What is a Tax Audit?
In simple terms, a tax audit is the CRA’s form of verifying that the income, expenses, and taxes that your business declares are correct. It is similar to when you go to the doctor and get a check up to verify everything is fine.
The CRA checks out the tax returns, income information and all the documents that you submitted to ensure compliance with the Tax Act. They’re not being cruel on purpose, it just that they are being business minded.
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Why Does the CRA Conduct Tax Audits?
The CRA performs audits to guarantee the effectiveness of the law on taxation in Canada. They revisit business often to ensure that everyone is compliant with the law. This keeps the economy healthy and prevents tax evasion.
Types of CRA Tax Audits
Not all audits are created equal. The CRA uses different types depending on the level of scrutiny required.
Desk Audits
Mostly done is desk audit. Specifically requested documents are provided for a review, usually through online submission or post mail, is rather quick and without the personal contact.
Field Audits
Auditors of the CRA will travel to the business location where they meet to review your records with you. You may even be interviewed and some may observe your operation. Field audits take much longer and are also more time consuming.
Comprehensive Audits
Complete audits look at your business and personal financial situation comprehensively. They are infrequent but very meticulous, not missing any details.
Triggers of Common CRA Audits
Why is the CRA singling out your business? Here are some common causes.
Red Flags in Your Return
You could have made errors on your tax return, especially in consistency and unusual items for deductions. For example, a large amount compared to industry averages could attract some attention from them.
Risk by Industry
It intended that some business sectors for example the construction and accommodation businesses stand high chances of being audited given the many cash sales. If you belong to any of these sectors you will need to raise the level of your concern even more.
Preparing for CRA Audit – Checklist
Organizing Financial Records
All financial documents must be in an order. These include invoices, receipts, payroll documents, and tax returns. A jumbled mess may cause delays and issues.
Reviewing Past Tax Filings
Past tax filings should also be reviewed to ensure no mistakes or omissions were made. Mistakes found ahead of time can help to rectify them promptly.
What Takes Place During a CRA Audit?
The audit usually proceeds in three phases.
First Contact
The CRA will notify you of the audit, and what they need and how the process will be done. This is the opportunity to question and clear out any expectations.
Process for Reviewing Documents
You have to submit the requested documents. The CRA will go through it in detail and may even ask for additional documentation sometimes.
Outcome of the Audit
Once the audit has been completed the CRA will come with a report of what they have seen. You could receive a medical clearance or a revised tax form or at worst a sanction.
Consequences of Non-Compliance
Failure to meet the provisions of CRA regulation is strictly actionable as outlined below:
Penalties and Fines
The CRA has the perforce to fine organizations for mistake, oversights or deceitful reporting to the tune of thousands. These fines can be cost, as Gene recently found out when his business was recently fined.
Legal Implications
Consequently, non-compliance results in going to court or even a criminal case at worst-case scenario.
Tips to Avoid CRA Tax Audits
While it remains unattainable to avoid an audit altogether, these tips will help decrease the chances.
Accurate Record-Keeping
Keep proper records of every transaction. Well-organized records are easier to explain why the taxpayer should be correct.Hiring a Tax Professional
A knowledgeable accountant or tax professional can help you avoid common mistakes and navigate the tax complexity.
