Tuesday, April 16, 2013

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12 Things that could trigger an income tax audit
WalletPop Editor
Everyone fears an income tax audit. But if you've filed your return and kept receipts for any deductions you claimed, you don't really have anything to fear. At worst, you may have miscalculated your tax payable, and after a review the Canada Revenue Agency may send you an adjustment to your return that requires you to pay the proper amount.

Sometimes, that may be more. On occasion, it may even be less. If it is substantially more, you'll be able to negotiate a payment arrangement that may spread out over a reasonable period: a year is not unheard of.

There are four main groups or criteria that the CRA searches for, when looking for returns to audit:
  • Lists of tax returns generated by comparing financial information of people in similar occupations,
  • A lot of non-compliance found within a specific group may result in some members of that group being chosen for a closer look,
  • People associated with someone whose return is under review (for example, a business partner) and
  • Leads from other audits, investigations, and outside sources
Although you won't find a list of audit "triggers" on the CRA website, here are 12 things that may put you into one of the four groups listed above:

 1. You've cheated on a return in the past
This one's a no-brainer: if you've ever been caught cheating they're going to look at every return you file for a long time with a fine-tooth comb, and anything out of the ordinary will get you flagged for an audit.

2. Expensive purchases on a low income
If you're collecting a lot of income under the table and declaring only a fraction of it while flying first class and parking something expensive and Italian in your driveway, you may find yourself the subject of a tip to the CRA hotline. If your income doesn't match your lifestyle, it's like waving a red cape at the CRA.

3. Reporting a hobby as a business
Crocheting stuffed sheep as a novelty item in your spare time? Trying to sell a few on eBay whilst declaring your basement a sheep-making facility and reporting losses from your "business" for multiple years? You might as well paint "audit target" on your forehead. You must have a reasonable expectation of a profit and the CRA will want to see a profit eventually or those "losses" will trigger an audit.

4. Excessive expenses or employment expenses
It looks pretty suspicious if you claim 50 per cent of your home expenses as business expenses. Ditto if you claim 90 per cent of your car travel for business purposes. Auto expenses, particularly, need to be logged carefully. The CRA loves it when you keep a book of how many kilometres you travelled for each meeting with a client. Those eligible for employment expenses belong to a small group, and the CRA likes to keep an eye on this. Be prepared to supply additional documentation if you have claimed child care expenses.

5. Discrepancy in revenue
This applies to people who are self-employed or own their own business: you can't try to reduce your income by not reporting the same revenue on your income tax return as what was reported on your GST/HST return, even if you didn't collect the tax.

6. Moving expenses and tuition transfers
This includes perfectly legitimate claims. They just insist that you prove what you spent on your move. You're allowed to claim expenses to move at least 40 kilometres closer to work, but this often triggers a request to audit that part of your return. As long as you kept your receipts (moving vans, some maintenance of the old residence up to $5,000, costs of cancelling a lease, meals and accommodations are all eligible), you have nothing to worry about. Ditto for tuition transfers: as long as you kept the T2202A form complete with signature for the tuition transfer, this one's easy to remedy.

7. You forgot to include a T4 slip
If you earned the money, your employer will have filed a T4 slip, so if you don't file one yourself, the CRA will notice. If you truly forgot, the CRA should be satisfied once you provide it. But if you don't report income from a T4 slip two years in a row, be prepared for having your financial data looked at under a microscope, along with significant penalties. This can actually apply to failing to provide any requested information slips or receipts you referred to on your return by the date the CRA asked you to.

8. Failing to report separation pay
Failing to accurately report separation pay will always get you flagged for a close look. It's not unheard of for an employer to screw this one up. Even if your employer failed to report it or reported it incorrectly, you have to report the amount you received. That doesn't change, even if you had it transferred directly into a Registered Retirement Savings Plan (RRSP) to defer the tax hit.

9. Not notifying the CRA of an address change
This one bites a lot of students. The CRA will mail your return assessment to the last address they have on file and if you're not there to find out you owe money or have to provide more documentation, it could trigger an audit. And they won't be happy that they had to find you to tell you.

10. Not following RRSP rules
If you don't follow the rules for providing RRSP contribution receipts, or if you didn't file a Schedule 7 for unused RRSP contributions, transfers and Home Buyer's Plan (HBP) or Lifelong Learning Plan (LLP) contributions, this will flag you for a second look.

11. Incorrect, ineligible, or inappropriate claims
This can cover a host of things that include, (but is not limited to), claiming incorrect or inaccurate child support payments (or claiming them when not eligible), the northern residents deduction, infirm dependents, caregivers, eligible dependent amount, student loan interest, tuition fees, medical expenses, federal foreign tax credit, union or professional dues, and Ontario Credit-Occupancy Cost.

12. Large Charitable Donations
Any charitable cash donation or capital property donation exceeding $10,000 may get a second look. Just be sure to back it up with proper receipts and documentation.

All of these fall in some way under the four ways the CRA searches for returns to audit:
  • Lists of potential returns generated by comparing financial information of people in similar occupations,
  • A lot of non-compliance found within a specific group may result in some members of that group being chosen for a closer look,
  • People associated with someone whose return is under review (for example, a business partner) and
  • Leads from other audits, investigations, and outside sources
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