowed up. Sometimes they produce results. "A big office like Montreal or Toronto receives from 50 to 100 anonymous tips every month," Hauch explains. As policemen, it is very obvious the fraud squad has decidedly mixed feelings about these nameless informants.

They don't like them, but can't operate without them. Known informants. These are as welcome as they are rare. Here someone comes forward and provides information without hiding behind an anonymous call. "Usually this is for personal reasons, a grudge of some kind," he says.

"But sometimes it is simply a law-abiding citizen who feels the law is being broken. We always promise to conceal the identity of these informants and the offending taxpayer never finds out who tipped us off." The tax assessors. When in the normal run of checking tax returns the assessors suspect a taxpayer has gone beyond carelessness and on into outright dishonesty the file is sent across to the investigations branch. This is probably the largest single source of leads. The newspapers.

The fraud squad members quickly become expert at looking for leads in newspaper stories. Whenever there is a whiff of scandal, a rumored payoff by a building contractor, a professional man disbarred for unethical conduct, an immigrant who claims to have paid for illegal there is a better-than-even chance there are some undeclared earnings to be found. A classic case came a few years ago when police in a big Canadian city cracked down on a major brothel operation. While other readers lapped up the spicy details, the fraud squad was won- UtAR KAUU bUAU. into investigating it than a case concerning a few hundred dollars.

The principle involved. Sometimes the officials come across a case where the sums involved are not large, but the principle is felt to be vitally important. For example, every now and again the tax assessors in their routine checks will discover a "small" taxpayer frequently a new immigrant claiming for nonexistent relatives on his or her tax return. Depressingly often, a follow-up check on this reveals the immigrant had been approached by a shyster accountant who in return for, say, $25 promised to file the immigrant's return and save him a minimum of $50. To do it he simply invents dependents.

When one of these cases comes along the investigation branch swings into action with the enthusiasm usually reserved for a million-dollar tax swindle. The accountant inevitably comes to a sticky end and the immigrant has to pay those missing taxes. Equally tricky is the question of who actually gets prosecuted once an investigation has shown fraud. There are amazingly few prosecutions in the last' fiscal year 474 investigations led to only 21 prosecutions, all of them successful. However this doesn't mean the other 453 got away with it.

National Revenue has the power to assess a penalty of 25-50 of the unpaid taxes, and can charge 5 annual interest on all owed taxes. This can amount to a great deal and in Ottawa's opinion it is more useful to hit these people hard in the pocketbook than to send them to jail where they won't earn enough to pay back what they owe the state. Anyway, using whatever formula it does use, the investigation branch makes the decision to go ahead and look into the affairs of a suspected tax dodger and thus starts a complex series of events. The approach is never direct. The investigators start by looking through the tax records of the suspect's customers, clients, known friends, etc.

in short anyone who might have dealings with the suspect. They move steadily in on him from the outside edges of his contacts. Let's take an imaginary case, say an architect who is reporting income of $25,000 a year, has a $70,000 house, a $45,000 yacht, two expensive cars and spends long holidays in the sun and has annoyed someone enough for this person to point out these interesting facts to National Revenue. An initial check reveals the architect isn't living on inherited wealth or from any other legal source. It is pretty obvious he is taking in more money than he is declaring, but how is he doing it? Investigators would go first to the architect's clients and check their books.

They would only tell the clients they were income-tax investigators, not whom and what they were investigating. They would dig back through mountains of old tax returns and records of all concerned in the affair. This is the dull, plodding, routine side of investigation work. Slowly the fraud squad build up a picture of their suspect's activities. It may take weeks, but piece by piece the puzzle is put together.

By the end of this phase, Hauch and his investigators are almost completely sure what the suspect's records are going to show. They then obtain a search warrant from the Exchequer Court and move in. In 15 of all such cases, the suspect breaks down and confesses. "I think for some of them it is a very real relief that the thing is over," Hauch says. "They have been under strain for years waiting to trip up, and when it comes they frequently break down." When all the evidence is in, it is up to the deputy minister of National Revenue to decide whether to prosecute in criminal court.

