6 tips to steer clear of an income tax audit: Mayers

Humorist Will Rogers once said that income tax has made more liars out of people than golf.

He’s dead right. Nobody wants to pay tax. Nobody. Not even royalty. Princess Cristina, the youngest daughter of King Juan Carlos of Spain, was charged with tax fraud in January as part of an alleged corruption scandal.

But for most of us, the plans for a larcenous tax-free life never leave the realm of a daydream. We may be tempted, but there’s not much room to go astray. According to the Canada Revenue Agency, two-thirds of working Canadians are wage earners, so the bulk of their income is reported by employers who also collect the tax through payroll deduction. A large group of pensioners also have the tax taken off their monthly cheques. But that still leaves 2.67 million people, according to Industry Canada, who are self-employed.

Related: 11 questions you are afraid to ask the tax man

Before you give in to tax-dodging temptation here are answers to questions you might want answered but are too afraid to ask:

What’s my chance of being audited?

Generally, it’s pretty low if your return is simple and your deductions standard. If your return has self-employment income or your income is based on commission, you have a higher risk, says Mark Goodfield, a chartered accountant with Cunningham LLP in Toronto, who blogs as The Blunt Bean Counter .

The odds also go up if you’ve had run-ins with the CRA before, adds Henry Korenblum, a tax manager in Toronto with Crowe Soberman LLP.

You could also be collateral damage if the CRA audits your group as a special project and don’t forget that angry ex.

“Many audits are triggered by a scorned spouse, business partner or a falling out with a dismissed employee,” Goodfield says.

What’s the difference between a request for information vs. an audit?

An information request is typically harmless. Here the CRA is after proof of a deduction or credit claimed. Common requests are receipts for daycare, charitable donations and medical expenses.

An audit is different. It’s usually because the CRA has found something unusual. The process can be “intrusive and stressful,” Goodfield says.

Who gets audited most?

The CRA won’t say, but it uses computer-generated algorithms to come up with norms within groups. If your claims are vastly different, you may get a call. A huge year-over-year change in your claims for deductions or credits will raise flags.

Sometimes it audits a sample within a group just to keep them honest. Goodfield says in his firm’s experience, these audits have included construction contractors, car dealers, jewelers and pharmacists. Other groups who face scrutiny are hospitality industry workers including waiters, waitresses and bartenders.

Korenblum says last year the CRA looked at Toronto condo sales. It took a tough stand on many claims that units purchased pre-construction and sold soon after completion, were a primary residence and so tax exempt. Many were reassessed and the gains were taxed as business income.

Related: Some condo sales face tax scrutiny

What happens if I get caught?

What the CRA really wants is your money, but jail is the ultimate penalty. Though rare, these cases often make the news. Last May, Imad Kutum, a former chartered accountant in Mississauga was sentenced to two years in prison , for submitting more than $3.6 million in false charitable deductions on behalf of clients. He was also assessed a $100,000 fine, representing Kutum’s profits from the scheme.

If it’s a mistake and you must pay a reassessed amount and a penalty, you may also be on the CRA’s radar for a while, which is a nuisance.

If you cheated, it can get expensive. If the CRA determines you deliberately made a false statement or left something out, you could be penalized 50 per cent of the tax owing, Goodfield says. So, if the CRA finds you owed $1,000 in tax, the penalty could be $500.

Here are some tips to help stay out of trouble:

File on time: And do not send explanatory notes along with it. They only raise eyebrows and can cause larger problems, says Goodfield.

Be reasonable: Your expense claims and other deductions should fit the income you claim against it.

Don’t make things up: If you don’t have receipts do not make the claim.

Keep proper records: Be able to back up your claims. Having the paperwork on hand saves time.

Respond promptly: If you disregard CRA queries they will rule against you by default. “You cannot ignore a review or audit with the hope that it will go away,” Korenblum says.

Be polite: You don’t diss police, customs officers or the tax man. They can make a tough situation worse.

Get help: Getting it right up front is the best way to avoid a problem, says Korenblum, but if you face an audit, professional advice will save you time, anxiety, and may help reduce the assessment.

Related: What’s new on your 2013 return