For a business owner, we know that there are few things more panic-inducing than the thought of receiving a tax audit. You’re probably scared that dealing with the audit will be timely and costly, but if you follow our tips for surviving a tax audit, the process can be relatively pain-free. But how can you avoid an audit altogether? The reality is that business tax returns are heavily scrutinized (and some audits are even randomly selected), so there’s no surefire way to completely avoid a CRA audit. You can, however, reduce your odds by paying attention to these key red flags.
Top 4 red flags that will increase your risk of a CRA tax audit
1) Filing your taxes late: Continually failing to file your taxes on time will definitely draw the CRA’s attention. Year in and year out, make sure you file on time to reduce your chances of an audit.
2) Unusual changes in your tax return: The CRA looks at your tax returns for consistency from year to year, especially if you’re a small business owner. If you suddenly have any large changes in your deductions or your income, it’s very likely that you’ll be flagged for an audit. (If you do have any big changes to report, make sure that you maintain clear, organized records throughout the year to help support your claims when the auditor comes knocking on your door.)
3) Writing off your home office or car: If you have a home office or you use your car for business purposes, you are able to take advantage of deductions offered by the CRA to write off some of these costs. However, many people try to make excessive claims in these areas, such as saying that they use 50 percent of their four-bedroom house as a home office, or that 100 percent of their car expenses are business-related. Make sure your claims are reasonable if you want to avoid triggering an audit.
4) Outstanding shareholder loans: Have you borrowed money from your company, whether to try to defer taxes or to help finance something in your personal life? If you have shareholder loans and you owe money to your company, this is going to put you on the CRA’s radar, especially if these loans are there for two years in a row.
While you won’t always be able to avoid all of these red flags, being aware of them ahead of time can make it easier when the auditor comes calling.
When you’re trying to meet specific goals in your business, you have to quantify how much each new initiative is going to help you achieve these goals. The best way to do this? Create forward-looking income statements. We’ll explain what they are and how they’re useful to your business in our next blog post.