Tips on Tax Audit Protection for Small Businesses

Tax Season: How to Prevent an Audit by the CRA

If there’s any one time you don’t want to draw attention to your small business or agribusiness it’s during tax season. In addition to ensuring your paperwork is in order and your taxes are prepared correctly, a growing number of business owners are worried about getting audited by the Canada Revenue Agency (CRA).

How likely is it that your business will get audited by the CRA? That’s not an easy question to answer because the CRA doesn’t exactly reveal how it flags high-risk taxpayers for audit.

But we do know that there are red flags that attract an auditor’s attention at CRA. And if your taxes are audited, there’s a good chance the CRA auditor will want to take a look and reassess additional taxes.

Below are some tips for keeping your small business taxes in order and the CRA at bay.

Keep Accurate Records

As a small business owner, you are responsible for everything that happens with your business. That’s why it’s imperative that you keep detailed records; this includes all business information, invoices, receipts, and bills. In the unlikely event that your small business is audited, this will make the process go a lot more smoothly.

Provide the Information the CRA Auditor Asks For

If you are contacted by the CRA about an audit, be honest with them. Answer the questions the CRA asks you; however, there’s no need to provide information it doesn’t ask for.

Don’t Ignore CRA’s Requests for Further Information

The CRA asks you for a receipt to back up a big expense you’ve claimed. What do you do? You can’t just ignore the CRA. It’s not going to simply go away. If you do not respond to the CRA in a timely manner or cannot seem to locate the receipt to support a claim, the CRA will issue a reassessment and could deny the claim completely.  Failing to respond to the CRA can also flag your returns for audits in the future.

Irregular Deductions

One of the benefits of being self-employed or running a small business is knowing you can make certain deductions on your taxes, but some people get carried away. The CRA likes consistency. Income or deductions that are out of the ordinary compared to your own tax history or those in a similar line of work are more likely to get tagged for an audit.

Major changes in income or expenses can raise suspicion; for example, trying to write off a huge portion of the costs of a six-bedroom house for a small business or claiming 100% business use of a vehicle.

Not Keeping Up with the Joneses

Reporting income that is significantly lower than the other people that live in your neighbourhood or in the same line of business is a red flag that could get you audited. If you report income of $45,000 and the people in your postal code are multi-millionaires, it might appear as though you have unreported income.

Keep Up to Date with GST/HST

GST/HST is the most common source of CRA tax audits, so it’s important to stay up to date with GST/HST and, if applicable, payroll submissions as well as regular tax filing. Asking to request or amend a prior GST/HST return is also a red flag.

Get Help from a Tax Professional

Many Canadians hire someone else to do their taxes. But not all tax preparation services offer the same experience and services. When looking for professional tax consultants to help you prepare your taxes, make sure their offices are open all year, that they can answer any questions you might have, and if necessary, that they can represent you in event of an audit.

FBC: Representing Small Businesses Owners During a Tax Audit

Preparing and filing taxes can be stressful, but not as stressful as getting audited by the CRA. While the chances of getting audited by the CRA are slim, it can be nerve-wracking, costly, and can take you away from running your small business. If you’re a small business or agribusiness owner looking for a comprehensive tax preparation service, the professional tax experts at FBC can help.

FBC is Canada’s largest and most experienced rural income tax consulting firm. Since 1952, we have worked exclusively with Canadian farmers and small business owners to help them minimize their tax burden and maximize their assets.

All Members with FBC receive Audit Protection. If you’re ever audited, we’ll represent you at no additional cost.

For more information on how an FBC tax consultant can help your farm or small business prepare and file your annual income taxes, call us today at 1-800-265-1002 or submit an online form and an FBC tax specialist will contact you at your earliest convenience.

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"I have used FBC since 2007, both Calgary and Grande Prairie’s offices and have always gotten great service and great tax advice."
- Trent Bellamy, Taylor, BC