Avoiding a CRA Audit

We have many clients who are self-employed.  We also represent professionals and businesses who are required to keep their own books and a variety of others operating cash-based businesses. These groups are usually audited more than others.  If you belong to a group that is already under some scrutiny, then it is important to audit-proof your business. A question often asked of our firm is, “how do we avoid audits by the CRA in the future”? There is no simple way.  But I have compiled the following list of 10 tips to help you stay audit-proof.

  1. Check and double check your return. Mistakes are sometimes construed as purposeful, so it is better to avoid mistakes as much as possible.
  2. Keep detailed records. some expenses and deductions are audited more than others. Ensure you keep meticulous records of these expenses.
  3. File correctly the first time. Amended returns can draw scrutiny to your filing position.
  4. Properly document any unusual changes to your filing position. If you are suddenly earning double the income from a previous year, or claiming an unusual capital expense, don’t be afraid to explain it in your return, and certainly document it.
  5. Try not to claim unrealistic deductions. Home office expenses are claimed often, but if you claim half your home expenses, you may be audited. Likewise, if you ascribe 100% business use to a vehicle, you may be audited.
  6. Fly under the radar. Excessive charitable donations, very low income while living in a mansion or participating in tax shelters.  All of these will raise red flags which may result in an audit.
  7. File on time. Late returns are never a good idea for a variety of reasons not related to a potential audit.  But certainly, to avoid CRA inquiries it is better to file on time.
  8. Your business should not consistently earn less than similar businesses, and your business should not show substantial losses for consecutive years. Sure, this does happen from time to time, and those taxpayers can expect to be audited.
  9. Don’t use round numbers. If all of your figures end in 0 and 5, it is likely the CRA will become suspicious.  Use actual numbers as much as possible.
  10. Hire an accountant, especially if you have a complicated filing position. An accounting professional is trained to report properly and can advise you on matters you may not have been aware of.

Ultimately, the name of the game is to simply fit in.  If something seems abnormal about your return, the CRA will likely ask questions and may commence a full-scale audit.  If you are audited, call a professional.  Your accounting professional will usually assist you in a simple audit.  If the matter is more complicated or contentious, call Ummat Tax Law to assist you.