Taxes are not a fun topic to deal with on a good day, so when you get the notification that the CRA has selected you for an audit, the day just goes from bad to worse. Whether you run a business or are an individual, an audit can be stressful and anxiety-inducing. Contrary to popular belief, however, CRA audits are not randomly selected. The CRA has a network of purpose-built tools for risk assessment to watch out for triggers that put up red flags considered “high risk.”
This blog will examine some of the most common CRA audit triggers and how to avoid them to prevent flagging for a tax audit.
Common CRA Audit Triggers
Unreported Income
Reporting all income from the T4 slip to the CRA is critical. Any slip you receive from your employer will also be reported to the CRA so they can track if you have reported your total income. Any discrepancies will likely trigger a CRA tax audit.
If you receive cash payments, they may not be tracked, so you must record all cash transactions and report this income on your tax return.
Unusual Changes
The CRA’s system compares tax returns to previous years to look for inconsistencies. The most common discrepancies are dramatic and unusual changes in your income, deductions, or credits. Without supporting documentation for these changes, they might trigger the risk assessment system and flag your return for a tax audit.
It is critical to keep diligent documentation for all activity, especially if there are significant changes to previous years, to justify the changes to the CRA.
Excessive Claims
Tax credits and write-offs can relieve your tax burden. However, as the saying goes, there can be too much of a good thing. While it may be tempting to try to claim as many expenses as possible to reduce your taxes owed or increase your tax return, ensuring you are eligible for what you claim is critical.
One often-used example is a home office. You have to calculate the percentage of your home you use as your home office so you claim a reasonable amount. Depending on the size of your house, 10-15% is a realistic number. The CRA website offers guidelines on how to calculate home office deductions.
Another case is if you use your family car for business. Unlike a dedicated vehicle, such as a delivery van or a snowplow, you cannot claim 100% of your family car as a business expense. The CRA also has guidelines for vehicle-related expenses to help you calculate a reasonable percentage.
If any claims like these seem excessive for your circumstances, the chances of your return setting off CRA audit triggers increase, and your return may get flagged for an audit.
Self-Employment
Freelancers who don’t receive T4 income statements are considered a high-risk taxpayer category as the CRA does not receive official documentation and automatic taxation for your income. This high-risk assessment stems from the increased risk of incorrectly reporting taxes.
Keep detailed records of any income you receive as a self-employed individual so you can provide these documents in the case of a CRA tax audit.
Repeated Losses
Business can fluctuate between years, so it is not uncommon for a company to report losses. However, if these losses start to show a pattern and are used to offset other gains or earnings, they may set off flags in the CRA’s risk assessment system and trigger an audit of your return.
One example would be if you own a rental property that reports losses every year, which may raise suspicion by the CRA. In these cases, you must be able to provide detailed documentation of your expenses to adequately explain continued losses and avoid losing the opportunity to claim these expenses.
Prior Tax Audits
If you have been selected for a CRA tax audit in the past, the probability of being flagged for another audit is high. Having set off CRA audit triggers in the past marks you as a risk factor for having made errors or omissions in previous tax returns.
The risk of being audited again is even higher if the previous audit was triggered by large amounts of undeclared or owed money or if you had issues passing the audit.
How to Avoid a CRA Audit
Tax audits can be a stressful situation that nobody wants to be in. However, you can take steps to avoid setting off any of the CRA audit triggers.
- Be diligent. Many audits are triggered by inconsistencies or errors. Keep accurate records of all income and expenses and ensure you are eligible for all claims you make on your tax return. Accounting software or the services of a professional bookkeeping and tax accountant can help you ensure all documents are in order and your taxes are filed accurately and properly.
- File taxes on time. Keep your account in good standing by filing your taxes on time. Typically, late filings are not considered obvious CRA audit triggers, but a compliance history can help avoid getting flagged.
- Ensure your tax return is complete. Completing your entire tax return is critical, even if you have to put $0. Whether omitted on purpose or by accident, an incomplete return may flag your return.
- Work with a Certified Professional Accountant. CPAs have the experience and expertise to ensure properly and timely filed taxes. Especially if you have diverse income streams or complex tax deductions, professional help can prevent problems before they escalate and potentially trigger a CRA tax audit.
What Do I Do If I’ve Been Selected for a CRA Tax Audit?
You must comply with your tax auditor. The CRA will notify you which types of records they will require for the audit process. This is why keeping accurate records of all income and expenses is critical.
If you are unsure which documents are required or do not have the necessary information, talk to one of Stratos’ experienced CPAs for professional advice. We can help you obtain missing information, get all documentation in order, and, if needed, file an audit appeal.
Get Professional Tax Advice
If you want to reduce the chances of getting audited by the CRA or need professional advice for your taxes, expenses or other deductions, Stratos Accounting & Consulting is your professional choice for dedicated, personalized, customized services. We strive to provide our clients with exceptional customer service and always be available to answer questions and provide guidance. Our experienced professionals work closely with our clients to understand their unique needs and objectives and develop solutions tailored to their specific situations.
Our company is built upon five pillars: Integrity, Professionalism, Respect, Quality and Transparency.
Contact Stratos Accounting & Consulting today at 416-477-4775 or fill out our convenient online form to learn more about how Stratos can help your business soar.