Anyone ever been audited?

Discussion in 'General Discussion' started by jourdo, Apr 21, 2008.

  1. jourdo

    jourdo TFW2005 Supporter

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    I'm just getting my income tax stuff together and I just have a bad feeling an audit is in my future. It is not that I've done anything shadey, but here is the situation/back-story:

    - I work for myself and therefore only pay myself what I need. Basically I have no set monthly income. It all depends on my monthly expenses. I pay a set amount to the government in source deductions (basically the taxes, etc. that I estimate will be due at the end of the year) each month so ideally I don't owe much more at the end of the year -- basically try to pay my taxes up front. To further lessen the tax burden, my wife and I income split (basically we take the money made and divide it in half so both of us end up in a lower tax bracket than I would individually if I made the whole amount).

    - We sold our house this past year, and the housing market here was insane at the time. Basically sold for almost double what we paid. Instead of taking a salary for a few months (to decrease my business expenses), we basically lived off of the proceeds from the house sale. I checked and double checked with the accountant that the government was not going to come after this money... and the tax laws here say no. It is all mine. Basically, it is one of the few tax free investments available.

    Long story short... on paper, my wife and I didn't make a whole lot of money this past year and it looks like I am actually in line for a big fat refund.

    Now me, the layman here, see a bunch of red flags and I assume the tax-man will as well. So, anyone gone through an audit before? Is it as painful as I anticipate?
     
  2. Bryan

    Bryan ΜΟΛΩΝ ΛΑΒΕ

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    I was stressing for you until I read this:
    I think if you have an accountant, you'll be fine.

    Not saying that every accountant is perfect or incapable of making mistakes, but you're well ahead of where you'd be if you'd try to firgure it all out on your own.
     
  3. smangerbot

    smangerbot The Holy Zombie Jesus TFW2005 Supporter

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    plus it gives you someone to blame!
     
  4. Team Jetfire

    Team Jetfire Pop-POP!

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    Capital gains that you get from the sale of an owner occupied home are tax free. If it was a rental property...that would be a different story.

    As for your other income, things should work out fine as long as you accountant knows what he is doing. I see many clients that are business for self, or pay themselves from an incorporated company and give themselves a very limited income...just to avoid paying a lot a tax at the end of the year.

    Also, have you thought about paying your self in dividends (rather than T4'ed income) as you are taxed at a lower rate than standard employment income.
     
  5. jourdo

    jourdo TFW2005 Supporter

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    Thank you TJ! I forgot you were a financial guy... I should have come straight to you.

    We discussed the dividends thing, but opted to go for a Employee Profit Sharing Plan. It worked better since my wife has no income of her own. My T4'ed income is minimal at best (basically enough to pay a LITTLE CPP and EI, but not much) -- everything else is profit sharing. I think we chose to claim more as (T4'ed) salary this year to maybe take some potential heat off of the situation.
     
  6. Dark_Rage

    Dark_Rage Jaded Member

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    I don't think that an audit is the end of the world, your yearly income tax return is just under a very strange or unique circumstance. Since your yearly income varies from being self-employed, eventually you'll see a trend in your yearly income, either as a level amount or a gradual increase, then you'll be able to do a more accurate estimate of paying income taxes up front.

    But yeah, definitely listen to TJ, he's the pro here (whereas I am not), plus asking a question about Canadian taxes on an international (or American) message board is just silly :D 

    You can always see a financial advisor...*hint hint*
     
  7. jourdo

    jourdo TFW2005 Supporter

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    It was more about the going through an audit that I was curious about. That should be a universal experience no matter where you are from. ;) 

    The tax info is just icing on the cake.
     
  8. GavynN.X.

    GavynN.X. I want AM thundercracker

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    To start the audit on a good note, you need to show that all your numbers on your tax return are properly substantiated (receipts, mileage records, 1099s etc)

    Ok, that was an obvious answer..
     
  9. nkelsch

    nkelsch Do you know this Icon? TFW2005 Supporter

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    Be careful with not paying yourself. the IRS doesn't like to see businesses not paying employees. It sounds like your personal and Business fiances are intertwined a little more than they should be.

    But as long as your accountant says you are ok, you should be fine.

    Audits usually come when people make lots of itemized deductions and they turn around and say "prove it". If you claim donations, you better have proof. If you deduct purchases for work/school/whatever, then have reciepts.
     
  10. Team Jetfire

    Team Jetfire Pop-POP!

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    Yeah, I suppose that some tax is going to have to be paid by either you or the company eventually, so it makes sense to pay yourself and your wife (if she is an employee) just below the tax cut off. Takes off the tax burden from the company and you still pay little or no tax.

    Plus it gives you more money for Transformers! (Come on, I know that's what you were thinking :)  )

    Well, listen to your accountant, he is the pro. I just have some clients in the same type of situation as Jourdo. Amazing how much there is to know about this stuff.
     
  11. funkatron101

    funkatron101 TFW2005 Supporter

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    I'm always afraid of that. Mainly because I am horrible at organizing my shit.
     

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