After a long day you come home and check your mailbox. In taking a look at your postal correspondence, you see a letter imprinted with the logo of the Canada Revenue agency. When you open the letter, your fears are confirmed: you have been selected for a tax audit, part of a large-scale investigation across Canada.
How to avoid problems during a tax audit?
It’s normal, whether you have actual claims against you or not, to feel anxious at the idea of having the CRA delve deeply into your financial situation, your skills and your work. After all, nobody likes to be placed under a microscope and the Canada Revenue Agency’s financial microscope is one of the most intimidating around. However, try to relax and rely on some of the useful tips given in this article in order to better deal with the unwelcome arrival of your tax audit.
What reasons justify a tax audit of the Canada Revenue Agency?
According to an article by distinguished business publication Forbes, here are the most common reasons for the CRA auditors to perform a more thorough check into your tax file:
Receiving a more than significant income
With everything that surrounds the use of "tax havens", the Canada Revenue Agency has decided in recent years to more carefully scrutinize the tax behaviours of the wealthiest people in society.
Giving “very” generously to charities
People who give large sums to charities and then submit tax receipts should be sure to follow the rules surrounding such acts of charity. A poorly completed form will attract suspicion from the Canada Revenue Agency.
Omitting certain forms of income in your tax return
With the technology and artificial intelligence available nowadays, income agencies’ computers around the world can detect anomalies in the tax accounts of anyone who submits documents with irregularities and amounts that are not consistent during the calculation of the tax to be paid by an individual taxpayer.
Owning a business that files successive deficits
During their audit, if CRA agents find that your small business suffered consecutive losses over a given period, it is possible that the legality and legitimacy of your business’ taxes will be in question.
Declaring losses due to your pastimes
You read correctly, it is clear that pastimes and hobbies are not intended to generate profit. However, each year, officials of the Canada Revenue Agency decide to undertake tax audits after taxpayers report losses of income due to their participation in dog shows, tournaments, video games or participation in different types of “large scale” adventures.
Using the aid of a tax expert with a troubled past
Maybe the cousin of a friend of your colleague bills you almost nothing to take on your tax return. What you do not know is that he was under the scrutiny of the CRA for notorious irregularities in the last few years. Using a tax expert with a questionable reputation raises the curiosity of the Revenue Agency officers. It is therefore important to know whom you entrust with the filing of your tax return. Take the time to find a reliable and competent expert with whom to entrust this important task. After all, it is not they, but you who will be the target of a tax audit!
Declaring amounts that are “too” exact
It is unlikely that all of your income and your expenses are exact amounts such as $1,000, $5,500 or $100,000! The auditors might want to look specifically at your tax situation, seeing that you or your accountant does not seem to know the real value to the penny of your financial calculations.
How to make sure to go through a tax audit carefree?
To ensure you can effectively defend yourself in the event an agent assigned to the tax audit of your file asks you questions, or simply to avoid attracting the suspicions of the Canada Revenue Agency, you should follow these tips during the filing of your annual tax return.
Here are the four strategic concepts to put forward when filing your tax return:
When you decide to fulfill your civic duty and prepare your tax return, make sure to benefit from a quiet, well-lit environment free from distractions that could lead to errors in calculations or inattentiveness.
Before filling out your tax return, be sure to have on hand all necessary documents and organise them so they can be quickly referenced. Once you have completed your tax returns, take the initiative to place copies of them in a folder and keep them on hand just in case the CRA decides to engage in a tax audit to get more information about your financial situation.
If you entrust this task to an accountant, be sure to make copies of all documents that you give them. This will prevent you from having to justify yourself without tangible evidence during an audit by the Canada Revenue Agency.
Do not rely on your friend's advice, or that of your colleague or your brother to report your income and expenses. When in doubt, take the time to consult an expert or to go to the Revenue Agency website to confirm or deny any information.
If you decide to entrust the task to a tax expert, make sure to ask about their reputation and history before placing your trust in their hands.
In finance more than anywhere else perhaps, silence is golden! If you're one of those people who likes to show off their wealth and their possessions in front of your colleagues, neighbours and friends, know that the Revenue Agency strongly encourages reporting of suspicious persons that may be participating in tax fraud in one way or another.
Tax Audits: with the right tools, there’s no need to panic!
We hope these tips and tricks will help you understand how tax audits work, and above all, better prepare you you in the event of a CRA audit. Feel free to check out our blog to learn more about the world of accounting and finance! You can also contact us for personalized advice.
• Some administrators are reluctant to entrust certain information on the income and expenses of their corporation to professionals who have no connection to their organization.
• You need to physically move, find an accountant, forward the relevant information and revisit their office once the process is finished. This is an investment of valuable time, and can cause exasperation to some corporation owners.
• Many accountants are extremely competent, but you may still find yourself with a less conscientious one who will blunder opportunities to save on your annual tax return.
We must therefore think carefully before deciding to choose this avenue for your corporate tax return.