There are only three absolutes in life: birth, death, and taxes.
If you’re like many small business owners, you most likely dread the coming of Spring and the obligations the season brings:
- Reconcile your books
- Sort through receipts
- Deciphering tax forms and instructions
When it comes to getting ready for the upcoming tax season, staying vigilant to avoid a CRA audit should be your first priority.
Preventing a time-consuming and invasive tax audit is every company’s main focus, whether you run a small business out of your home or maintain a larger company with numerous employees. While there is no true way to prevent a CRA audit, avoiding the red flags that draw the CRA’s attention can help you prevent undue stress and headaches.
1. Check and Double Check – Provide Accurate Numbers
The first step in any successful return is ensuring thorough reporting and complete correctness. By reporting all revenue, providing support for deductions, and ensuring your books and records reconcile with what you are reporting on your tax return, you can avoid matching errors, or errors generated when information reported to the government does not match.
Even one transposed number can lead to an investigation – it’s vitally important to double-check your work.
2. Put Your Deadlines in Your Calendar – And Then Meet Them. All.
In addition to preparing your return properly, be sure to meet all deadlines. That includes quarterly filing deadlines if required. Companies that routinely miss deadlines or do not pay on time are much more likely to be investigated by the CRA.
3. Blend In…If You Can
If at all possible, avoid being an outlier in your industry. The CRA tracks average income for all industries and takes special interest in companies that do not fit – whether too high or too low. If your business is taking large losses year after year or is making significantly more than your peer companies, you are more likely to find yourself the subject to a CRA audit.
The same idea extends to deductions.
Taking unusually large deductions, business losses, or write-offs raises red flags.
Taking excessive deductions is a common form of tax fraud used by businesses to significantly reduce taxable income. If you have legitimate large deductions, do not be afraid to take them, but be sure you have the proper support on hand in case the government comes knocking.
4. Keep A Paper Trail, Especially for Cash Business
The way you run your business can also draw CRA attention. For example, cash-intensive businesses, like restaurants, are often the subject of additional scrutiny.
If you do a lot of business in cash, the CRA might come looking for hidden revenue.
These sorts of companies receive a lot of money with no paper trail, making it much easier to hide revenue. If you are a company that relies on cash-paying clients, be sure to keep meticulous records that support the income you are reporting. Other business factors, like having family members on the payroll or high shareholder loans, can also attract an unwanted CRA audit.
5. Remember, A CRA Audit Isn’t 100% Avoidable
Although some of the circumstances that may trigger an audit are out of your control, there are many others you can monitor during tax season and throughout your fiscal year. By focusing on the situations surrounding your business, you can take great strides in minimising your risk by preparing your return properly, meeting all deadlines and being aware of any situations that may raise red flags.
If you are audited, your best defence is a good accountant or other tax professional (and of course, Tax Investigation Insurance to pay them).
A good accountant has the knowledge you need to make sure you keep what is rightfully yours. As long as you follow all CRA rules and policies and ensure proper record-keeping, you will always be prepared, even if you find yourself facing a dreaded business tax audit.
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Watch: How Tax Investigation Insurance Protects Taxpayers
Even when they do everything right.
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