Dale Barrett, expert tax lawyer and owner of Barrett Tax Law, briefly explores strategies on avoiding as well as facing a tax audit.
Does the CRA target small business owners and the self-employed?
The CRA focuses on the groups who are more likely to omit or misrepresent information on their tax returns, one of whom is, according to the CRA, the self-employed.
Is there anything I can do to avoid a tax audit?
There are strategies you can employ to reduce the number of red flags that may come up with your file, thereby reducing the likelihood of an audit:
- File on time! Nothing places a red flag faster than a late tax return, so get your return in by the deadline. Likewise, filing too early and thus filing with missing financial information that would have been necessary to file accurately will peak the CRA’s interest in your file.
- Be honest. The CRA has tools to investigate and gather information about your industry. If your numbers don’t fit the typical profile, then chances are you will be audited. Likewise, any mathematical error that is caught or brought to their attention after the return has been filed will increase the chances of an audit. The use of a tax preparation service or tax software is useful here. Also, major changes in income or expenses or tax deductions from one year to the next will raise suspicion, so be consistent with your declarations.
- Avoid declaring business losses year after year. This isn’t to say that you can’t have a reasonable amount of business losses. However, continuous business losses over a few consecutive years will alert the CRA.
- Select your partners wisely. Any close association you make with other businesses or individuals who had or currently have problems with the CRA may result in a tax audit.
I am being audited. What can I do to lessen the potential blow?
- Consult a tax lawyer. Yes, a tax lawyer is advising you to consult a tax lawyer. Nevertheless, the key to being audited without your tax bill doubling is to ensure the audit is conducted fairly – without intimidation and with your rights upheld. This is best achieved with the representation of a tax lawyer, who is trained to know the law and the CRA’s internal policies and is, unlike other tax professionals, trained to fight for your rights.
- Be nice. True, no one likes being audited, but taking it out on the auditor will get you nowhere.
- Be on guard. It’s one thing to be nice, it’s another to befriend the agent and innocently let your guard down. Avoid getting chatty with the auditor and volunteering more information than necessary that can later be used against you.
- Be organized. Although it may be tempting to dump a box full of financial records onto the lap of the auditor, this will only serve to motivate the agent to work harder to find omissions and mistakes in your return. However, keeping your records organized will, at the very least, lend credibility to you as a responsible businessperson and citizen.
- Inform yourself. Knowing your rights will help you be better prepared when facing an audit. The CRA publishes a ‘Taxpayer Bill of Rights’ and although some of these rights are not technically legal rights, it is still useful to know the principles behind which the CRA hopes to conduct their tax audits.
Dale Barrett is a licensed, practicing tax lawyer and principal at Barrett Tax Law – helping taxpayers across Canada resolve their tax problems with the Canada Revenue Agency.