CRA is getting tougher on Sole Proprietor Audits

The Canada Revenue Agency is getting aggressive about taking additional steps to check on whether sole proprietors are hiding sources of income during field audits.

Our current audit experience has found that CRA field auditors are generally effective in checking for unreported income during field audits of sole proprietors. Further, we see that CRA has increased pressure on auditors to do net worth audits. As a minimum the auditors have to fill out a report at the audit’s end explaining why a net worth audit was not necessary.

I guess another way of looking at this is that small businesses are seen as tax cheaters unless proven otherwise.

While CRA auditors generally check for unreported income, we find that CRA is doing a close look at the lifestyle of the entrepreneur for determining that the taxpayer must be earning more than they claimed on their tax returns.

Auditors take a close look at personal-living-expense data. The preliminary cash transaction analysis involves little or no taxpayer burden, but uses tax return and personal expense data are used to determine whether the sole proprietorÂ’s income and expenses are roughly equal. If the auditor determines that the lifestyle suggests a higher income than reported, there will be a life style assessment levied.

In lifestyle audits, CRA does not have a credible test, instead looks to the auditor to do serious assumptions that do not require verification by the auditors.

CRA really needs to read their code of ethics and code of conduct, then they need to revisit the subject of net worth assessments.

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