The average small business owner in Vancouver has a limited budget to deal with their marketing, accounting, IT and high location rental costs. Successful businesses tend to be surrounded by strong support networks, which include bookkeepers and tax advisors. As a result, their books and records are orderly, current, and their tax filings are consistent with their accounting records. For these businesses, a CRA audit is merely a small project to attend to with the help of a professional accountant. Unfortunately for some small businesses, a CRA audit can go from a small inconvenience to a large nightmare.
When Audits Become Nightmares
This is because some taxpayers do not seek professional help when confronted with an audit letter. Many auditors request information that is straightforward to obtain such as bank statements, invoices, or cash register tapes. Auditors verify income reported and expenses claimed by comparing reported amounts to bank deposits, cash register tapes, invoices, cancelled cheques and other business-related documentation. If the income and expenses reported do not agree to income tax and/or GST returns filed, then explanations are sought for the differences. It is at this stage that a routine audit can become a nightmare for taxpayers.
It is best to seek professional representation once you receive an audit letter and let a professional accountant contact the CRA on your behalf to determine the purpose and scope of the audit. A professional accountant knows how to best present the information the CRA seeks so that when an auditor shows up to do their job, relevant information is made available and the audit is quick and efficient.
Responding to a CRA Audit Letter
When a taxpayer decides to respond to an audit letter without professional representation, it is likely that they would not know which reports and information will fulfill the purpose and scope of the audit. Consequently, during the actual audit itself, either too much information is provided, which in itself can lead to more questions, or incorrect information is provided, which again can lead to further questions from the auditor. Another potentially significant problem is that the information being provided to the auditor may not be consistent with the tax filings and the taxpayer may not be able to provide an explanation for these inconsistencies. All of these factors have the potential to turn a small audit into a big audit.
Understanding CRA Auditors
Auditors are accountants. They speak accounting terms and ask for accounting reports that taxpayers may not understand.
A professional accountant’s job is to obtain all the information the auditor would need ahead of an audit. An accountant would also review relevant accounting information, compare it to tax filings and, with the taxpayer’s assistance, have a reasonable explanation for the differences that arise. This way the audit itself would be a quick exchange of information rather than a bookkeeping exercise for the CRA auditor.
Without a professional accountant to act as an intermediary, the taxpayer would also risk having information and communication gaps occur with an auditor. These gaps could prove costly when the taxpayer receives a notice of reassessment after an audit.