Fear Of An Audit
Almost every single person I have every talked to is afraid of an audit by the government. This extreme fear paralyzes them and completely prevents them from seeking out new ways to save money.
Your single greatest expense in life is taxes. The government is nice enough to each year create and modify the tax laws to create new opportunities to save money. Sometimes they remove old tax saving benefits, but you will find that often times the old ones that were removed are removed because they are being replaced with new clearer rules.
An unfortunate fact about government benefits is that a very small percentage of people actually take advantage of them. This past year the numbers of people who took advantage of the latest government credits was so low in Canada that the government actually took out advertisements to inform people of the credits they were entitled to.
Thinking about how hard the government is working to try to get people to use the new credits, why is it that we are so afraid of the government. The tax department cannot jail you without trial. They cannot steal away all your money without reason either. Using tax credits as they were designed in the system is not a reason for the government to audit you. Not using tax credits that you are entitled to could be a reason to audit you though, since you are either very foolish or you have something to hide.
I know many business owners who have been through tax audits. While these can be difficult, the government rarely wins in these cases. The tax department actually only wins in less than 25% of the cases taken to court. Before an audit case goes to court you are given many opportunities to reprocess your paperwork and make corrections if required. Quite simply you cannot be forced to pay fines when you didn’t do anything wrong. People who file their taxes correctly and take care not to forget things shouldn’t have a fear of being audited.
Taxes can be very doom and gloom. Take heart though because our legal system enabled us to be innocent until proven guilty. Those people I know who were audited came out alive and most actually came out in a better position financially. Remember that if the government has the right to look back and find errors against you, you also have the right to look back and make positive corrections.
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The thing is, sometimes they do win and they can be very nasty. The government ruled against my parents in an EI case of not being at arm’s length (my mother works for my father) and even the judge admitted that he believed they didn’t do it on purpose and that he was finding them guilty on very little.
But because of their mistake, they had to pay back all benefits received, with interest (even interest accrued during the appeals process) balooning from 5000$ to over 20 0000$. I heard a couple talking about a similar horror story who were suing the government on CBC’s The Current and I felt for them because I’ve seen the toll it has taken on my parents’ mental and physical health.
I realize their case is relatively rare, but it does happen and I can see why people fear it.
You are quite correct. The audit process is designed to catch people who are wrong/incorrect and unfortunately not knowing the rules correctly is not a defense. One should certainly spend the time and effort to understand the rules and credits before you take full advantage of them. For example in your parents case they should be able to claim back 100% of the EI payments made. When you own the company you work for you cannot claim EI and thus you do not have to pay it either. For myself I find I save thousands of dollars each year because I don’t pay EI. I don’t get to claim it but I haven’t actually found anyone who got more from EI than they had paid in, so I see myself as coming out ahead.
The interesting thing in your parents case is that there is very likely nothing in the pure paperwork that would have caused an audit due to their EI issue. Likely they were randomly chosen for a more in depth search and suffered due to that more than anything. Fearing the random is just like planning your life around the potential of winning the lottery. It is huge when it happens but the likeliness is somewhat low.
By the way, this is not to take away from your argument in favor of tax credits. You’re totally right that they exist to be used.