Ways to Avoid a Small Business Tax Audit

tax audit concept

Small businesses, due to their very nature, are under close scrutiny by the CRA. While there is no way to ensure you’ll never be selected for an audit, there are some ways you can decrease your chances. Read on for five ways to keep the auditors at bay.  

1. Avoid Revenue Discrepancies

When submitting your business revenue, consistency is key. If there are any discrepancies in your business income across any tax forms, that is a big red flag for the CRA and will usually warrant a further investigation.

2. Understand Industry Risk

If you are in an industry that deals with a lot of cash (restaurants, bars, other retails businesses), the CRA is going to be keeping an extra watchful eye right from the start. To combat this, it’s important that your records are organized and complete so it’s quick and easy for you to send along supporting documentation if asked.

3. Stick With the Norm

If your business reports an income that is largely higher (or lower) than other businesses in your industry, it could tip off the tax man. Now, this point comes with a disclaimer: honesty is always the most important factor when it comes to your tax return, so if your company ends up legitimately bringing in an income that widely deviates from your competitors, that’s okay! Just ensure your paperwork and supporting documents are in order, as you may be prompted for further information.  

4.  Avoid Outstanding Balances in Shareholder Loans

Changes in shareholder loans can be a red flag for the CRA. Any money taken from the company needs to be reimbursed or reported as personal income to ensure the proper tax is being applied. Failure to do so can even result in double taxation under subsection 15(2) of the Income Tax Act. Ensure that any shareholder withdrawals are completed properly. To learn more about this process, speak to an accountant!

5. Stay Realistic (and Honest)

There are certain deductions (home office, car, etc.) that are commonly abused by small business owners, and therefore, are under close watch by the CRA. Claiming 100% business use of your vehicle is simply not realistic, and the CRA agents know this! If you are claiming these type of deductions, ensure that you’re keeping the proper paperwork to ensure your claim gets accepted!

Liu & Associates Can Help

Honesty and diligence are the two best ways to minimize your chance of being audited. Even more, if you do happen to be selected for an audit, the amount of stress you experience will be much less, because you’ll have nothing to hide! Keep thorough records, and you’ll have no reason to worry. If you have questions about your business tax return, don’t hesitate to contact an accounting professional. Having your taxes completed by a professional will help to maximize your return and minimize errors. If you are looking for help filing your business tax return, or are currently facing an audit, contact the team at Liu & Associates for honest, professional advice.