Whether it's unreported income, unfiled tax returns or the failure to remit required employee deductions, tax evasion is a huge black market that continues to thrive across Canada.

Even though some of these "oversights" can result in a criminal prosecution with fines as much as 250 per cent of the taxes owing, there is hope for businesses that have found themselves on the wrong side of a tax return.

While the Canada Revenue Agency (CRA) will not hesitate to prosecute if necessary - earlier this year a Toronto businessman was fined $100,000 for failing to remit employee payroll taxes while a Quebec company pleaded guilty to tax evasion charges and was fined $240,000 - the tax agency says confrontation is not its ultimate goal.

"For the CRA, litigation is always a last resort," says agency spokeswoman Colette Gentes-Hawn. "We prefer co-operation to confrontation."

This form of co-operation could be referred to as the CRA's version of "True Confessions," where businesses or individuals can correct their tax transgressions.

The CRA calls it their voluntary disclosures program (VDP). Others describe it as a sort of tax amnesty or a type of pardon.

Essentially, VDP allows taxpayers to come forward and disclose material they did not previously report, possibly avoiding penalties or prosecution.

Any tax owing, plus interest, will still have to be paid.

Paul DioGuardi, a senior tax counsel for Ottawa-based DioGuardi Tax Law LLP, a firm that specializes in negotiating tax settlements, says it all comes down to the fact that the taxman is indeed watching.

"People don't understand what can happen," says DioGuardi, a former tax counsel for Revenue Canada who also acted as legal counsel for the tax litigation section of the Department of Justice. "They can seize a bank account and they can put a secret lien on your house and you'll never know."

Some business owners might counter that the CRA wouldn't shut their business because it would put employed people out on the street.

But, says DioGuardi, "they don't care. They're doing their job (to collect unpaid taxes.)" He cites one case where a businessman failed to report "a significant amount of income" for two years.

The man, now deceased, had terminal cancer and the CRA was going to prosecute even though he only had a few months to live.

DioGuardi says it took a lot of manoeuvring on his part, including a possible move to hold a press conference at the man's hospital bedside, before the agency backed off.

"I'm not trying to paint the agency as ruthless and hard- hearted. There are a lot of good people in the agency who would never think of that (prosecuting in that situation)," says DioGuardi, who also notes that there are a lot of nasty tax- cheaters out there.

In the United States, he adds, "Americans know the IRS is not their friend. (But) in Canada, the CRA says, 'We help our clients.' That's sort of like saying 'Come into my parlour, said the spider to the fly.' It's dangerous to think that they're your friend."

To qualify under VDP, it must be a voluntary move initiated by the business or individual, be complete, involve a penalty and include information that is at least one year past due. A VDP will not be accepted if the goal is just to avoid late filing or instalment penalties.

Further, it needs to be made before the CRA takes any action, including sending out an audit letter.

"If the tax department is already conducting an enforcement action against a business or has started an audit and then the client comes to the lawyer, it's too late (for a VDP). It's not voluntary," says Lorne Saltman, partner and head of the tax and trusts group for Cassels Brock & Blackwell LLP, a Toronto-based law firm.

That's why timing is crucial, adds Saltman. In one instance, he convinced a client to make a voluntary disclosure - not knowing that an audit letter was already in the works. The VDP was made and stood up, even though the client received an audit letter two days later, because no one on the client's side was aware that the CRA was moving forward in the situation.

Even if it is too late for a voluntary disclosure, legal officials stress that it is still important to have a counsellor who specializes in tax litigation on hand.

"A lot of people think 'Let me play ball here and I'll be OK' (when they receive an audit notice). But you have no obligation to give them things that they're not supposed to have and that's often a legal interpretation as opposed to an accounting interpretation," says Michael Edelson, principal partner of Edelson & Associates, an Ottawa-based law firm that handles criminal litigation.

DioGuardi and other tax lawyers warn that you should watch what you tell your accountant, as it could be used against you - even if they were given the information in confidence.

"Your accountant can be forced to testify against you. Only a lawyer has lawyer-client privilege," says DioGuardi.

The tax department can require production of all the accountant's notes, papers and conversations, adds Saltman, and the accountant can be forced to testify and disclose all the information.

"Where it's important to bring an accountant into the process, the client would contact and retain me and then I would engage the accountant in providing information to the client - and the client would pay the accountant. (This way) it's all covered by the privileged umbrella a lawyer has with the client - it extends to the lawyer and those assisting the lawyer," says Saltman.

Saltman noted that businesses should give serious consideration to obtaining legal assistance rather than going it alone.

"Clients may not represent themselves in the best way. An experienced (tax) lawyer can help minimize the damage that can occur - if the case is presented properly," he says.

Last year, the CRA processed 1,652,936 corporate tax returns.

There were also 9,464,533 self-employed individuals who reported business income to the CRA, out of 25 million individual tax returns.

The CRA's Gentes-Hawn says that while litigation is a last resort to collect unpaid taxes, the agency does have the responsibility to ensure that the self-assessment system - where every business and individual is responsible for filing their tax - is working. As such, it will look at tax returns using industry information to ensure that all tax due is being paid.

Tools used by the CRA include analysing industry profit margins in specific geographic sectors, which provides a guideline to the revenue a particular business is likely to make.

The type of industries scrutinized will vary. "It depends on what we're looking for in that year - where is it likely there are taxes that aren't being paid," says Gentes-Hawn.

It isn't just the CRA that business owners should be concerned about.

It can also be disgruntled business partners or associates - or even a spouse who wants to get back at their partner who calls in and makes an anonymous tip to the agency.

That's why DioGuardi urges people to take advantage of VDP.

"The reason they do that (the VDP) is because they can't catch everybody," says DioGuardi. "This way, they put some honey on the table and maybe get some flies - they get the taxes (owing) and the person is back in the system and becomes tax compliant. That is valuable to them."

(Laura Severs can be reached at laura@businessedge.ca)