Whether it’s personal or business taxes, an audit is everyone’s worse nightmare. Sometimes there is nothing you can do to avoid one- the CRA (Canada Revenue Agency) does audit at random. However, there are 8 huge red flags that people often commit that draw unwanted attention and can result in an complete financial audit.
- Revenue Discrepancies: Make sure the revenue you declare on your income taxes matches all forms including your employer’s, your GST and your spouse’s.
- Being an Outlier: If your business profits are higher or lower than the normal industry amount the CRA pays special attention to you. Sometimes you can’t avoid this so if you’re in this situation talk to your accountant to make sure all your financial information is set incase an audit comes your way.
- Deducting Large Business Expenses: Make sure you’re deducting the right amount for the large items you purchased for your business. Your accountant can best advice you on how much to claim for advertising, entertainment and other business expenses.
- Claiming Home Office Deductions: If you work out of a home office you can make some tax deductions but the CRA keeps a close eye on these so be sure you qualify and that you only claim the correct amounts.
- Claiming 100% Business Use of a Vehicle: This is a huge red flag the CRA notices. Very few people use a vehicle exclusively for business. Keep detailed records of mileage and consult your accountant before making these claims.
- Running a Cash-Intensive Business: Businesses that work with high levels of cash (restaurants, bars, hair salons etc.) are big targets for the CRA. There’s a big temptation to underreport and the CRA knows this. Make sure you report everything to avoid an audit, back payments and fines.
- Math Errors: Basic math mistakes are red flags committed by both individuals and businesses. We’re only human but the CRA audits most people because of these simple errors. Have your accountant double check all your work to avoid unwanted attention.
- Income Threshold: If you earn more than $100,000 in income a year the CRA automatically pays more attention to you unfortunately. If you fall into this category make sure you and your accountant have all your financial data ready for an audit because your chances of getting hit with one significantly increase.
Honesty is the best policy when it comes to filing both business and personal taxes. Avoiding these red flags significantly decreases your risk of an audit by the CRA. Sometimes it can’t be avoided though so make sure you keep your financial information up to date and organized.