As a small business owner, there are probably two words you fear the most — tax audit. Just thinking about a dreaded audit can be crippling, let alone actually going through the process of one.
When that letter comes, it can be nerve-wracking because, as a small business owner, it makes you feel guilty or as if you’ve been ‘caught,’ even if you’re not entirely sure what you’ve been caught doing. The reality is that some audits are ordered because a business sent up red flags that drew the CRA’s attention — such as continually failing to file on time — and some audits are simply a random selection.
Regardless of why a business is being audited, it doesn’t need to be a painful process. And it will all go smoothly, as long as you follow these three rules.
Don’t ignore it. Do not, we repeat, do not, put the CRA audit letter in a drawer and hope it will go away. It won’t. Doing so will only make things worse — much, much worse. Instead, call your accountant right away.
Don’t be chatty. If the auditor needs to discuss an issue with you, be polite but zip it. An auditor is not your friend and you will not do yourself any favours by being chatty. In fact, being chatty gives away more than you need and could raise additional suspicions, leading the auditor down an unintended path. The words ‘yes’ and ‘no’ are considered complete sentences and they shut down any possible fishing expeditions.
Better yet, don’t speak to the auditor other than to direct him or her to your accountant who will speak on your behalf. An accountant knows what the auditor is looking for and how to answer questions appropriately.
Keep organized records. When the auditor comes calling, it’s for a specific reason. The best way to prepare for an audit is to keep organized records all year round so that what you need is at the ready. This means maintaining good bookkeeping habits (or hiring someone who does small business bookkeeping to do it for you) and not using the shoebox solution to record keeping.
Do you know that the number one predicament small businesses find themselves in at audit time is not having an up-to-date driving log to justify automobile expenses? And if you don’t have an accurate driving log, it becomes a scramble to attempt to defend those expenses with the auditor.
The moral of this story is that an audit need not be feared; an audit simply needs to be properly planned for and properly executed. And the best way to do so is to speak to the person who initially filed your return, or call an accountant, and make that person your authorized representative. Then, it’s just a matter of providing CRA with exactly what they’re looking for.