There is no way to guarantee that you will never be audited by the CRA, but being compliant and up to date can certainly help. To avoid more scrutiny from the CRA, meet the filing deadlines. It seems simple but if you repeatedly miss deadlines, you are drawing attention to your file. Small business people have more forms, such as payroll and HST filing, so make sure you know the deadlines and meet them.
A CRA review may also depend on other people in the same industry and their tax filings. Unfortunately, you have no control over this situation. But if your tax return is a major variance when compared to other industry filings, you may receive some unwanted attention.
The CRA sends out thousands of requests for information every year. It does not mean you are being audited and is nothing to be alarmed about. But you must respond to the CRA within the deadline set. And you will need to have all your documentation, receipts and sales invoices filed and findable. And it may seem like old technology, but sending supporting documentation by fax means you have a paper trail.
If you do not respond within the 30-day deadline or you cannot produce the receipt, your chances of being audited have increased. If you cannot support your claim, the CRA will reassess your return and you will probably owe more tax. Keeping tidy files can avoid this situation.
The CRA can select a group of taxpayers in a particular area or business to test for compliance. If the CRA finds that most people in the group cannot produce the supporting document or are non-compliant with the request, it may decide to audit a number of returns within the group to see if this is a pattern. Again, this is something you cannot control.
If you are selected for an audit, here is some advice:
- Spend time organizing your records and ensuring your supporting documentation is in order. You should have accurate payroll journals and employee files. If you use time cards, ensure the transfer of information from the cards to the payroll journal is accurate and the cards are filed in an orderly manner. Your employee files should be up to date, including TD1 Forms, emergency contact information and benefit plan coverage.
- Your HST remittances should include your business number, legal name and contact person, as well as address information. Your files should include your older HST reports that note your filing confirmation numbers or details of payment, including your cheque number.
- Sole proprietors will need copies of T2125 Forms for every year, as well as the supporting receipts, records of your instalment payments, the amount of taxes paid for the year and copies of your Notices of Assessment and Reassessment.
- For incorporated businesses, the CRA will want to review copies of T2 tax returns, electronic filing information and confirmation numbers, details of instalment payments and final amounts paid each year.
Small business owners who know paperwork is not their strong suit may be well served by outsourcing this job to a bookkeeper. It is much easier for your tax preparer to have organized files when it comes time to file, and there is a much greater chance that all the receipts will then be available. And if you are chosen for an audit, your tax preparer should be willing to support you through the process and help you deal with the CRA auditor.