If the decision is yes, the investigator in charge of the case takes on a twofold role. He assists the prosecution in preparing its case, and once the case opens he acts as an expert witness for the court. It is the investigator who leads TIP-OFFS altout tax lolters come from many person. Tax dodgers and their tricks -I "Tux-dodging and alcoholism have a lot in common. Like the man who takes a little drink one day, a bigger one the next, we find many dodgers start small and just can't seem to stop," Edwin G.

Hauch, head of the Special Investigations Section, Taxation Division, Department of National Revenue. HAUCH Fraud Squad Investigations TOTAL RECOVERIES (dollars) TOTAL NO. OF CASES 14,203,998.37 OTTAWA It frequently takes some pretty hard digging to reveal the methods of suspected tax dodgers. But the fraud squad usually finds what it is looking for sooner or later. Here are some recent cases from the squad's files: An 85-jear-oId doctor who claimed to have a serum that cured cancer had been under investigation by narcotics agents of the RCMP for some time.

They tipped off the fraud squad that he looked like a tax dodger as well. The investigators found him a tough nut to crack. His operation employed 12-18 nurses. Desperate cancer victims streamed into his clinic for injections at $10 a shot. The records were sketchy and the doctor absolutely refused to cooperate with the squad.

He and his grandniece did all the bookkeeping. Because most of his patients died of cancer soon after beginning their treatments they inevitably had been told by their doctors that nothing further could be done it was remarkably difficult to track down his clients and to get an idea of the clinic's actual income. The doctor reluctantly admitted he had three bank accounts. They were checked and showed nothing wrong. The investigators began an exhaustive check of other banks to see whether he had an account somewhere else.

It turned out he did 32 of them in 19 branch banks in four cities, both in Canada and the U. S. It also was learned again through sheer hard digging the doctor had no less than four hefty brokerage accounts and four safety deposit boxes. He had flatly denied he had either. The squad returned and searched the doctor's house.

It turned up a further $45,000 in cash tucked away in drawers, behind pictures, etc. When it was all added up, the fraud squad made the doctor pay up $433,152 in back taxes, $90,969 in interest and $125,000 as a penalty. Because of his age it was decided not to press for a jail term. Men who frddle taxes shouldn't bt harsh landlords too. One such man made a habit of buying properties and immediately raising the rent.

It made him many enemies and soon they were calling the tax men's attention to him. The investigation turned out to be fruitful. He had, it turned out, made more than 1,000 real estate transactions that were tax dodges. His technique: to buy a piece of property and then when he had arranged to sell it for a considerable profit he would sell it instead to his daughter or some other phony nominee. It would then be sold as arranged, the profit being taken as a "capital gain" by the nominee.

He and his business partner were fined $103,025, charged back taxes of $355,852 and interest of $114,000. A husband and wife who both worked for a Crown corporation had modest incomes but didn't like paying taxes. The wife worked in her spare time for a well-known charity and in the process came to realize what a bonanza there was in charitable receipts. From then on virtually any receipt these two received was forged into either a charitable or a medical receipt. Their returns caught the attention of an astute clerk and the file was sent along to the fraud squad.

They took the receipts to the crime laboratories which quickly confirmed almost all had been doctored. The investigation showed it was the wife who had done the actual forging, although the husbpid knew about it. National Revenue thn had to decide what action to take. To bring charges against them automatically would have cost them their jobs, ruling out any hope of recovering the back taxes. It was decided to charge only the wife.

She was fined $450, charged the costs of the action and made to pay $661 in back taxes. The husband retained his job. 15,825,819.96 18,283,195.99 9,706,024.82 9,697,030.18 2,945,010.41 dering about undeclared earnings. It led to a series of investigations. Other investigations.

It almost never fails that one good investigation deserves another. As the fraud sleuths plow their way through the murky affairs of one tax dodger they almost always come across leads that reveal another fraud case. They just keep right on going. From all these sources, and combinations of them, comes the flood of leads. But not all are investigated.

