There are a few things you like receiving in the mail: promos for your favourite restaurant, postcards from travelling friends, and an influx of cash via tax refunds. A letter from the Canada Revenue Agency advising you about an audit of your small business? Not on that list.
Breathe. Panicking won’t do you any good if you do receive the dreaded notice because the first step to getting out of an audit alive is to handle it calmly. We know; easier said than done!
According to the Canada Revenue Agency Annual Report to Parliament 2013-2014,
The CRA budgets 54% of its resources to auditing small and medium sized businesses and this amount will be growing over the next five years. This means even more audits.
If you are part of the lucky group that those resources have been allocated to, your job as a business owner is to provide the CRA with the right financial evidence to back up your claim. What if you don’t know what that financial evidence is? Your finance department should.
As we mentioned in our last blog post, having an in-house finance team may not be feasible due to resourcing limitations, but when the CRA comes knocking, having the right team to support you is crucial. That’s why, at Qmulus, we work as your finance department on an as-needed basis, even if that need includes helping you through an audit. Here’s how we can help:
Avoid Getting Audited
Unfortunately, there is no way to avoid getting audited. Even with properly tracked and reported finances that are all tax compliant, the CRA may still choose your business as their next target. No matter the size of your business or the claims you are making, there’s no guarantee that you’ll be safe from the tax man.
While you can’t do anything to outright avoid getting audited, you can be cognizant of how to manage your books so you can fly under the radar. This is where a great financial team fits in, as they know what’s happening in the tax space, and can provide strategic advice for how to file your taxes. As an example, we’ve heard recently that over the past several years, the CRA has been identifying “professional fees” as a line item to investigate. A smart financial team like ours will know to be careful when using this line item for expenses.
With that said, making sure you are properly accounting and reporting your business’ finances is always important. If the CRA ends up sending you that letter for proof, you will be well-equipped to handle it.
Handling an Audit
So you’ve gotten that letter – now what?
The first thing you need to do is speak to your finance team (like us!) about what the next steps are. Each case is unique and could require strategic action.
For instance, a business that makes millions of dollars a year may get asked by the CRA to prove a $5,000 claim, which is a minimal amount comparatively. Is spending the time and money to prove this claim worth the amount of the claim, or will it just cost more fighting it? An experienced finance team would be able to tell you that ignoring a request from the CRA for information could simply open your company up for further audits if they feel the potential of assessing more taxes is a possibility.
When being audited, your financial team will help compile the required information in a way that the CRA will understand. Based on what is requested, your team will provide the right support documents — this can look like a receipt to support the claim or a short explanation. Compiling the information may take a few hours, or it may take a few days, weeks, or months, depending on how well-maintained you’ve been keeping your books. The better kept your books are, the easier it is to compile the appropriate audit documentation. (Bookkeeping is another one of the services we offer, by the way.)
Financial and Legal Consequences
When it comes to an audit, one thing is certain – you can’t lie.
During an audit, not only will the auditor examine your business’ books and records for inconsistencies or discrepancies, but they could also dive into your personal records. Since the personal and business records of other individuals or entities (i.e. a spouse, or a trust) are also legally considered to be part of the audit process, it ends up being pretty difficult to hide things from the CRA.
If an auditor finds no issue, you’re home free! If not, you may be subject to an adjustment where more taxes are owed and this is where your company may be hit with unexpected financial consequences. Interest and penalties issued by the CRA can sometimes be as much as the taxes reassessed.
There are also serious legal consequences if the CRA finds that what you claimed is inaccurate. In fact, the CRA is taking a more aggressive approach to handling tax-paying businesses. For the first time, “the agency has used proceeds-of-crime provisions in the law to freeze the assets of individuals charged with tax evasion.” The CRA is using Criminal Code provisions in order to send a strong message to tax evaders.
Avoid Worst Case Scenarios By Being Prepared
You don’t want to be stuck in a position where your small business is out thousands in cash because of poorly or inaccurately reported records due to your inexperience, but we get it – most business owners don’t know tax. An outsourced finance team will help ensure that your business is following best practices and in accordance with the law to try to avoid audits, but will also be there for you in case you end up getting one.
If you’re considering working with our team, we offer our clients an audit fee waiver to cover our fees in the event that you or your business does get audited by the CRA because we stand by our work and our clients.
Want to get your books and records in order to keep the CRA at bay? Let’s talk: give us a call at 647-476-2145 or schedule an appointment with us.