How is a CRA Audit Triggered?

Clients ask us all the time how audits are triggered. This is a common question because each year thousands of Canadian taxpayers are audited, leading to hours of frustration, mountains of paperwork, tax debts and exorbitant penalties.  

It is true that there is definitely a short list of behaviours that you can exhibit that can trigger an audit: 

1.      If you claim certain expenses it can increase your risk of being audited. Expenses like medical expenses, child care expenses and moving expenses will increase your risk of being selected for some form of audit.  

2.      If you change your status from married or common-law to single numerous times or the other taxpayers at your address are not consistent with how you reported to CRA, this can also trigger an audit. 

3.      If you claim business or employment expenses or rental losses year after year, you will increase your odds of being flagged for an audit. 

4.      Being self-employed increases your risk of being audited. Self-employed individuals calculate the taxes they will owe themselves and are responsible for making tax instalment payments.T4 employees have taxes deduced by their employer and remitted to CRA directly – so CRA can assume that any additional income taxes they could find in an audit will be small. 

5.      Charitable donations have come under intense scrutiny by CRA over the past few years. If you made donations to charities highlighted by CRA as potential scams or participated in tax shelters it is a virtual certainty that you will be selected for an audit. 

6.      Filing changes to your return after it has originally been assessed may lead CRA to believe there are errors resulting in them wanting to look into the return in question. 

7.      Having large year over year changes in your expense claims can cause you to be selected for an audit. For example, if one year you claim $2,000 in child care expenses and then the following year you claim $8,000 in child care expenses, this may trigger additional scrutiny. 

8.      If you are in an industry where you are earning far less than the industry standard or are in an industry where businesses commonly fail to declare income, this could cause you to be flagged for an audit. 

9.      Standard of living is another big one. If you own a million dollar home, have 3 kids and 2 cars but are only declaring $50k per year income this may cause CRA to believe that you are not declaring all of your income. 

There are different types of audits, both informal and formal. An informal audit may take place through the mail. CRA may request that you provide them with additional information to support a recently filed return. A formal audit will involve an auditor coming to your home or business. Oftentimes people are being investigated and they don’t even realize it, so it is important to pay attention to the job titles of those who write to you. If they have words like audit, compliance or investigation in their title, this is an indication that your return has come under scrutiny. 

For more information about CRA audits or if you are being audited and require some guidance please visit www.taxsolutionscanada.com or call 1-888-868-1400.

How Does CRA Find Out Where You Bank?

If you have had your bank account frozen by CRA through a Requirement to Pay and are wondering how they found out where you bank, well it is far easier then you may think. 

Here are the top 3 ways that CRA can find out where you bank: 

1.      Through your payments to them: Any time you send a payment to CRA (even if it is a joint account), they will obtain your banking information which they can use against you at a later date. Even if you have a joint account, CRA can still issue a Requirement to Pay and freeze it at any point in time.

2.      Through a financial disclosure statement: When CRA agents initially contact you to collect a debt, they will appear open to making a repayment arrangement with you. They may allow you to make a short term payment plan that you can afford, in exchange for a financial disclosure statement. The financial disclosure statement will require you to disclose where you bank.

3.      Through the “shotgun” approach: In Canada there are only 5 main banks – Royal Bank, TD Canada Trust, Bank of Montreal, Scotia Bank and CIBC. CRA can simply send a letter to all the 5 banks’ head offices to inquire as to whether or not you have an account there.

If you owe money to CRA and know that you cannot pay in full and will need to make a monthly payment arrangement, you are going to have to take action to protect yourself if you don’t want them to obtain your banking information. 

Owing money to CRA is no fun at all. Your best chance at being successful is to understand that you are dealing with a massive bureaucracy that has immense powers under federal law and infinite resources all designed to collect from taxpayers. You are going to have to be extremely careful about each and every interaction you have with them, and keep interaction with them at a bare minimum if you want to avoid life-altering enforcement action. 

For more information about how to avoid having your bank account frozen or to discuss a tax problem, please visit www.taxsolutionscanada.com or call 1-888-868-1400.

Dangerous CRA Forms and How CRA Gets Your Information

CRA agent’s job includes checking that the information you have provided and filed on your return is accurate. Put differently, this means trying to catch taxpayers who make mistakes or are tax cheats. 

Triggers to CRA increasing their level of scrutiny include:

·        Late filing

·        Increasing unpaid balances

·        Major changes in income and expenses between years

·        Inconsistent information between your return and records they have from third parties.

CRA  will deploy various tactics including sending you forms to fill out in order to build trust with you so that you tell them everything they need to know. It truly can wind up being a case of them playing “good cop, bad cop.” 

Here is a typical scenario that we see with CRA enforcement agents:

·       Taxpayer owes a debt

·       CRA agent calls taxpayer and indicates that they are prepared to accept a payment arrangement – often this will be over 3-6 months. The CRA agent will advise the taxpayer that they simply need to complete a financial disclosure statement to bind the arrangement. The financial disclosure statement will require you to disclose your current income, income source, expenses, assets, liabilities, as well any bank accounts that the taxpayer has. CRA agent is very friendly in this phase and the taxpayer likely thinks that he/she “got lucky” and landed up with a nice, reasonable CRA collector.

