Want to Know The Number One Reason that Triggers an Audit?
Inconsistent Information may be your worst tell-tale
I had a client a realtor. For the past 5 years she had 0 subcontractor expense in year 6 she left my area and had another accountant file for her.
That year her daughter lost her job and since she made over $200,000 she claimed Subcontractors expense of $30,000 so her daughter did some work (now the amount she did needed to represent or at least give the appearance of full time work-).
So you have 5 years 0 then a jump to $30,000 then back to 0. In year 7 she came back to me because CRA audited. What they asked for was a listing of duties. What she gave them was a one page that amounted to FMV of work about $8000.00 part time.
They reassessed and dropped the amount from 30,000 to 7500 and assessed an amount of 22,500 back to the client at her marginal tax rate (which was the highest). What I would have provided is a detailed listing of at least 4 pages of duties that represented full time work.
This cost her a lot of money. This is an example of why you need to show consistency and the biggest tell of an audit is unusual increase in expenses and not providing enough details when asked.
Did her daughter do full time work? maybe, but it is my job and experience to know how to sell it to them. That is what clients want to see. It is what is not said that often gets overlooked or not realizing what CRA wants to see.
Now what the daughter did, to me may have sounded like full time work, but you need to be very forthcoming with details and not give them something that sounded like a part time job as FMV of non arm length employees is a requirement.
There are many clients that do not take deductions entitled and some take more (grey area) than allowed. Lets face it how many clients actually even keep a mileage log. So my job is to take what I believe to be deductible and not help CRA audit.
One year CGA Canada presented there audit findings and found that 26% of tax returns prepared by CGA firms (before the amalgamation of all unifying bodies) contained errors. Some of those errors were in clients favor and some were not in there favor thus paid to much.
Accounting to the exact penny is almost impossible. When I was articling, I worked for a CA firm Tierney and White Chartered Accountants. When we audited the DUECK Group Of Companies, you keep a tally of found misstatements, then at the end you use statistical analysis to determine Likely Misstatements and compare that number to the Misstatements number that if over then the financial statements need to be revised to get an "Unqualified Opinion".
If under sleeping dogs are allowed to lie and are left alone. Now if you are going to make a mistake, at least make sure it is in the clients favor. Ok i did not just say that. Bad Accountant.