E-filing Your Tax Return and the Liklihood of Being Audited
Although many taxpayers fear that their return will be selected for an audit, your odds of being audited are actually quite slim; it's anyone's guess on the chances, but we would say about one in 100. If your return fits a certain profile, however, your chances may increase. Filing your return electronically does not put you in any special profile. Millions of people are expected to file their returns electronically -- a record number – but that will not increase their odds of being audited. So, take full advantage of e-filing.
Canada Revenue Agency ("CRA") will not disclose precisely how it selects returns for audit but does have programs in place for checking returns to "grade" them for "audit worthiness.” But remember, not every audit is a face-to-face audit with a CRA auditor. Most audits are conducted by correspondence. CRA sends you questions and you answer them. Even if you are selected for a face-to-face audit, the tax rules give you many rights and protections and, in response to public pressure, CRA is trying to be more customer-friendly.
These items on a return could trigger CRA’s interest:
- Very high income
- Income not subject to tax withholding
- Unusually large deductions or losses in relation to income
- A business or profession currently being targeted for audit
- Insufficient income to fund claimed deductions
- Refunds disproportionate to gross income and exemptions
- Possibility of unreported income (e.g. self-employed individuals with a lot of cash transactions)
- Profit from business or profession below the industry average
- Rental property losses claimed on a property recently converted from a residence
- Business owners who claim the standard deduction and have an extremely low net income in relationship to the gross income of the business
- Wage earners with a second or sideline business
- Individuals involved in a partnership that may be a tax shelter
Now that you are aware of some of the areas targeted by CRA, what can you do avoid an audit? Here are some tips to help minimize any audit anxiety you may have:
Provide all information forms to your accountant for return preparation. CRA computers crosscheck reported income and deductions against tax slips received from your employer, dividends, interest, and mortgage interest reported by banks, brokerage houses, and other financial institutions in about 96 percent of the cases.
Check the mathematical accuracy of your return. Although errors in arithmetic alone rarely lead to a full audit, anytime your return is made to stand out, for any reason, increases your chances for an audit.
Do not ignore CRA correspondence. Respond promptly to all CRA notices you receive. While getting a notice from CRA does not necessarily mean your return will be audited, once again, it's in your best interest to keep as low a profile as possible.
When in doubt, just ask. If you are concerned that any income or deduction may increase your chance of an audit, contact our office. Tax minimization is not illegal; tax evasion is. With good records and competent professional guidance, you have nothing to fear from CRA.
The information presented in this document is of a general nature only and should not be relied upon to replace professional advice. Before acting on this information, talk with a professional advisor as laws and regulations are constantly changing. Readers accept full responsibility; no document found here is a substitute for a consultation.