To many self-employed people and small-business owners, the idea of being audited may cause panic at tax-time. The Canada Revenue Agency (CRA) has an extensive and expansive audit process. With the right record-keeping and tax preparation strategy, self-employed Canadians and small-business owners can reduce your risk of being audited and/or painlessly getting through an audit if it happens.
The Audit Process
If the CRA decides to audit you, an auditor will call or write to you to set up a meeting. It may take place at your business or off-site at another location. The auditor will provide a fairly detailed, yet expansive, list of things they want made available for them at the audit or prior to the audit.
Items that the auditor will request to see may include, but not be limited to; your business and personal records, ledgers, accounting records, receipts, credit card statements, bank statements, invoices, and contracts. If you have business partners, the auditor may also request to see the same type of personal financial records from them.
The auditor simply needs to ensure your records match the figures you have noted on your income tax return. If everything matches, the process is complete.
If the auditor determines your tax return has incorrect or missing information, they will ask for clarification, and if they are not satisfied or convinced, then they recommend your claims be denied and the account reassessed.
The Reassessment and Objection Process
If you disagree with the auditors findings, you have a limited period from the date the Notice of Assessment has been issued, to object to the findings. If you object, you have to provide the CRA with additional information to allow them to take a second look at the original assessment and the reasons behind it. You have 90-days to object and you can do so online using the Register My Formal Dispute Option found in your CRA My Account, or you may complete form T400A and send it to your nearest tax centre.
If the CRA agrees with your findings, they will issue a Notice of Reassessment, to have the assessment reversed.
If, however, the CRA disagrees, or you find that their assessment was accurate, you can pay the tax owing. You do not have to wait until the CRA issues the reassessment. Instead, you can ask the auditor for an estimate and pay in advance. That helps reduce interest and penalties – and every little bit helps.
If you disagree with the CRA’s review of your objection, you can object again, however, this objection is made to the Tax Court of Canada.
Common Audit Triggers
The CRA selects returns to audit based on a range of factors such as the likelihood for errors related to certain credits or deductions you have claimed. The agency also compares returns to previous years or to similar companies or lines of business as per your industry (SIC) code. They also randomly check people so you could also fall into that pile.
If you file a return and claim unusually more or less deductions or credits than you have in previous years, your return may be flagged for an audit.
Similarly, excessive home office claims, writing off 100% of your vehicle expenses for business or claiming significantly less income than your neighbours, or claiming re-occuring losses from rental or self-employment may also trigger the audit process.
Being self-employed also increases the likelihood that your return will be audited. However, if you have an effective and well-organized record-keeping strategy in place, such as using QuickBooks (QuickBooks Self-Employed too) you shouldn’t have to worry if you are audited.
As a business owner, you are obligated to report all of your business’s income and expenses, and you are required to keep records of them for at least six years – although we strongly recommend that you keep them for 10-years.
To make meeting that requirement simple and error-free, you can get an app such as QuickBooks Self-Employed that allows you to upload expenses to your smartphone as they happen, and coordinates with your accounting software.
To help navigate the filing of your tax return, you would benefit from using TurboTax Self-Employed, Canada’s only tax software that’s specifically designed for self-employed Canadians. This software is so smart, that it walks you through your taxes step-by-step to help ensure you never miss a deduction or credit. If you prefer to have an expert look over your tax return before you file it, try TurboTax Live Assist and Review so that not only to you have those extra eyes, but you have a tax expert available to answer all your questions as you complete your return. Finally, if you want nothing to do with your return, TurboTax has an option where the return is done for you, and you don’t even have to leave your house.
For more information, visit the TurboTax Canada product page.