St. Patrick’s Day is not just about drinking green beer. St. Patrick’s Day actually represents something more significant. It’s the unofficial start of tax season. That’s right, it’s time to start thinking about your 2010 tax return since you probably haven’t filed it yet.
As we step into tax season 2011, let me share with you a few tips on how to avoid a tax audit. The last thing you want, even if you’re honest on your tax return, is to have hours of time wasted having to deal with the taxman as he examines your tax return more closely. It’s about as fun as a root canal. Here are some ideas to consider.
1. Requests for information. There’s a difference between an audit and a request for information. Generally, unless you have a business (that is, you report self-employment income on your tax return), you’re not likely to be audited. You may receive a request for more information. An audit is more involved and time consuming. Requests for information are more common and are a normal part of life, particularly if you’ve filed your tax return electronically and therefore didn’t send in certain receipts. In either case, don’t panic.
2. Audit your own return. According to the Canada Revenue Agency (CRA), some of the most common mistakes on tax returns can be easily avoided. First, do the math correctly; make sure your tax return adds up properly. Tax software can help here. Next, make sure you’ve provided all relevant personal information, including your name, address, social insurance number, and province of residence. If you miss these simple things, your tax return could be flagged. Also, make sure you’ve included all income on your tax return. Much of your income is reported on T-slips, which the CRA has copies of, so don’t neglect these (i.e. income from employment, interest, dividends, capital gains distributions, etc.).
3. Assess your risk of an audit. The truth is, there are certain industries that the CRA has targeted in the past for audits, because they consider cheating to be a problem in those industries. The following come to mind: construction businesses, subcontractors, carpet installers, unregistered vehicle salespeople, auto mechanics, independent couriers, direct salespeople, jewellers and restaurant wait staff, among others. This list grows each year. And be aware that the CRA has set up a “snitch line” for others to call anonymously to report you. So, be sure not to cheat.
4. Have a reasonable expectation of profit. Are you expecting to report losses yet again this year? If you consistently report losses from business or rental activities year after year, the CRA will eventually come looking to deny those losses. Some losses may be expected in the early years of a business, but profits are eventually expected. This year, the CRA has sent letters to some taxpayers who have reported losses for two or three years in a row to remind them that the taxman is watching. I expect this “scare tactic” will cause a few people to rethink whether they’ll report losses again this year.
5. Be consistent with expenses. If you have incurred expenses, particularly business expenses, that are significantly higher this year than in the past, without a corresponding increase in revenue, the taxman may flag your return. The costs to be most careful of are those that can be personal in nature, such as travel and entertainment, or even repairs and maintenance. You have nothing to worry about if the expenses are legitimate, but be prepared to provide an explanation if the CRA comes knocking.
6. Learn from your mistakes. If the CRA has found errors or omissions on your tax return in the past, you have a higher likelihood of being called on again to substantiate your claims. It’s important to learn from the past and avoid the same mistakes twice.
7. Don't give the CRA something to audit. Certain deductions and credits are more prone to being audited: Interest deductions, moving expenses, charitable donations and, yes, even clergy deductions, come to mind. Claim these if they're legitimate, but make sure you can back them up if the CRA asks about them.
8. Watch what you say online. Yes, even the CRA reads blogs and other online musings. Don’t make the mistake of bragging about never paying tax or making other incriminating comments online.