Preventative strategies to help avoid a tax audit
No one can guarantee that a tax audit will not occur, but we can use the followings tips and preventative strategies to help prevent the likelihood of an audit.
- CRA accepts the reasonable amount of business losses. Continuously declaring business losses will be red flagged and increase the likelihood of a tax audit because CRA gets suspicious about your frequent business losses. Therefore, taxpayers should be aware of this rule.
- Filing an accurate tax filing. When you prepare for tax return, you should make sure that you captured all of the necessary financial information and document. If you have to make a tax adjustment after filed return, it may increase the chance of a tax audit.
- Inconsistent income and expenses or tax deductions from one year to the next will increase the chance of a tax audit. Thus, a taxpayer should be careful about the consistency of your profit.
- When preparing a tax return, it is recommended to have a senior experienced tax professional to Double-check or even triple-check your tax returns to avoid any errors that may increase the likelihood of a CRA tax audit.
- Don’t overstate your expense or deductions. The CRA will compare the information you provided with the industry-specific information. You may be selected for a tax audit if there is a major discrepancy. The most common case is the large home office deductions for taxpayers who working from home, such as large portion of mortgage interest, utility expense and maintenance expense. Thus, in order to avoid being targeted for an audit, the reasonable expense for taxpayers’ home office should be reported honestly.
- Unreported Income. Don’t try to hide your earnings. The CRA will do an investigation to see if your lifestyle matches your declared income, such as the car you drive and the house you live. If there is big contrast between your income and your lifestyle, it will increase the chance of an audit by CRA.
- It is important to deal with an honest organization or a person. Given an example, a taxpayer made contribution to a charity who offers to give you a receipt that is higher than the amount you donate. It is very risky that the taxpayer could be audited because the charitable organization is under investigation by CRA. As the result, you will be required to pay back your tax refund along with the possibly penalties and interest.
- File your tax return on time. Late tax filing is more likely to be red flagged and selected for a tax audit.
Tax Audit triggers
The CRA has risk-assessment system, and the files are selected based on a number of conditions. After the tax returns filed, all returns will be compared with statistical norms, and those with anomalies will be reviewed by personnel to have assessment whether a tax audit needed. When an audit occurs it could be stressful and unpleasant to taxpayers during the process. It’s very important that all detailed records of business expenses be kept clearly, for which will help to protect against any expenses being denied by CRA’s auditor.
The following are some factors may increase the risks of being audited by CRA.
- A business with repeated losses more than 3 years
- Unusual expense in relation to your industry
- Obvious errors on prior tax returns
- High rate of home office expense claimed
- Excessive business deductions (especially business and personal expenses, such as meals, entertainment and car)
- Any big changes
- Late file tax return
- Not reporting all of your income
- Higher incomes are likely to result in more complex tax returns that could be one of the triggers.
CRA Tax Penalties
Failure to File and Failure to pay can substantially increase the total amount that you own the CRA, and CRA charges the interest on the penalties. Such situation will cause the amount owed to be substantially greater due to accumulated penalties and interest. CRA charges compound daily interest on any unpaid amounts owning if taxpayer couldn’t pay the tax owning, and the interest on the penalties starting the day after your return is due.
CRA will charge you a late-filing penalty if you own tax to CRA and you don not file your tax return. For the first year, the penalty is 5% of the balance owing, and additional 1% penalty will be added on your balance owing for each full month, to a maximum of 12 months.
If you already were charged a late-filing penalty in one of any previous three years, and are still late filing your income taxes again, the CRA will charge a penalty of 10% percent of the balance owing for the current year and 2% percent of the balance owing for each full month that your current income tax return is late, to a maximum of 20 months.
Taxpayer Relief program may be help to cancel or waive penalties or interest if you meet some circumstances such as serious illness or accident, serious emotional or mental distress, or other circumstances. Contact TaxFix Solutions for free Consultation, and our tax professionals can help you to quickly fix your stressful tax problems.
Failure to report income for multiple years
Total 20% penalties may be charged by CRA if you failed to report an amount in your return and you also failed to report amount for the preceding 3 years. (The federal and provincial/territorial are each 10% of the amount that you failed to report.)
Omissions penalty or false statements
If CRA believes you knowingly or under circumstance made a false statement or omission on your tax return, you may have to pay a penalty. The penalty is 50% of the overstated credits and/or the understated tax to the false statement or omission.
Voluntary Disclosures Program may be helped to waive the penalties about the amount you failed to report and/or credits you overstated. Contact TaxFix Solutions Inc. for free Consultation, and our tax professionals can help you fix your tax mess.
Penalties are not deductible as business expenses
After March 22 2004, penalties imposed by a government, federal, provincial, or municipal governments are not deductible. And this rule is also applied for Municipal parking tickets issued after March 22, 2004.