The CRA’s software is highly advanced and is able to make multiple comparisons between the information you provide in your return and the data they have stored. In other words, if something doesn’t add up in your return, chances are it will get flagged for review, and you may get audited.
If your return is selected for an audit, contact an experienced CPA at Tangs Accounting. You need a professional accountant’s advice on how to prepare, and you may need them to represent you at the audit as often, auditors will use what you say during an audit against you.
Why Returns Get Selected for an Audit
Doing the following on a return is usually a good way to get audited:
- Underreporting profits based on your industry code. Like having industry stats on expenses, the industry code you enter provides the CRA with all kinds of historical averages and other data for standards under that industry code, including average profit margins.
- Noncompliance/nonpayment of GST/HST.
- Not reporting T-slips. The CRA receives copies of T4, T4(OAS), T4(p), T5, T4A, etc., that you receive. If any are not reported in your return, the CRA must investigate to learn if it was an error on your end or your employer’s.
- Information from a third party. The CRA sometimes receives anonymous tips from the public regarding a taxpayer and will usually follow it up. They also receive information from other enforcement agencies. If a taxpayer was part of a criminal investigation, for example, they may be referred to the CRA in order to review their tax returns.
- A return is related to one being audited. If a tax return is selected for an audit, other returns that are connected or related to it are likely to also be subject to an audit.
- You are in a high-risk category. There are certain categories of taxpayers that are considered at high risk of not complying with their tax obligations. They typically include taxpayers who have a history of noncompliance or were previously audited, self-employed individuals, taxpayers with offshore assets, cash businesses like bars, restaurants, and barber shops, or those in industries with a high rate of underreporting income and over-inflating expenses.
- Unreasonable write-offs for home businesses. As with other industry statistics, if you are attempting to write off extremely large amounts as personal expenditures for a home business, expect an audit.
What to Do If You Receive Notice of an Audit
If you receive a letter from the CRA that puts on notice of an upcoming audit, you should cooperate with them by providing them with what they ask for.
Gather all the documentation you have that supports the calculations you entered on your returns. Considering the potential consequences and the fact that the CRA auditor is looking specifically to prove that you made errors on your return, it is not advisable for you to represent yourself at an audit.