13 TIPS TO AVOID CRA AUDIT

AUDIT!  A dreadful word that sends a shiver through your spine. Everyone hates it!

But, is there anything you can do to avoid it?
The answer is that there isn’t a 100% bullet proof strategy to avoid an audit.

However, even CRA confirms it that YOU CAN LIMIT YOUR EXPOSURE! The tips below will help you to minimize the risk of audit.

1. Check your own tax return for mathematical errors before filing. A simple math mistake can flag your return for further investigation.

2. Be alert when you make claim for certain deductions and credits.

13 tips to avoid CRA audit

13 tips to avoid CRA audit

HINT:  CRA possess certain information about: your income, deductions and credits. For example, any “T”, “NR” slips are on CRA file.  Quite obviously there is much smaller risk of CRA requests, if your tax return consists only of “T” slips.

Other deductions like: moving, interest, child care, employment, spousal support expenses will attract more attention from CRA.

Also, be prepared to subst antiate your claims for credits like: tuition fees, tuition transfer, donations, medical expenses.

If the claim is only few hundred dollars, it will most likely pass without any further questions.

However, if the claims are in the thousands, you, or your accountant will probably receive a “request for information letter” from Canada Revenue Agency asking for documents to support the claim.

3. You put substantial amounts to “Other Expenses” on your tax form.   Large amounts will draw attention of the auditor.

4. Evaluate your own risk. If you are a self-employed individual, or you have rental property the risk of audit increases significantly.  You are especially vulnerable if the points below apply to your business.

5. Your business category is classified as “high risk”. CRA identified certain industries, for example  construction businesses, subcontractors, carpet installers, unregistered vehicle salespeople, auto mechanics, independent couriers, direct salespeople, jewelers and restaurant wait staffs as high risk because of deemed “cash payments” that are not reported.

6. You have been claiming losses for last few years. CRA may consider it a “tax shelter”, not a viable business venture, since “there is no expectation of profit”.

7. There was a substantial change in your expenses comparing to the previous years. It is especially true if your changes are related to travel and entertainment or repair and maintenance since CRA looks at them as more of “personal nature”. Also, sudden increase of office expenses can raise a “red flag”, since there is a possibility that it may include expenses of capital nature like: computers, furniture, etc., which should be depreciated.

8. You are frequently late with your tax filing. It may signal to CRA that you are disorganized and you may not be fully compliant with the law.

9. Watch for audits of your big client or vendor. You may be exposed for audit because of association. Review your risk accordingly.

10. Correct your errors when you detect them. CRA offers a Voluntary Disclosure Program (VDP) that allows you to rectify inaccuracies without incurring additional penalties. If it is implemented properly there is also a possibility of reducing interest. Legal or accounting advice is recommended.

11. Keep good records . (VERY IMPORTANT). CRA is most concerned with claiming personal expenses as a business deduction. It is recommended to keep business and personal expenses separate and have separate bank accounts for your business and personal finances. Keep documentation and receipts for expenses you want to claim. If there is a personal element, document the business connection on the receipt. Invest in simple software as: AccountEdge or QuickBooksto maintain your record.

12. Watch what you say online. CRA reads blogs, follows Twitter and Facebook postings. Don’t make any statements about “not paying tax” or do not make other self-incriminating comments online.

13. Have a professional designated accountant to assist you.  An experienced professional accountant, for example Certified General Accountant (CGA) will review and make sure your records and documentation are complete.

I hope that you enjoy reading my “13 TIPS TO AVOID CRA AUDIT”. These tips minimize the risk of audit,  but they do not guarantee that you will not be audited.

Unfortunately…it happens. You got that dreadful letter from Canada Revenue Agency, advising that YOU ARE A CHOSEN ONE for audit. What should you do next?  Please subscribe to our mailing list to receive the answer “13 TIPS TO SURVIVE CRA AUDIT !