How businesses can prevent a tax audit
As Seen in "In Your Neighbourhood" on Sep 26, 2015
Incorporated businesses, sole proprietors and partnerships have no assurance that they will never have to face an audit, butRajasri CPA in Toronto recommends steps business owners can take to decrease their chances of being targeted by the CRA.
Audits can be time-consuming and complex, and are certain to cause a great deal of stress and sleepless nights. Although the CRA may randomly perform an audit, one is usually instigated after a verifiable report of wrongdoing or red flags such as variations in historic reporting, consecutive losses claimed as a tax liability for other income or other suspicious activity such as living a lifestyle beyond the means of your recorded income.
Although businesses can never prevent an audit, there are ways to reduce your chances or protect yourself should one be initiated. The CRA has identified certain industries at high risk for tax evasion, including tradespeople in the construction business, independent couriers, wait staff and other income earners who deal with cash transactions.
Start by keeping thorough records that document proof of purchase with relevant and valid transactions under a registered business. When filing a business return, compare it to previous years and keep it consistent. If you have a large increase in expenses or you start claiming new expenses, the CRA will notice, and unless it is obvious, such as an equipment purchase, it may be questioned.
Make sure the return is accurate and complete so that the CRA does not have to contact you about unexplained gaps. Be aware that they are watching businesses that show consecutive losses for three or more years and businesses that are claiming personal expenses as deductions, such as a home renovation. It is always advisable to keep your personal and business expenses separate.
The best way business owners can protect themselves from an audit is to hire the services of a Chartered Professional Accountant. Rajasri CPA is located at 1315 Lawrence Avenue East, Unit 401, and can be reached at 416-265-2674 to answer all your questions about business accounting.