Why am I being audited? Factors Leading to a Personal Tax Audit

June 13, 2013 Published by
Post Categories: Risk ManagementTax Accounting

Approximately 85% of personal tax returns are filed electronically.  Canada Revenue Agency processes these returns fairly quickly and many people have received their refunds.  However the process doesn’t end there.

Canada Revenue Agency may revisit your return in July and request further information.  Since a majority of the returns are filed electronically, no actual receipts are submitted.  They may ask for proof of RRSP contributions, charitable donations or childcare expenses.  This is not an audit but simply a request for information.

Canada Revenue Agency will take a closer look at your return if something seems out of the ordinary.

Here are some reasons you might get audited: Red flags for Canada Revenue Agency

 

You’re Self-Employed

  • Canada Revenue Agency wants to ensure that you have declared all income and that expenses are all business related
  • They are particularly interested in cash operations (restaurant, retail, construction)
  • Canada Revenue Agency has the ability to compare your business with others in the same industry.  If anything appears unusual they ask questions

You Reported Large Changes

  • Substantial changes in your return from one year to another will certainly raise questions

You Show Continuous Losses

  • Reporting losses from a business or rental property for several years will raise some questions
  • Canada Revenue Agency will want to know if there is any chance for a profit

Comparison

  • As noted previously, Canada Revenue Agency has the ability to compare your return with others
  • If you are reporting income of $50,000 a year and living in a neighborhood where the average is $200,000 a year, then they may have some questions for you.

You Report Large Expenses

  • Claiming of significant expenses will cause an enquiry
  • Canada Revenue Agency will request receipts to ensure expenses were incurred to earn income or to ensure that the deduction is legitimate

Aggressive Tax Planning

  • Canada Revenue Agency takes a dim view of aggressive tax planning
  • If you have participated in a tax shelter, donation scheme or other aggressive tax planning, you will be audited

Other Expenses

  • You must keep a log if you are claiming automobile expenses
  • Claiming more than 15% of your residence as a home office will also raise some questions