Being selected for a tax audit can be a nightmare. Apart from random selection, the chances of being targeted for a tax audit are dependent on various factors or “triggers.” A few of the most common tax audit triggers are as follows.
1. Cash Run Business. This is a red flag for the CRA. If a business receives the majority or all, of its’ income in cash, the chance of that business being audited is high. This is because cash-run businesses have a higher incidence of not reporting their taxable income, making them a CRA target.
2. Lifestyle factors. If a taxpayer is living in a multi-million-dollar home, yet reports only $40,000 of annual income, or if a taxpayer is living a lavish lifestyle that does not align with their reported annual income, these types of factors can trigger the attention of the CRA.
3. Being self-employed. Taxpayers who receive T4 income are at low risk of being audited because they have their taxes withheld at the source by law. Individuals who are self-employed are more susceptible to being audited because they were self-reported and are therefore more likely to incorrectly report. Self-employed individuals are also entitled to many forms of tax deductions that other taxpayers are not entitled to, such as home office, entertainment, or mileage deductions, all of which are red flags for the CRA as possible targets for errors.
4. Previous tax audits. If the CRA finds a large number of discrepancies and errors in a previous audit, you can assume that you will be audited again in the near future. If you did a poor job satisfying CRA during your prior audit and the CRA found a large number of undeclared monies, the chances of subsequent audits will be higher.