Tax Articles
“Hello, this is the tax auditor…”
By Colin Wong
Trade Talks
July 2006
You receive a call from a tax auditor who wants to review your business records. Now what do you do? Why have you been singled out? Will you end up with a huge tax bill --or worse?
First, don't panic. Audits happen and it may have nothing to do with your particular tax filings. If you report business income, you can expect an audit sooner or later. The Canada Revenue Agency (CRA) often targets certain industries or professions for review, comparing selected financial information for current and previous years of taxpayers engaged in similar businesses or occupations.
If your financial records are complete and accurate and your claims are justified, then you don’t have anything to worry about. There are, however, a number of steps you can take to move the process along as quickly and smoothly as possible.
-
The CRA will usually call you to make an appointment. You have some flexibility; the Agency will provide you with extra time if you have a good reason – for example, if you need to gather records from your bookkeeper or accountant.
-
Contact your accountant as soon as you hear from the CRA to help you answer the auditor's questions, provide the necessary documents and understand any changes to your tax return that may be proposed. Your accountant can also help you negotiate with the auditor or file a notice of objection if you are reassessed.
-
Ask questions. Before the auditor visits, determine what taxation years are under review and what records he or she will need.
-
Have all required records ready when the auditor arrives.
-
Keep your financial records for six years from the end of the fiscal period to which they relate. These include financial statements, ledgers, journals, invoices, shipping/receiving records, purchase vouchers, expense accounts, and bank accounts. If you have a corporation, all directors’ minutes and governing documents should be available.
-
Provide only the records requested. Discourage “fishing expeditions” by asking the auditor to request the records needed from you or someone you designate, such as your bookkeeper.
-
Be courteous and prfessional. Provide the auditor with a comfortable place to work in a quiet part of the office. Discourage small talk between your employees and the auditor.
-
Ask the auditor to direct questions to you or someone you designate in order to quickly secure the correct documents and answer questions correctly.
-
If you don't understand a question, don't answer. Tell the auditor you need to check with your accountant and then get back to him or her with the correct information.
If the auditor proposes tax adjustments, discuss this with your accountant. You have 30 days to respond and it is usually far less expensive and disruptive to settle disagreements at this stage. Once the audit is finalized, you'll receive a notice of reassessment with the details of adjustments to your return. If you still have unresolved issues at this stage, you have up to 90 days to file a notice of objection.
Some of the areas that commonly lead to tax adjustments include:
-
Incorrect calculation of automobile benefits;
-
Inflated expense claims, including meals, entertainment, automobile and home office deductions;
-
Incorrect reporting of shareholder/employee benefits;
-
Unreported income, such as bonuses, dividends, interest, dispositions of appreciable assets;
-
Incorrect GST calculations;
-
Incorrectly paid bonuses;
-
Capital cost allowance calculation errors; and
-
Incorrect characterization as self-employed rather than employee.
The best advice? Always be prepared for an audit. Discuss tax issues with your accountant on a regular basis to prevent errors that could trigger an audit. And keep good records. Then, if you are audited, the experience may not be wonderful – but it should be relatively painless.
Colin Wong is a partner of BDO Dunwoody LLP (www.bdo.ca). One of Canada’s leading accounting firms, BDO helps entrepreneurs and family businesses succeed. If you have questions about this article or you would like to receive BDO’s “Tax Factor” newsletter, contact Colin at (905) 270 7700 or cwong@bdo.ca.
