Often, when taxpayers receive mail from the Canada Revenue Agency (CRA), the first question that pops in anyone’s mind is “Why me?“(or they’ll simply avoid it) assuming it could lead to the ever-daunting audit. It is important for you, the taxpayer, to understand how the CRA approaches reassessment, and which actions tend to attract their attention.
Research conducted by the CRA’s Small and Medium Enterprises Research Audit Program (formerly the Core Audit Program) compared the effectiveness of random versus targeted audits. The results showed that random audits resulted in only a 12.2% success rate in detecting non-compliance while targeted auditing helped achieve a 46.7% success rate, making it a more preferred method of selecting which returns should undergo a CRA audit.
AG Tax Analysts have prepared a brief summary on the CRA’s way of selecting files for audit and common risk situations which may cause your return to be red-flagged.
CRA’s Audit Selection
Many audited returns are selected by a computer program that compares yearly returns filed by taxpayers to select questionable returns. Taxpayers may be audited as a result of a group audit; such could be carried out on a regional and even national level, or fundamentally, just due to their association with other audits. For example, a partnership business could be audited for past dealings with one of their clients whom is being audited.
An audit can also be a result of information received from external sources, government organizations or informants.
Audit Red Flags to Avoid
The CRA’s computer program compares information provided by a taxpayer on his/her return to information from related third parties to look for any inconsistencies in information provided by the two sources. For example, mortgage payments details from the bank, contributions to qualified plans or purchase of additional investments.
Audit by Association
If an employer fails to comply with the CRA in providing information related to such things as status of workers (full-time, part-time, contract based), pretax and taxable benefits, or fails to provide all the information in a systematic and timely manner, the CRA may audit.
Embellishing or Minimalizing Claims
When taxpayers request to amend their returns, it may make the CRA suspicious. Re-filing past years tax returns to take advantage of loss-carrybacks may not be supported by the CRA. This is not to be confused with the CRA’s Voluntary Disclosure Program which allows taxpayers to file potentially consequence-free for previous years when they’ve failed to file.
If there is significant change in the credits/deductions claimed in a particular year as compared to other years, it would be detected by the computer program and looked into by the CRA. If there is a proper explanation for the change, the CRA will ignore it, but if it arouses any doubt, the CRA may look forward to an audit. Proper, relevant, and comprehensive documents should be maintained in support of deductions claimed.
If the CRA requests for audit-necessary documents and information before a CRA agent conducts an audit, supply the information pertaining to the particular year’s audit. Not complying with the CRA may result in damaging your position in case of a future audit.
The organization may compare tax returns (income, GST/HST) filed by similar businesses or companies in the same industry. Filings that seem vague (which raises doubt) and not constant to the industry may also attract an audit.
Generally, the CRA assumes that income of taxpayers in a specific neighborhood would be in the same range, given that all of them would be living similar lifestyles, and thus any low income reported may be questionable for obvious reasons. It could also lead to a “net worth” or arbitrary assessment.
If you have rental incomes, the CRA may rely on property tax rates and market rent for properties in each area. Reporting ‘no rental income’, losses, or lower than market value rental income from rental properties may raise doubt that the income is either unreported or the property has been let out at a low cost to a non-arm’s length person.
That being said, once a taxpayer is subject to audit, s/he is most likely to be on the CRA’s audit radar from then on. This shows the importance of consulting a professional when it comes to your taxes. A qualified and well-versed accountant knows the solutions and steps to preparing a proper return and, thereby, can potentially avoid an expensive and time-consuming audit.
AG Tax LLP Can Help
If you have any tax-related queries, need assistance with tax planning or filing your tax returns please contact us. Our team comprises of highly experienced tax professionals with extensive knowledge of U.S. and Canadian tax laws as well as cross-border compliance
Furthermore, as a full service accounting firm, AG Tax assures complete assistance with even your most complex tax needs.
We can assist with:
- Canadian Personal and corporate tax returns
- Cross Border Taxation and Business Planning
- U.S. Personal and Corporate Taxation
- Disclosure of Foreign Assets and other information filings
- Retirement planning
- State Sales Tax & E-commerce Taxation
- Estate Planning, Inheritance tax advice
To obtain a quote or to arrange for a consultation to discuss your tax related queries, please contact us at:
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Disclaimer: The information in this publication is accurate as of the time of its publication. AG Tax assumes no responsibility for changes to tax legislation subsequent to the publication of this document. The information provided is for general information purposes only and should not be acted upon without seeking professional advice. If you would like to engage our services, please contact our staff and obtain authorization to send our firm confidential information. A client relationship is not created by the transmission of information. A client relationship is only formed with our firm when a scope and engagement letter signed by the firm and the potential client detailing the terms of engagement is present.