Even though Hauch can draw from the ranks of the National Revenue assessors when necessary, there isn't the time or staff to pursue every lead. Nor could the courts process that many prosecutions. This brings up a point that genuinely troubles Hauch and his men: the question of selectivity. "When you make the decision to investigate Mr. A and not Mr.

you inevitably create the suspicion of playing favorites," Hauch admits. "Why me and not him? It can be difficult." Understandably National Revenue has no desire to let taxpayers know the formula it uses in deciding who is to be put in the investigation spotlight. But there are two main considerations: The amount of money involved. Clearly if National Revenue suspects a tax fraud running into millions, it is much more inclined to throw its efforts main district offices earn around $10,000. It clearly is not the money that attracts them because they get no more than their opposite numbers in the less dramatic sections of National Revenue.

"It takes a special kind of man," Edwin G. Hauch, head of the investigations section, explains. "They have to like the work, the steady putting together of the bits and pieces that make up the case. Either they like it or they can't do the job at all. It is that kind of work." Hauch has been in this work since the formation of the section almost 20 years ago (see separate story), and he clearly likes it very much.

He takes enormous pride in the hard-slogging detective work done by his men, and the unrelenting toll they take of dishonest taxpayers. A close-up view of the fraud squad at work would be enough to bring all but the most hardened tax crook scurrying back onto the right side of the law. Once the fraud cops have picked up the scent they are seldom sidetracked. The all important initial leads come from a variety of sources: Anonymous -tips. The officials say there are thousands of these each year.

Sometimes written, sometimes telephoned, the vast majority of these turn out to be from petty, frustrated people who more often than not have their facts wrong. But each tip is studied and fol- Jan. 1 to 1957-58 1958-59 1960-61 1962-63 1963-64 Dec. 31, 1948 Fiscal years rp chart World War spawned tax dodfersaud the fraud squad i 0 precedents with which to work. The course over, they split up.

Initially they were posted in teams to Toronto, Belleville, the Ottawa district office and the National Revenue headquarters at Ottawa. "We wanted to stay fairly close together while we developed our techniques," Hauch explains. "It wasn't until later that we began to add staff snd spread out across the country." Initially known as the Enforcement Section, then the Intelligence Section, it finally became the Special Investigations Soction a title the members feel is more accurate. In the almost 20 years since Max Fell held his initial lecturnS, thf taction has grown in 224 No, it isn't Elliott Ness and his Untouchables. These men were the first members of National Revenue's tax-fraud squad who had just completed their training in the winter of 194546.

There had been no specific fraud investigation machinery of any kind in the department until a year earlier. Before World War II, it seems, neither incomes nor taxes had been high enough to provide many Canadian tax dodgers with the necessary incentive. The war changed all that. Income and taxes chased each other ever upwards, and tax-dodging became a major occupation for some less desirable Canadians. By 1944 the situation had become serious enough for National Revenue to enlist retired RCMP offirer, Tom Scrogjj, look into.

But SrroesT rwn found that police tactics were of limited use when tracking down a tax-fraud case. It was balance sheets and not fingerprints that held the clues. Within a year he had quit. His replacement was a very different kind of man. J.

N. "Max" Fell (front row, centre) had studied accounting and was a Queen's commerce graduate. In 1931 he had joined National Revenue as a values investigator for the customs branch. His work took him throughout the U. S.

and gave him an insie'er's view of the business During the war he had worked with the Foreign Exchange Control Board, tracking down some prrtty high-pressure criminals who were smuggling currency and out of Cpnada, Fell began enlisting staff. He took as his number two Edwin Hauch (front row, left) who, last year, succeeded Fell as head of the investigations branch. Hauch's career had closely paralleled Fell's, and included a period in Commodity Price Stabilization Corporation. The others were an interesting cross section: three were tax assessors recruited within the department, one was a White Russian fresh from wartime intelligence, one had been an accountant before wartime pilot duties, two had worked in banks and one in a stock-broking office. Fell, and the departing Scrogg, gave the recruits a basic course in tax investigation, to some extent making it up as they went tlong.

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