CRA audits are scary and no body wants to be flagged for an audit. So, do you hire a experienced and qualified CPA for your accounting and tax needs or do you try to go on your own?
At first, the audit process may appear daunting, especially CRA may ask you to submit specific documentation by a specific date. However, if you take the right approach and seek professional advise, the process may not be as tough.
To prevent the CRA from looking into your books, it is essential that you understand the issues that they consider questionable. As a business owner, it is clever to take precautions to ensure that your business don't get selected for an audit.
What is a Tax Audit?
A tax audit is where the government decides to audit someone’s tax return. Audit is conducted to ensure that a tax payer is paying the appropriate amount of tax. The CRA auditor is effectively looking for supporting documentation to back up the claims made on the tax return. In case there are errors found on the return, the taxpayer will end up paying higher tax bill to the government. In any circumstances, DO NOT neglect an audit, you have a legal obligation to cooperate with the CRA when an audit is requested.
Who gets audited and why?
Generally, anyone can be selected for an audit. However, small or large business owners claiming higher business expenses are at greater risk of getting audited. If an error is flagged on your return, CRA will issue an audit by mail. Here are some of the reason your business can get selected for an audit:
Changes in Credits and Deductions - If you claim significantly more credits or deductions than you have in previous years, it increases the likelihood the CRA will flag your return for an audit. However, as long as you have the records to prove the claims were correct, the auditor will close the case and issue you a letter of completion.
Business Expenses Claimed - If you own a small business or are self-employed, claiming higher business expenses can trigger an audit. For example: if you claim that your home office takes up more than 50 percent of your home space, it may raise red flag and an audit will be issued. Similarly, if you claim 100 percent of your vehicle expenses as business expenses, that may be enough to get your books audited.
GST/HST Refunds; If your net GST/HST have always been in the payable position and suddenly, you are claiming a higher refund, the government might not like it and would request to review your records. Read our detailed article on the GST/HST Here.
In fact, when completing your return, be as accurate as possible and ensure that you have records to back up all of your claims, as being self-employed can increase your risk of being audited.
Some other reasons of an audit includes:
Significant changes to income year-over-year
Analytics and Algorithms: If you are living in a postal code where average household income is significantly higher than your income. The chances are that you will likely be triggered for an audit.
Failure to file certain forms
Home office expenses; if claiming for the first time
Randomly selected - this method used to be very common back in the days, but currently not the most common anymore
Type of Audits
Generally, there are two type of audit requested by CRA: specific versus general. Although, both type of audits are serious business, but specific requests are less serious than general requests since CRA is looking for specific documentation for a specific credit or deduction. item. For example: many business owners have a home office or use other areas around the house as additional storage space for their business. While it is legal to write off a portion of your home as a business expense if you are using it exclusively for business purposes, it can still result in an audit.
General audits are much serious than specific audit because general request is broad in general and can include books, records, contracts, invoices, list of customers etc. This type of request can impose a real hardship on taxpayer to comply with general requests. So, it is advisable to consult with qualified accountant if you have been flagged for an audit.
Note: you might have received a review letter from CRA which is not an audit. Reviews are generally less serious than an audit. The reviews are issued prior to initial assessment of your tax return whereas an audit takes places after the assessment is issued.
How Can I Ensure I'm Not Audited?
There's really no way to 100% guarantee that you'll never be audited, but there are things that can be done to lower the chances that one happens.
One of the most important aspects is ensuring that you report all income, including investments in stocks and/or bonds. If there's income that's unaccounted for, that will raise a red flag, causing the government to be in touch to find out why.
Be Consistent
Unless you have a proper accounting process in place where you can support all the income and expenses, being consistent will less likely to result in getting audit letter from the CRA. Wherever you file your income tax return, CRA will match the numbers across the board to ensure that the income you are reporting is consistent year or over and matches the industry standard.
Finally, work with an experienced and professional accountant. As qualified CPA, we have many years of professional experience in assisting small businesses and self employed individuals with their accounting and tax needs. We would love to help you too. Get in Touch with Us. We offer free consultation.
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