Are you on the Canada Revenue Agencies radar? How about on the CRA’s Audit Radar? Have you been “flagged”?
Have you ever wondered how the Canada Revenue Agency (CRA) decides who to audit? Are there red flags? Or does the CRA know how you operate your business which makes you more or less likely to be audited?
Here is the answer that you might be looking for;
The CRA knows who Cheats on their Taxes!
Do you fit their profile?
Are you at risk?
First, some background.
While I was still working at the Canada Revenue Agency (CRA), we released the results of a study that was put together to profile what kind of person poses the most risk for the CRA’s collections and audit groups.
The CRA spent a lot of time going through the main accounts; personal tax, payroll, GST/HST, and Corporate Tax, and we looked at who filed on time, who filed late (and how late they filed), and who was regularly compliant, and who needed a follow up verification audit, and what the result of those audits were.
This study focused on Tax Compliance, specifically;
- Percentage of Taxpayers who accurately reported income and expenses (95%)
- Percentage of Taxpayers who file on time (93%)
- Percentage of Taxpayers who made payments on time with their filing (91%).
When it comes to reporting compliance or honestly reporting all your income and/or expenses, this study found that males are more likely to underreport their tax owing than females.
The study also found that underreporting is highest among taxpayers aged 35 to 54 and lowest among taxpayers under 35.
Underreporting of tax was also lowest for taxpayers who are married and highest for those who are separated, with single taxpayers somewhere in between.
Not surprisingly, underreporting of tax is higher among taxpayers whose main source of income is either capital gains or self-employment income versus taxpayers whose main source of income is wages, where most of the tax is withheld at source by the employer.
So who is on the CRA’s radar?
The prime candidates for the CRA to audit, or perform a desk review of expenses, are the separated or divorced males between the ages of 35-54 years old.
Do you fall into that category?
If so, know that the CRA is keeping one eye on you and the other on what you report and when it is reported.
Contact us at inTAXicating, and let us help you ensure that you remain compliant, and ensure that you have the knowledge necessary to organize your records so that you can quickly and easily get through a CRA audit.
Here is an example of a case where the CRA used the criteria identified earlier to quickly descend on a taxpayer who fell behind in his filing and remitting duties.
Case: Tax Cheat? Or Disorganized Business Owner?
I was approached by a business owner who ran very loosely with his books and records. He kept a box of receipts and while most of the business receipts made the box, many got lost along the way. Additionally, this business owner charged business expenses on his personal credit card, and personal expenses on his business card. He travelled quite a lot for work, and he posted a lot of content on social media, but he failed to keep a thorough and accurate log documenting his personal versus business travel.
Additionally, because he was always on the go, had no time to review the details of the tax side of his business. He had money in his business bank account, then he knew he was earning money. At year-end, he would bring his half-completed records and his shoebox to his accountant for the preparation of his returns.
In June he would receive a refund.
A series of events, however, changed his life forever.
- His accountant began to get busy
- As a result, he was late getting payroll figures, and was late making the payroll remittance
- Then the GST/HST numbers were delayed, so that filing was late
- His personal tax filings were delayed
- His business tax filing was delayed.
- His business made money.
- While all of this was going on – he continued to send his info to the CA, and pay the CA’s invoices. He would get the odd notice from the CRA and send it to his accountant to “take care of”.
This is very typical and a common occurence.
What he didn’t know was that everything was not okay.
One day a CRA field officer showed up to discuss his non-compliance and to arrange a payroll audit because the company was 6-months behind on remittances. There was also a balance owing to the CRA of over $35,000.
Shocked, he contacted his CA who said that she would look into it, that it was going to take some time and she felt the CRA was completely wrong.
Convinced that the accountant was right, the business owner went back to work, and the accountant was going to find the error and fix the problem.
Only problem that he didn’t know was that there was no “error”. The balance owing to the CRA was legitimate. By filing late over that 6-month period, the accountant had amassed a significant balance due to late filing penalties and the balance was jumping by leaps and bounds as a result of the 10% interest the CRA charges on outstanding balances (compounding daily).
Then one day he received a call from one of his main suppliers who was concenred because not only did he cheque bounce, but there was a CRA officer there earlier in the day asking questions.
He contacted his accountant.
She appeared stunned and said that she would call the CRA and fix it.
She was just buying time.
A week later, the garnishment was still on the account, interest was accruing, and the accountant was telling stories of the CRA being unfair, and mean, and not listening or returning calls.
Frustrated and panicked that he might have to close his business without a bank account, he contacted his CA and asked for his books and records.
She refused. Realizing that this was the end of the relationship with her client, she told him that she had done a lot of work with the CRA and she demanded payment before she would give up his information.
He refused to pay – how could he? He had no access to his bank account and the CRA had taken all of his funds.
In fact, it took him 8-months and a small claims court date for this process to resolve itself. She took him to court for unpaid work, and thankfully, the judge was wise to this CA and her practices and awarded the client his books and records in return for payment of the work actually completed, not the entire invoice.
The damage was done. The business was also close to being done.
The CRA doesn’t care about the reasons why someone becomes non-compliant – they look at the business, the owner, and then set their course to fix it.
The fact that this business owner fit the category did not help him at all, as the CRA quickly and aggressively went after every asset that he had, raised assessments for the missing payroll and GST/HST figures, and sent Requirements to Pay to his business bank account, contacted his receivables (clients) and quickly moved to raise director’s liability so they could go after his personal assets.
Running a business is difficult.
Running a business without a business bank account is also difficult.
Running a business without a bank account, after the CRA notified your clients that you owe considerable amounts of tax money is next to impossible.
What killed this business was a combination of bad accounting, bad advice, lies, deception and some really bad luck.
The reality is that many, many businesses and individuals have this experience on a daily basis. It is next to impossible for the CRA to determine if the information being told to them is legitimate or a made up story – but when the owner of the business is a perfect fit for commiting tax fraud – the CRA takes notice.
Could this have been fixed? Of course.
If you owe money to the CRA, or if you have fallen behind on compliance, or if you suspect that your tax advisor is giving you bad advice, contact us now. At inTAXicating, we’ll look at the facts, and help you run your business while we work on solving the problem.
Visit our website @ www.intaxicating.ca.
Send us an email to: Info@intaxicating.ca