Are You Playing the Audit Lottery?
The audit lottery is the game you play when you do stuff that you know is not right for income taxes and hope that you do not get audited that year. This is a similar plan to the one you had when you were 8 and hoped that your parents would not notice that “someone” broke a window!
Your chances of being audited by Canada Revenue Agency (CRA) run to about 4% a year. However, if you are self-employed, you have a 100% chance of being audited in your lifetime. Some of these “audits” are not full blown “come to your office hang around for a week” type events, but CRA will eventually ask you for more details about something you have filed with them.
There are certain areas where Canadian taxpayers are more likely to play this lottery.
Everyone knows that they are supposed to be keeping a mileage log, if they plan to deduct any part of their vehicle expenses for work or business. However, people play the audit lottery on this requirement. They keep an appointment book but do not actually record mileage. Google is here to help. When they get word from CRA that they have 30 days to produce a mileage log; the plan will be to take the appointment book and to use Google maps to figure out how far it is from the office to each location listed in the appointment book. Will this work? Maybe, if you made a good guess when you imagined your mileage for your tax return in the first place.
Are you keeping all of the receipts that you would need if you got audited? If CRA asked for all of the receipts for the meals that you are deducting on your tax return would you be able to come up with the actual slips from the restaurant? This receipt must show the details about what was eaten. You also need the credit card or debit receipt and you need to know with whom you were eating if you were entertaining? If you are out of town on business you do not need to be entertaining anyone to get this deduction.
If you deduct vehicle expenses based on a mileage log do you have the slimy pieces of paper that come out of the gas pump? Are these slips still legible? Without those slimy bits of paper you cannot actually prove that you bought gas. A notation on your VISA statement from Petro Canada does not prove that you bought gas — could have been pop and chips.
Are you claiming anything else that you do not have a receipt for? Just having the amount printed on a credit card statement or writing a cheque for an amount is not a receipt. A receipt has names, dates, GST/HST numbers and details. See the article on acceptable receipts on this site.
If you are audited and you do not have the proper documentation for amounts that you have claimed on a tax return the expense will be disallowed and you will owe additional tax plus interest on that tax. The amount you owe CRA will have interest added to it each day until you pay. That interest calculation started back on the due date for the original tax return, which could be years ago.
Think about it — are you lucky enough to win the audit lottery? You could make a few simple changes, such as holding on to more receipts, and you will reduce your tax bill — if you win the audit lottery.