If you want to figure out how to avoid a CRA audit there are a number of things you should know.
Probably one of your worst nightmares is the dreaded audit letter from the Canada Revenue Agency (CRA) informing you that you’re going to be audited and CRA will send out approximately 30,000 such letters this year.
You are at risk if you file late or have outstanding returns or balances owing
Who gets audited?
Technically, everyone can be audited. However, the CRA tends to zero in on certain categories of taxpayers. Some elements of your tax return could also raise red flags and lead to an audit. You’re especially at risk if:
- You constantly file late or have outstanding returns or balances owing.
- You’re self-employed. Tax returns for self-employed people are usually more complicated. There isn’t a single piece of paper, like a T-4 slip, that the CRA can use to cross-reference the income you declared.
- You work in construction, retail or the restaurant industry. The CRA has singled out those industries, where businesses are often heavily cash-based, for extra scrutiny due to high rates of tax evasion.
- You keep reporting rental and/or business losses. CRA will wonder how you are able to sustain this.
- You reported drastic swings in income.
- Your expenses are not comparable to other companies in your industry.
Tax reviews aren’t audits.
When you first get a letter from the CRA it’s important to really understand what they are asking for.
Most common is to receive a tax review notice, sometimes called a pre or post assessment notice, not an audit letter. These are the most common types of requests by CRA.
With a review, the CRA is wanting to check out the records and receipts (the support) you used to claim expenses to verify that no errors have been made.
However, these common tax reviews can turn into full audits if you don’t respond to the auditor’s requests or the response isn’t adequate to satisfy their inquiry. Your response to the CRA is one of the most important steps to take to avoid a CRA audit.
How audits work
To learn about the audit process, read about it in our article on the CRA audit.
Using a tax professional like one of the CPA’s at KWB is the best way to get through an audit or inquiry unscathed and also a great way to avoid a CRA audit in the first place.
If you would like more information or have any questions, feel free to contact us at 780.466.6204, or click here to send us an email.
Thanks to David Wickenberg of KWB Chartered Accountants for providing this content.