Welcome to the FreshBooks Tax Thursdays series! We know a lot of small businesses struggle with taxes, so we’re hoping to help make it a little easier by featuring advice from leading accounting professionals every second Thursday from January to April. Today Gary Porter walks us through a strategy for how to approach a tax audit.
The first rule – don’t panic! OK, maybe you panic a little bit. But rest assured, even though you might have a lot of “what if…” scenarios running through your head, a tax audit is not the end of the world. To help you feel prepared with a plan of action should you receive an audit notice, follow this 3-step gameplan (that doesn’t involve Zantac):
1. Determine the scope of the audit request
Often the audit will be on just one item. In fact, the audit may simply be an inquiry such as why haven’t you included a particular employment income slip. Remember that the government receives copies of all your income slips and matches them up to your tax return. In this case, you can put an accountant in charge of supplying all the relevant information. It can help in instances where the income on the slip was included in your business income. But if the slip was never received or is incorrect you need to tell the government and get the issuer to amend the slip and reissue it, which can feel like a lot of steps to follow.
So first thing’s first for dealing with the audit request: Send in all your charity receipts, medical receipts, retirement savings slips and the like. Usually the IRS or CRA will want a questionnaire answered or a form completed. A professional can do this quickly (and correctly), so the cost isn’t normally too much.
2. Recognize tax mistakes – and commit to fixing them
So you have interpreted the Tax Act one way and the government sees it differently, and the difference in tax involved is truly significant. Say, for example, you bought a few houses, then renovated and resold them. You have claimed these gains as capital gains and therefore included only half the gain. But the government sees that you do this frequently and takes the view that this is a business. Business income is taxed on 100% of the amount. If you had made $100,000 profit on 3 houses and paid tax on only $50,000, you’ll be required to pay tax on the other $50,000 (which means you owe as much as $23,000). If you’re unsure, get an accountant involved. You may still have a case for your viewpoint, but an accountant can argue your case better, because they know more about the Income Tax Act.
3. When to call in the big guns
Another situation could be if your records are terrible and you have simply guessed at your income and expenses. Or even more serious, what if you have simply not reported all your income, or deducted expenses you should not deduct. Get comfortable owning up the situation and in all of these cases, you should talk to a tax lawyer. Your conversation with them will stay confidential and the tax lawyer can present the best case possible and work to negotiate the best settlement possible. In the worse scenario, a tax lawyer can represent you in court if you are charged with tax evasion.
The better news is that there are plenty of folks you can call should you need a hand figuring out what you need to submit before it gets too bad. The key takeaway here: Do your tax return promptly and carefully, get help when you need it and don’t cheat. This way, an audit may still occur but you don’t have to lose any sleep over it.
To find accountants who can help with your taxes, visit the FreshMap!
About the Author: Gary Porter is a Chartered Accountant and a Certified General Accountant. He was a tax practitioner for 28 years until 2009. He now describes himself as an avid boater, chorister and storyteller living on the banks of the mighty St Lawrence River.