CRA taxpayer abuse by inflating revenues? Possible?

I'm self-employed and I have some recent concerns about CRA's audit process. I haven't been audited but I'm worried as to what would happen during one. I have a fairly simple service business where I have some moderate expenses (about 15%-25% of revenues) and I've consistently earned similar incomes over the past 5 years (roughly $75000). I document my revenues and expenses using Excel as the amounts in this ledger correspond exactly to my financial inflows and outflows going through my business bank account. I use the data from Excel when preparing my T1 returns each year.

I'm not underreporting revenues or overestimating expenses, but my question is if I ever get audited by the CRA, would it be possible for the auditor to ignore my ledger and bank statements, and just arbitrarily inflate my revenues without any justification to me? What would be stopping him from claiming that my revenues were really say, $140k instead of $90k? What recourse is there for honest taxpayers?

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  • 1 decade ago
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    I agree 100% with Ontario CGA's response, CRA is not as sinister as you perceive them to be.

    I can speak from experience on this issue, since I was a CRA employee on contract in the GST collections department many years ago.

    I am currently a self employed tax consultant and have been for many years. Like Ontario CGA, I have also helped many over the years, who were randomly audited by CRA.

    Random audits by CRA are quite common, especially for first year businesses, and for existing companies who show a significant change of business activity from one taxation year to the next.

    It's up to CRA's auditors to review any records that they feel may be suspicious at first glance, and to conduct whatever investigations into books and records that they deem necessary.

    If the taxpayer has all of their books and documents in good order, and can substantiate their claims, then they have nothing to fear. The auditor simply reviews these records, and submits a report to CRA that no further action is necessary.

    On the other hand, if the auditor has "stumbled" across something that he/she believes to be unsubstantiated, then further reviews will follow.

    Auditing is not just done on the business level, but with personal tax returns, too, especially when taxpayers make claims for rent, charitable donations, child care claim, spousal support payments, equivalent to spouse claims, etc. (I am certain that the new public transit pass claim on line 364 will be added to that list effective in the 2006 taxation year).

    While you may very well be an honest taxpayer who does everything by the book, unfortunately, not all Canadians are following this procedure.

    If all Canadians were to pay their outstanding taxes owed both federally and provincially, our country would be in far better shape financially than it is currently in.

    Thanks to Ontario CGA for a great response to this question, I simply wanted to elaborate further on some of the excellent points he stated and give you my point of view having "been there, done that".

    Hope my information helps you.

    Source(s): Tax consultant for 27 years and former CRA GST collections officer (on contract)
  • 1 decade ago

    Hi Joe,

    I think that you're picturing CRA as far more sinister then they really are. Having assisted clients through audits, I've never run into a situation similar to your hypothetical.

    When audited, the taxpayer needs to provide evidence of their incomes, expenses and deductions. In your case, if your business activities were reviewed and you could correlate your spreadsheets to the business bank accounts and supporting documentation (invoices, receipts etc), then also show that your personal bank account deposits matched up with your business draws there wouldn't be an issue.

    I think perhaps you've heard something about adjustments which have arisen due to a net worth assessment. In that case, the auditor looks at the claimed revenue of an individual and compares it to their cost of living. If they determine that the cost of living requires $50K per year of income yet the taxpayer is only claiming $25K, and the taxpayer cannot provide justification for this difference then there may be a reassessment.

    Now to answer the other part of your question, if a taxpayer feels that they have been assessed in error, they can file an objection with CRA and have it re-reviewed. If that fails, then the file can be taken to the tax court of Canada, and if needed ultimately to the supreme court.

    Cheers!

    Source(s): CGA in practice
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