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On Halloween, children in costumes travel from house to house asking for treats. Homeowners decorate their private entrances and wait for the moment when children dressed up as adorable princesses, skeletons, and comic book heroes knock on their doors and yell “trick or treat!” Sometimes, the occasional zombie can even look grisly enough to scare onlookers.

But imagine the sheer terror of opening the door to a smiling tax auditor, holding a curiously large booty bag with a shiny dollar sign on the side.
As ludicrous as it sounds, this may in fact be coming to a home near you. In recent years, Canada Revenue Agency (CRA) has increased the number of tax audits – especially for small enterprises (businesses with revenue of less than $1 million). The focus of these audits is to detect unreported income, which can result in civil penalties or criminal prosecution.

Furthermore, it has been reported that CRA has admitted to using publicly available social media posts to build cases against individuals suspected of filing improper tax returns. If CRA happens upon photographic evidence suggesting your apparent lifestyle is inconsistent with the income amount reported for tax purposes, then you may soon receive a special visit – and not from someone just asking for candy.
So, you may want to think twice about posting photos of your luxury automobiles, limited edition handbags and extravagant vacations to social media for the world to see.

The increased tax scrutiny goes back to the year 2006, when CRA implemented an initiative called “Indirect Verification of Income”, or net worth audits. Its purpose is to combat what the government perceives as the underground economy. These situations involve taxpayers that deal with cash transactions, do not maintain proper books and records, and have poor internal controls. Also, these taxpayers often report very low income on their tax returns, which may contradict their apparent lifestyles. Obviously, such persons are prime candidates for CRA to go door knocking.

So, if you suspect that you have unreported income or may become an audit target, what can you do? The preferred solution is to be proactive and discuss your situation with us. Where appropriate, we may suggest making a voluntary disclosure to disclose the unreported income. Time is of the essence: If CRA catches you first, they would not only ask for payment of taxes on the unreported income, but also interest and penalties (which are usually punitive). A voluntary disclosure, if successful, can provide full or partial relief on interest and penalties (but the underlying tax liability still remains payable).

In the spirit of Halloween, in addition to artificial spider webs, plastic skeletons and jack-o-lanterns, homeowners may now wish to add photos of their professional tax advisors to their private entrances decorations to ward off unwanted visitors. Of course, the more practical approach is to consult your professional tax advisor and manage your tax audit risk.

Charles Fu is the Senior Tax Manager at Sloan Partners. Contact Charles today for an analysis of your family’s tax savings opportunities.

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