Tips to avoid a tax audit

Don’t Be a Victor the Audit Attractor

We all love attention. It’s our instinct from the first day we’re born.

However, you’d better lay low and stay invisible when this special season starts – the Tax-filing Season.

Victor is the kind who is determined to attract the attention of CRA. The following actions of his are like waving a red flag at a bull or stick an “Audit me!” sticker on his forehead.

  1. Being self-employed and filing his tax returns late. Victor has his own small business and he is busy doing far more important things than just filing his tax returns, so he didn’t file his returns for 3 years in a row. Victor is very likely to get a CRA letter requesting for more information after he finally files his tax returns. Self-employed tax returns are red flags for CRA reviewers, as it is easier for small business owners to over-report expenses and under-report revenues, especially in industries where cash can change hands unrecorded such as in the construction or restaurant business. Sometimes small businesses are chosen simply because they report some expenses higher than the industry norms or their profit margin is unexpectedly low.
  2. Refusing to provide more information. Victor has his own small business and he is busy doing far more important things than just filing his tax returns, so he didn’t file his returns for 3 years in a row. Victor is very likely to get a CRA letter requesting for more information after he finally files his tax returns. Self-employed tax returns are red flags for CRA reviewers, as it is easier for small business owners to over-report expenses and under-report revenues, especially in industries where cash can change hands unrecorded such as in the construction or restaurant business. Sometimes small businesses are chosen simply because they report some expenses higher than the industry norms or their profit margin is unexpectedly low.
  3. Claiming unrealistic home office deductions. Victor has a big house with 7 rooms and a swimming pool. He wants to write off 50% of the cost of running his house for his home-based business. This is a real red flag for CRA auditors. For your home office deductions to qualify, you need to use the space on a regular and ongoing basis to meet with your clients, customers, or patients. So, no, Victor can’t claim his recreation room even though he sometimes conducts his business there.
  4. Claiming repetitive rental losses. Victor bought a rental property three years ago, and he rented it to a relative at a lower-than-market price. By reporting losses for three years in a row, his other income was offset by the rental losses. Be careful, if you have reported losses for two or three years repeatedly, the CRA may get suspicious. Victor doesn’t have to claim the rental income, but he also cannot claim the rental expenses.
  5. Some deductions attract more attention. Certain deductions are reviewed by the CRA on a regular basis such as medical expenses, education and textbook amounts, moving expenses, and other deductions. Did you report your wedding costs along with your other deductions? Did you claim your Vitamin C supplements for medical expenses? Neither of those is deductible.

It is very important to keep your supporting document in case you receive a CRA audit, and you can always come clean about your false claims and reduce the penalty by joining the CRA’s Voluntary Disclosure Program.

Contact us today if you are confused by the tax deductions or you need assistance to prepare the tax documents requested by the CRA. Don’t be a Victor, the audit attractor!