5 Tips To Help Avoid Your Ontario Business From Being Audited

These surefire tips will help you avoid your business from being audited regardless of which tax year it is. Even if your taxes were filled out properly and you made sure that every piece of information in your tax return was correct, there’s always a chance that you could face an audit and have to go through the aggravating process of explaining where all your money came from and went.

To avoid the headache of an audit, there are steps that you can take to greatly reduce the possibility of experiencing one. Remember that one surefire way of avoiding an audit is by hiring a professional accountant.

Don’t Write Off Your Entire Vehicle

One of the common mistakes that business owners make before being audited is writing off their entire vehicle expenses for the year.

While the Canada Revenue Agency allows individuals to write off expenses related to using their vehicles for work, the CRA automatically understands that the majority of business owners don’t use their vehicle exclusively for work.

If you use your car for work and for personal reasons, only the work-related expenses can be written off. Don’t write off all your gas, don’t write off all your repairs.

Writing off all of your vehicle expenses is likely to lead to an audit, which you’ll want to avoid. Here are the allowable motor vehicle expenses for a business.

Provide Additional Information When Requested

The Canada Revenue Agency doesn’t automatically call for an audit just because there are a few small issues with a tax return.

In most cases, the CRA will simply ask for additional information to correct errors, or to support your return as it’s been filed.

If the CRA ever requests additional information from you pertaining to an issue they have found with your return, you may be required to provide any logs, schedules, or receipts that support your information as quickly as possible.

If you fail to provide the CRA with the specific information they’re looking for, they will likely choose to audit your business.

Keep in mind that there are times when an audit will be issued even if you provide the requested information on time.

Make Sure Your Tax Returns Are Consistent

If you’re the owner of a small business or are self-employed, the most important thing that the CRA looks for when assessing tax returns each year is consistency.

While businesses can increase in popularity in a very short period of time, the CRA will likely audit your business if you report an income increase of more than 100 percent in a single year.

If your business made much more revenues and profits compared to the previous year, it’s likely that you will be audited no matter what. At the very least, the CRA will take a longer look at your return.

The same is true if you report a much higher number of deductions when compared to last year’s return.

To avoid an audit, it’s important that you extensively document any change to business income that will support your current return. If documenting everything is too tedious of a job for you, hire an accountant – that’s their job.

Report Income From Your T-Slips

If you have employees at your business, they are required to file various T-slips with their returns. The CRA will always check the T-slips that it receives in individual tax returns against the return that you provide as a business owner.

As such, it’s important that you file all information and income from the T-slips that you receive.

If the CRA finds even a small discrepancy, they will take another look at your return and will likely ask you for additional information. If you can’t provide them with the requested information, they will almost certainly put your business through an audit.

Be Accurate With Home Office Deductions

If you’re self employed or own a small business, some or all of your work may be done from a home office.

The CRA offers a variety of home deductions to business owners who work from home. If you want to qualify for the various home office deductions available to you, the CRA will require you to denote how often the space is used for business and whether it’s also used for personal reasons.

When you decide to claim home office deductions on your tax return, make sure that you’re wholly accurate in calculating the office space that you use.

If the amount that you claim is deemed to be particularly excessive, the CRA could audit your return.

A home office that only takes up 10-15 percent of the space in your home is likely acceptable. If, on the other hand, you claim 50 percent of your home space to be office space, your return could be flagged by the CRA.

As long as you adhere to these guidelines, you should be able to avoid being audited.

If you find that there are aspects of your return that you believe will cause the return to be flagged by the CRA for an audit, you can also submit documentation that supports it.

The Take Home

Be as honest as possible. It does cost money to stay in business, but there’s no rhyme nor reason to fluff the numbers. If all the numbers line up, and if you’ve been as truthful as possible, the CRA will look kindly on your tax-filing and won’t come knocking at your door.

Don’t stop here! Although you want to be as careful as possible when it comes to your expenses, you’ll also want to read my article about overlooked expenses your business you should be writing off. This information will help you balance your books and help you get some money back that your business deserves.