When you think about it, there’s nothing more terrifying than the thought of being audited. You either panic or feel just this side of panic, and it can be a scary place to be.
Remember that businesses all over Canada experience the same rush of emotions, but that doesn’t mean you or anyone else has done something wrong. Most likely, there is a few bits of additional information required or clarification needed.
Working with your tax accountant will help you navigate the world of audits so you can focus more on the critical daily needs of your business and move through this process as smoothly as possible.
The Canada Revenue Agency (CRA) is Auditing Us!
That’s right—the CRA has a lot of work to do, and they’re looking at a lot of different businesses, individuals, and charities. So don’t panic if you get an audit notice from the CRA—it may just be that your business needs some attention.
The CRA has broad power when it comes to auditing for tax purposes. This gives them wide-ranging rights when administering audits. They can demand to see specific documents or records, compel people to give testimony under oath, issue summonses requiring information from third parties, and potentially impose penalties on businesses that don’t comply with their requests.
In most cases, you’ll receive a notice, provide some information, and either nothing happens, or you will pay a small amount to cover any difference between what was reported and what is accurate.
What Does the CRA Do?
If you’ve been selected for audit, you could be in for a long process. That being said, the process doesn’t have to be as stressful as it seems.
The CRA is responsible for ensuring everyone pays their fair share of taxes by conducting audits on businesses with missing or incomplete information.
Their job is pretty expansive as it covers:
- Income tax from various levels (federal, provincial, etc.)
- GST/HST taxes on goods and services
- Pension Plans
- Employee insurance plans
- And more
These numbers need to be accurate because the CRA handles benefit and credit programs often based on the completed documents you submit each quarter or year. If your accounting services are not entirely accurate, then there may be cause for an audit.
The audit process is neither personal nor does it mean there will be any criminal investigation into your tax affairs or charges brought against you. Instead, the auditor will be looking for reasons why you may have overstated or understated certain parts of your return.
This could include things like claiming business expenses (e.g., meals and entertainment) that do not quite fit the definition, claiming deductions for charitable donations that don’t match with what the organization reports, purchasing items at a reduced sale price then accidentally claiming full price, and other common mistakes.
What is an Audit Notice?
When the CRA decides to audit you, they will send you a letter explaining that they are auditing your taxes and what they need to see. The letter will tell you how long you have to respond to them before penalties start adding up. If there is already a deadline for filing returns or paying taxes that’s been missed, this can be moved back with clear communication.
It’s important to know that the CRA’s audit selection process is random, so there’s no way of knowing why you were chosen. However, one thing the CRA does look at when choosing a tax return to audit is whether there are any red flags on your return.
For example, if you have a high income or file as self-employed, there could be more chance that your tax return will be selected for review.
What is the best thing you can do if this happens? Don’t panic! The CRA doesn’t want to catch people who aren’t paying their taxes. They want to help people who have questions about their returns understand them better and ensure everyone is being compliant with their taxes
What Should I Do?
The CRA will ask you to provide all records that support your tax return. This can include receipts, invoices, canceled cheques, and other documents.
If you don’t have the documents in question, explaining why you don’t have them is essential. The CRA may accept reasons such as “the document was lost or destroyed” or “it was never received.”
This is why having CRA audit help from a seasoned team of professionals is critical to your success. With quality bookkeeping services, you’ll be able to provide answers to the questions being asked. In the meantime, you should always:
Create a Plan Moving Forward
You’ve probably heard the saying, “a place for everything and everything in its place.” This is especially true when it comes to keeping track of your audit. If you have a system for tracking your receipts and filing them away, it will be much easier to find them when needed. The goal is to locate the required information quickly so your audit process can move forward.
Respond Promptly
The CRA wants to work with you. They want to help, and they will go out of their way to accommodate your needs when it comes to responding to an audit or any other request for information. If you respond quickly, the CRA will be more likely than not to come up with an agreeable solution for you. One that doesn’t involve taking years off your life and livelihood for them to obtain. Responding promptly also means avoiding penalties for non-compliance, which can include fines, depending on how serious matters get.
Supply Complete Information
Provide all the information they request. If they ask for receipts or other documents to back up your expenses, do not hesitate to send them in immediately. Many taxpayers make the mistake of trying to be clever by withholding information out of fear that it will bring trouble, but this is rarely true and only makes matters worse when auditors realize that there was more information that could have been provided.
If you don’t have something at hand, explain why. You may not have all the paperwork necessary for an audit—and if so, let them know. While it’s possible that incomplete documentation could lead to penalties or fines later down the road, most accountants agree that honesty is always better than lying about whether or not something exists.
Maintain a Professional Tone
How do you think the CRA feels when it conducts an audit? They are spending their time and resources to ensure that your business complies with Canadian tax laws. You should be respectful of their time and resources, as well as the fact that they have a job to do. In addition, being respectful of the CRA’s staff will go a long way towards helping them feel more inclined to assist you in return. Everyone is simply trying to perform their duties. The sooner this is over, the sooner you can get back to growing your business.
Be Aware of Appeals
An appeal is a process in which you request that the CRA overturn a decision regarding your tax return. The CRA’s administrative policies state that an individual has a specific number of days from the date of their notice to file an appeal. If you win an appeal, any interest paid on your taxes will be refunded. While you will likely not need an appeal, it is good to know the process exists just in case.
What Happens if I Ignore the CRA?
If you do nothing, the CRA will issue a Notice of Intent to Assess. If within a specific amount of days from receipt of this notice you have not provided any additional information requested by the CRA, or if your response is incomplete and requires further clarification, the CRA may assess your tax account with interest and penalties.
If you still do not respond, the CRA can issue you a Notice of Assessment that includes the assessed amount plus interest and penalties before fining you for each day after 120 days from receipt of their original letter. We don’t need to tell you that it can get expensive quickly!
Time to Get Tax Savvy
The best way to avoid an audit is to be well prepared in the first place. It doesn’t matter if you have a young startup with Angel funding or a veteran business with many satellite locations. You need quality accounting services to ensure a safe and equitable audit experience.
At HQ Accounting, we help your business by providing clarity in your numbers that are aligned with current governance and regulatory standards. Our experienced CPA team members will help guide you through developing a solid accounting process, so if you are audited, you have access to everything you need to quickly respond and move on with your day. This minimizes the risk of any potential financial losses by putting you in a proactive situation.
Reach out to our professional team n Fonthill today and let us provide you with the protection and plan, so your financial future is in its best position. Book your 15-minute discovery call today!