Why Do Businesses Get Audited?

What are the Common Reasons a Business Gets Audited and What are the Consequences?

Have you always wanted to know more about tax audits and their consequences? Well, then you are at the right place since this is the topic we will be exploring in the following sections.

What are the common reasons a business gets audited?

Generally, there are four reasons why a business is audited. Let us go through the details here.
income tax preparation VaughanReason #1: Random Selection
Oftentimes, computers at CRA choose certain income tax returns which have some common parameters, as for instance, income tax returns where an increase in interest expense from the first year to second was in excess of ten percent may be selected. These randomly selected returns will, in turn, be sent to a person known as audit supervisor and it will be his responsibility to check all those income tax returns manually. Upon manual examination, the audit supervisor will either dismiss a return or sent the same to an auditor so that the details can be further investigated.
Reason #2: Tax Evasion
If someone (like a spiteful relative or a dissatisfied employee) informs the government that a business is evading taxes then the business may be audited. In case, the government finds that there is some value in the complaint then an audit can be performed. Thus, by hiring a firm specializing in income tax preparation in Vaughan, you can ensure your returns are filed properly and there is absolutely no chance of being audited.
Reason #3: Linked with Audit of Another Firm
An auditor while auditing another business (with which you are linked) finds that there is something which is to be further investigated. As for instance, at the time of auditing a hotel, the auditor finds that payments made by the hotel to bookkeeper are $7,000 per year. However, the bookkeeper is reporting his income as $6,000 and not $7,000. In such situation, it is more than likely that bookkeeper's returns will be audited.
Reason #4: Matching Program
Canada Revenue Agency (CRA) carries out what is known as a matching program. In case, T5 slip is sent by the bank with respect to interest income you have earned then your income tax returns are likely to be reviewed to make sure this income has been reported. This is where utilizing services of a firm specializing in income tax preparation in Vaughan can be helpful and the firm can ensure that all relevant details are included on your income tax returns.

What are the consequences?

Several things can happen based on the type of error you made. Let us go through the details.
  • Honest Error: In case, it was an honest error then extra tax due and the associated interest is to be paid. As for instance, sixty percent of car expenditure was claimed while it should be fifty percent.
  • Negligent Mistake: If it was your responsibility to file returns carefully but a negligent mistake was made then additional interest and tax is to be paid and penalties may be levied.
  • Fraudulent Mistake: If false expenditure was created then it would be a fraudulent mistake. In such situation, you will face penalties as well as criminal conviction.


To summarize we will say that filing returns properly is important and firms specializing in income tax preparation in Vaughan can help you do that.