Every individual and business, earning or not, should file taxes, as the Canada Revenue Agency (CRA) offers several benefits to tax filers. And when you file your taxes, they are reviewed by the CRA. Your tax filing clears the review if the agency is satisfied with the information and documentation provided. But if it finds any anomalies, something missing or not falling into place, it might ask the company for more details. And if the information is unsatisfactory, it could trigger a CRA audit.
A CRA Audit
A CRA audit is time-consuming and stressful as the agency reviews your books and documentation. You allocate a dedicated accountant to take care of the audit and incorporate any changes suggested by the CRA. And if the CRA finds any missing income or tax avoidance that you can’t justify with proper records and documentation, be prepared for a hefty penalty. Hence, many businesses and individuals despise a CRA audit.
Seven Red Flags That Can Trigger a CRA Audit
You can work smartly and identify the red flags that trigger an audit. The CRA has some risk-assessment parameters and some tax filing habits it looks into to find tax issues. Here are some taxation mistakes that could trigger a CRA audit.
Failing To Report All Income
The CRA receives transaction forms from everyone in the country. If a transaction involves two parties, a debit from A should show credit to B. If B misses reporting that income and this becomes frequent, it could trigger an audit as the CRA does not have a corresponding entry for the transaction reported by A.
The best way is to be transparent and report every income, including dividends or income from rent or proceeds on the sale of your old car. These income sources are more likely to be missed as they are not your main income source.
Having Huge Cash Transactions
A business with heavy cash transactions, like bars, restaurants, and contractors, is more prone to CRA audit as all transactions may not be digitally recorded. If your business involves several cash transactions, having good billing and accounting software and a professional bookkeeper to document everything is important. An expert is well-versed in the ways of the CRA and can handle the audit professionally.
Rounding Off Transaction Amount
The CRA looks at your tax filing in its entirety. Anything that seems too good to be a coincidence catches its attention. One such thing is perfect round-off amounts for several items. It makes the CRA suspicious that you don’t have receipts or are estimating the numbers at the end of the year.
Recording the numbers accurately and not rounding them off is the first key to filing a proper tax return. If the amount is $2,585.23, keep it the same.
History Of Investigation
If you are, or were, under an investigation for violating any tax laws or have a history of CRA audits or penalties, you are prone to face another audit in the future. Hence, filing your taxes timely and avoiding penalties is a good habit. And if you get a request for information from the CRA, be prompt with your replies and cooperate with the request.
An audit or information request is a normal procedure that could be triggered due to a certain transaction or as a random pick. Getting a clearance from the CRA can help you keep your records clean and present you as a law-abiding taxpayer.
Overpaying Spouses and Children
The CRA always looks for the salaries paid to spouses and children as it is the most common way of withdrawing too much money from business while avoiding taxes. Paying excessive salaries to spouses or children could raise suspicion and get the CRA digging into your expenses.
Hence, ensure the salaries you pay to everyone, including yourself, are as per industry standards.
There is a proverb, “Charity begins at home,” but be careful of reporting large amounts in charitable donations. Excessive donations to unregistered charities could get the CRA to audit the background and whereabouts of the charity. And if the charity proves fraudulent, it might lead to a penalty.
You can set a percentage of your income you want to donate and choose from the charities registered with the CRA to get the tax deduction.
Several Years of Losses
If you are a business or a housing property reporting losses for many years, it could instigate the CRA to look deeper into your books. Several years of losses could mean you show excessive expenses or underreporting your income. The CRA will have queries which could end up in an audit.
When you know how the CRA scrutinizes the tax files, you can address the issues proactively instead of the agency pointing it out with penalties and fines. Ultimately, it is better to play safe. A complete and honest tax filing is the best way to avoid an audit; a professional accountant can help you with this. While a complete tax filing does not rule out audit completely, it reduces your chances of one.
Contact McCay Duff LLP in Ottawa to Help You with Tax Filing and CRA Audit
A skilled accountant can help you file the taxes as per the CRA guidelines and ensure smooth conduct in case of an audit. To learn how McCay Duff LLP can provide you with your tax filing and accounting, contact us online or by telephone at 613-236-2367.