·       In good faith, the taxpayer completes the financial disclosure statement and begins making payments.

·       As part of the payment arrangement CRA will ask for post-dated cheques or direct payment through the bank.

·       Fast forward 3-6 months and the taxpayer will receive a call from the CRA agent, perhaps even a different agent.

·       This time the CRA agent is less friendly, less co-operative and wants to be paid in full or demands a monthly payment that is impossible to make.

·       When the taxpayer indicates that they cannot make payment to the CRA agent in the amount demanded, CRA proceeds to freeze the taxpayer’s bank account, garnishee wages and/or place a lien on the taxpayer’s home. 

How were they able to take enforcement action so easily? Because the taxpayer served all of their personal information up to the agent on a silver platter when the initial arrangement was made.

CRA is not your friend and cannot be treated as such. No matter how nice or how willing they seem to be as far as negotiating with you, their job is to collect your money and they do a very good job of this. If you owe CRA money and you know you cannot pay in full, right away, you have a problem and should consider seeking professional guidance before you have any conversations with CRA and do anything to expose yourself. 

You simply cannot afford to not take dangerous CRA forms like the financial disclosure statement seriously. Handing information out the wrong way can trigger extreme financial hardship, hardship that may prevent you from even paying for your basic necessities of life. With professional experience there are proper processes that force CRA to deal with you fairly in respect of the back taxes and minimize penalties and interest. 

For more information about dangerous CRA forms or if you have a problem with CRA and require guidance please visit www.taxsolutionscanada.com or call 1-888-868-1400.

Start the New Year with a Clean Slate

With the arrival of 2014, what would be better than starting the New Year on a fresh financial foot. This may be easier said than done if you have a large tax cloud hovering over your head. 

Knowing that you have undeclared income, are behind filing returns, or simply owe a tax debt that you cannot pay is extremely stressful. In these instances, many folks fall into the trap of ignoring the problem until CRA forces them to deal with it – this is the absolute worst thing you can do.   

The New Year is also problematic for those who are already behind filing taxes because of things like increasing penalties. It never looks good if you are caught cheating on your taxes or not filing – the longer you leave taxes unreported, the harder it will be to get relief, no matter the avenue you choose to take. This is why it is a smart idea to sort things out as soon as possible.  

CRA have a duty to collect taxes they think are owed and their vast collection agent team are experts in this field.  Just like we hear stories from people about their wildly successful share purchases (but never the losers!) you seldom hear people talk about their tax nightmare.  The CRA collection team will get your attention – usually with a sharp shock to your financial well being.  We have written elsewhere about these tactics (some not so clean!) but suffice it to say that CTRA’s powers are huge.  Without a warning they can freeze your bank account, garnishee your wages, put a lien over your house and seize your entire self-employment income. They can raise tax assessments against you and your business based only on the information they find from third parties.  It can get very ugly, very quickly.   

There are a number of programs and approaches that can be leveraged to deal with a CRA tax problem quickly and swiftly. 

Take undeclared income and late filing as one example. If CRA has not approached you yet about your tax debt then you can make an application under the Voluntary Disclosure Program, declare the income and avoid penalties, interest and prosecution. 

Not declaring income and late filing is tax evasion. Even if CRA is already on to you - so the Voluntary Disclosure Program is not an option – that still does not mean do nothing and hopefully they will “lose my file, go away, or some miracle!”  At any time CRA can re-assess a past return or notionally assess a return that you have failed to file, determine what taxes they think you should owe and assess penalties and interest accordingly. 

A Notional Assessment is a big problem because CRA will not take into consideration your legitimate expenses and tax credits. This is an even bigger problem if you are self-employed and have not filed for many years. You can only claim input tax credits on GST/HST going back 4 years. 

In the case of late filing, time is never on your side. It is not illegal to owe money to CRA (the criminal part is not filing the required returns), so it is better that you clean up your taxes coming into the New Year so that the only issue you have left to face is the financial burden of having a tax debt. 

On that note – there are ways to deal with these problems that are very fair to the taxpayer. The challenge thought is that if you try to negotiate directly with CRA they will often trick you into providing them with information that could cause you to fall prey to severe enforcement action later. Again, in this regard time is not your friend.  Avoiding is simply making the problem worse. 

It is important to take a long, hard look at your finances and begin making contingencies before CRA starts coming after you. If you have been assessed penalties and interest one of the programs that you can use to reduce penalties and interest is Taxpayer Relief. 

If you have suffered extreme financial hardship, have medical problems, a disaster has occurred, there has been some extraordinary circumstance or CRA has erred in some way – and you can prove it - then you can qualify under the Taxpayer Relief provision. 

The important thing to know is that a tax problem is not the end of the world and there are solutions and strategies that can be deployed so that you can clean up your finances and enter 2014 knowing that your tax problem will soon be behind you. 

For more information about how to deal with a tax problem please visit www.taxsolutionscanada.com or call 1-888-868-1400.