What you need to know about avoiding audits and the CRA during income tax time in Canada

Here at ConnectCPA we've met with hundreds of clients.  The most common questions that always come up relate to audits.

> How do I avoid an audit?

> Will this cause a red flag?

> Who's most at risk to be audited?

> What do I do if I'm audited?

> Is the CRA a bunch of monsters?

Ok, that last one is made up.  But we know that's what our clients are thinking.

Recently, the Huffington Post asked Lior Zehtser (partner and co-founder of ConnectCPA) and some other tax experts a few questions regarding audits.  The following are excerpts of Lior's responses.  To read the full article, click here.

What are some of the most common red flags that could catch the CRA’s attention?

There are two main types. One is when you’re a business owner, if you have a lot of ups and downs or peaks and valleys, which may happen from year to year and it’s perfectly legitimate, but I think it tends to raise more questions. The second thing is each year, the CRA focuses and hones in on different industries and they aggressively go after these industries. Last year, it was people who own rental properties. It can be random or something that’s trending like the condo boom over the last ten years.

Are there certain types of filers that tend to capture the CRA’s attention more than others?

One hundred per cent. I would say the ones that are least likely to grab the CRA’s attention are salaried employees. The ones that capture the most attention for sure are sole proprietors or partnerships because they have the ability to understate income and/or overstate expenses.

What are the tools the CRA uses to dig deeper into your filing?

They compare you to people on your street, so if you live on a street where most people are earning a million dollars and you’re claiming almost nothing, that also raises red flags. They also compare across your industry. So let’s say they choose to look at accountants and the average accountant makes $100,000 and you’re claiming $20,000, they may question that.

What is the best course of action once you’ve been flagged?

I’d say the first thing is to be nice to them. [Try not to lose your] temper or snap, because once you do, they think, ‘Hey, why is he or she getting mad? Maybe there’s something wrong.’

They’re not going to go away, once the letter is sent they will keep following up until you answer and until the case is closed. They won’t leave you alone until you provide them with what they want.

If you don’t feel comfortable then go to an accountant. It may cost you, but it will cost you less than what it would cost if you were on your own.