Clients ask us all the time how audits are triggered. This is a common question because each year thousands of Canadian taxpayers are audited, leading to hours of frustration, mountains of paperwork, tax debts and exorbitant penalties.
It is true that there is definitely a short list of behaviours that you can exhibit that can trigger an audit:
- If you claim certain expenses it can increase your risk of being audited. Expenses like medical expenses, child care expenses and moving expenses will increase your risk of being selected for some form of audit.
- If you change your status from married or common-law to single numerous times or the other taxpayers at your address are not consistent with how you reported to CRA, this can also trigger an audit.
- If you claim business or employment expenses or rental losses year after year, you will increase your odds of being flagged for an audit.
- Being self-employed increases your risk of being audited. Self-employed individuals calculate the taxes they will owe themselves and are responsible for making tax instalment payments.T4 employees have taxes deduced by their employer and remitted to CRA directly – so CRA can assume that any additional income taxes they could find in an audit will be small.
- Charitable donations have come under intense scrutiny by CRA over the past few years. If you made donations to charities highlighted by CRA as potential scams or participated in tax shelters it is a virtual certainty that you will be selected for an audit.
- Filing changes to your return after it has originally been assessed may lead CRA to believe there are errors resulting in them wanting to look into the return in question.
- Having large year over year changes in your expense claims can cause you to be selected for an audit. For example, if one year you claim $2,000 in child care expenses and then the following year you claim $8,000 in child care expenses, this may trigger additional scrutiny.
- If you are in an industry where you are earning far less than the industry standard or are in an industry where businesses commonly fail to declare income, this could cause you to be flagged for an audit.
- Standard of living is another big one. If you own a million dollar home, have 3 kids and 2 cars but are only declaring $50k per year income this may cause CRA to believe that you are not declaring all of your income.
There are different types of audits, both informal and formal. An informal audit may take place through the mail. CRA may request that you provide them with additional information to support a recently filed return. A formal audit will involve an auditor coming to your home or business. Oftentimes people are being investigated and they don’t even realize it, so it is important to pay attention to the job titles of those who write to you. If they have words like audit, compliance or investigation in their title, this is an indication that your return has come under scrutiny.
For more information about CRA audits or if you are being audited and require some guidance please visit www.taxsolutionscanada.com or call 1-888-868-1400.