While being audited may seem like a random and unfair punishment from the universe, there are specific reasons why some firms and individuals are targeted over others. Rather than picking names out of a hat, the Canada Revenue Agency (CRA) operates a sophisticated evaluation system behind the scenes.
The CRA uses specialized tools and programs to seek out tax returns that appear incomplete, inaccurate, exaggerated, or suspicious. There are "high-risk" outliers that draw the CRA's attention.
If you want to avoid the stress, inconvenience, and intrusion of a CRA audit, it would be to your advantage to avoid the following triggers:
There is no business or individual that wants to be subjected to a tax audit by the Canada Revenue Agency (CRA). However, no matter how thoroughly you run your business, there are times when receiving a tax audit notice can be overwhelming. Entrepreneurs may describe the process as unpleasant and complicated.
There are several factors that CRAs look for when conducting a risk assessment of a company or individual's noncompliance. Below are some proactive tips to help mitigate your company's CRA tax audit risk.
5 Tips to Reduce the Risk of a CRA Tax Audit
1. Reasonable Expense Claims
Deducting business expenses from your income taxes is one of the benefits of owning a business. However, claiming unreasonable amounts of expenses is a surefire way to draw the attention of CRA auditors and raise red flags.
Make sure there are a reasonable amount of expenses for your firm, especially when compared to income and other similar businesses. It may also be beneficial to review expenses claimed in prior years.
If there is a significant increase, the CRA may conduct an audit. Limit claims for expenses that are critical to your business as much as possible. It is also a good idea to retain professional tax audit services to ensure that you have adequate documentation to support your claims.
2. Be aware of tax discrepancies
Sales and earnings comparisons are one of the first things the CRA will do with your tax return. The information you report on your tax return will be compared to all your tax returns.
Make sure that the sales reported on your GST/HST return match the information on your income tax return. Be as diligent as possible in filling out your business tax forms to avoid discrepancies that could stir up an audit. Otherwise, if the CRA notices a significant difference, they may ask questions.
3. Minimize the reporting of multiple losses
Most firms experience losses. If you report a loss just once, don't worry, but if you keep doing it for years, the CRA is more likely to audit you. There is a chance that your business will be considered little more than a hobby. For your company to be considered a business, there must be a reasonable expectation that it will be profitable.
If possible, minimize reporting multiple losses. While all income must be reported, there is no requirement to report expenses in the same manner. You may omit expenses that would result in a small net income for the year.
4. Report all business income
Failure to report business income or repeated failure to file is a major red flag for CRAs. If there is an unreported income on your tax return, the CRA will infer that you are maintaining a lifestyle that exceeds your expected income.
Remember, CRAs compare your reported income to the average statistics for your industry and region. Be sure to report all of your business income. It is also a good practice to report the exact amount so that the CRA's auditors will not be suspicious.
5. Be proactive in filing business tax returns
There is no way to completely eliminate the risk of a tax audit from the CRA. However, you can minimize the likelihood of a tax audit by being more proactive in planning and filing your taxes. In addition, working with an experienced tax professional can help you file accurately and ensure that you have the legitimacy to support your claims.Preparing tax returns can be a complex task, especially for businesses that are incorporated and for individuals who have business or rental income. Experienced accountants do this work every day, understand the tax laws, and know how to minimize the chances of a tax audit. However, if there is a chance that you may have made mistakes in your past individual or corporate tax returns, you can avoid serious penalties and criminal prosecution by taking remedial action before the auditors arrive.
Spend the money and use the services of a qualified accountant; the same rules apply if you are faced with a CRA audit: leave all correspondence and filings with the CRA to the professionals, and pay more severe penalties and interest for possible or further mistakes that could be detrimental to yourself or your business. In the worst-case scenario, avoid criminal prosecution.
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