Nothing makes sweat bead on your brow faster than opening a letter from the Canada Revenue Agency that says you’re being audited.
It’s a natural reaction, even for the vast majority of Canadians who have nothing to fear from financial scrutiny. No one wants to be put under a microscope, but that’s exactly how an audit can feel.
Try not to panic. Being transparent and cooperative is the best way to approach an audit, and hiring a representative like an expert tax accountant from MMT Chartered Professional Accountants can help make the process less stressful.
Before you get too far ahead of yourself, read through our red flags to help you avoid being selected for an audit in the first place, and take our advice on what you should do if you are.
How to avoid being audited
While it may feel like bad luck, being audited isn’t typically random. The Canada Revenue Agency has a very sophisticated selection system. Here are some of the things that are more likely to raise a red flag on your tax file.
• Underreporting your income
This is a surefire way to get noticed. If you were issued a T4 by your employer, the Canada Revenue Agency will already have a copy, making it easy for them to identify anyone who has underreported their income.
If you work in a cash economy, you still need to report your income honestly. You should always keep records of any payment you accept in cash, including tips and gratuities. Income from self-employment should be accurately recorded on a T4(A).
Failing to report your entire income, including tips, makes you more likely to be subject to an audit and penalties. There are also advantages to being honest about how much money you earn; you can benefit from more RRSP contribution room, bigger pension payments, and an improved credit score.
• Making frequent errors
An audit doesn’t only cover your financials in the present year, but can also stretch back to past years. In fact, the CRA doesn’t actually have a limit on how far back they can go. You’re required to maintain your records for six years.
If you’ve made an honest error, that’s okay. While it isn’t optimal to make adjustments to your tax return, it’s still better to deal with it as soon as you notice an error rather than hope it goes unnoticed. You’ll need to wait until you’ve received your Notice of Assessment, at which time you can submit your changes by following the directions on the Canada Revenue Agency website.
• A drastic change from previous years
While your tax returns may not all look identical, drastic changes to your income or credits and deductions from one year to the next can attract the attention of the Canada Revenue Agency. Make sure you document everything carefully and maintain your records in case you’re subject to an audit.
• Ignoring a Request for Information
Legitimate requests for additional information should be replied to promptly. If you miss a deadline, it’s likely that the Canada Revenue Agency will take action in the absence of the requested response.
• Inflating your expenses
Saying that your home office takes up most of your house, or that you’ve never used the company minivan to transport your kids looks fishy. It’s entirely appropriate to claim these expenses, but you’ll want to follow the CRA guidelines carefully. Reflect actual usage by calculating your workspace or accepting the flat rate for home offices, and keep track of vehicle mileage and usage so that your claim is both accurate and reasonable.
The same goes for any other tax credits you’re seeking. Read the CRA website to determine what you’re allowed to claim and don’t request unreasonable amounts that aren’t allowable.
• Donating to unknown charities
Giving to charitable causes is commendable, but for tax purposes, it’s safest to stick to the CRA’s list of charities and qualified donees. Donations that are made to other organizations are more likely to be scrutinized since fraudulent non-profits are commonly used as a tax shelter.
• Oddities that don’t add up
When it comes to your tax return, consistency is key – and accurate record keeping is necessary if you’re ever questioned about legitimate variations. Oddities are bound to attract the attention of auditors, so keep this in mind if you own a rental property that is losing money year over year or have other unexplained differences from one tax year to the next.
What happens if you get audited?
Every year, the CRA audits thousands of Canadian individuals and businesses, so if you’re being audited, you aren’t alone. While it’s common to feel anxious about the process, most audits are straightforward and don’t result in significant outcomes.
You will receive a Notice of Audit by mail, phone, or both from the CRA. Supply any information that’s requested of you as soon as possible, including copies of all your paper and electronic records. This is when accurate record keeping will really pay off because without records, even legitimate claims can be denied or questioned.
Even though it feels stressful, auditors aim to be fair and quick. It’s helpful to have an experienced tax accountant during the audit process to ensure that everything goes smoothly and that your records are in order. If you don’t agree with the outcome of the audit or your tax accountant has concerns, you can appeal the decision.
Outcomes of an audit vary. Since an audit is really just a verification process, there may be no adjustment on the previous assessment if your file is in order, and nothing further will be required. If it’s found that you owe less tax than you’ve already paid, you could even receive a refund for any overpayment. However, if the audit reveals that you owe additional taxes, then you’ll have a balance to be paid and may be subject to additional penalties and interest charges.
If you’ve received a Notice of Audit, hiding it at the bottom of your recycling pile isn’t going to help you avoid problems. It’s actually more likely to make things far worse. At MMT Chartered Professional Accountants, we understand that it can be very stressful to receive mail from the Canada Revenue Agency. That’s why our team of experienced, knowledgeable tax accountants is available to assist you with the process.
We’ll reduce your audit anxiety, ensure that your records are in order, and advocate on your behalf during a CRA audit. We can even help you avoid being audited in the future. With the expert support of a tax accountant on your side, you’ll have nothing to panic about if you’re subject to a CRA audit.
