What to Do When the Income or HST Tax Auditor Arrives
The Income Tax Act requires each person who carries on a business to maintain complete books and records. Generally you need to keep your records for six years from the time you file your tax returns. The tax auditor will normally telephone you to arrange an appointment. Although the auditor may ask to come in the next day if you are extremely busy, or if you have a busy travel timetable and you wish to be available while the audit is taking place, ask for an extension.
Your Accountant will need time to gather the appropriate records together for the tax auditor. This will make the job easier for the tax auditor as well. The tax auditor will usually spend three to four days on average with small business files where the job involves two taxation years. However, the auditor could spend as little as a day or as long as several weeks.
The tax auditor should limit questioning to three people – you, your bookkeeper and your Certified Public Accountant. When it comes to the financial statements or tax returns, your Certified Public Accountant should answer these.
Depending on your timetable, the auditor should be asked to list the pertinent questions for you, and to go over them with you at the end of the day. If you don’t understand the question, or if accounting or tax treatment is involved, have your Certified Public Account answer the auditor. Never try to explain things that you don’t understand.
Reasons for an Audit
Usually your business has been chosen for a very specific reason. Perhaps your travel and promotion expenses are high or your gross margin is low. The department may be investigating the industry you are in. Loans to shareholders, tax shelter claims, unusual transactions – all these are reasons for an audit. They may be looking at your records to see if payments you make are being reported by other people. They may be checking to see if you have reported payments made by other people they have already audited.
Whether to Challenge
Go over each change with your Certified Public Accountant and decide if you are in agreement with the changes or whether the changes should be challenged. Some changes might appear small but may have more serious consequences as they may set a bad precedent for future years. If you feel the auditor is incorrect, you and your Certified Public Accountant should meet with him or her to convince the department of your position. Although, most tax auditors are reasonable, if your auditor demands are unreasonable touch base with your Certified General Accountant to decide whether or not a change of auditor should be requested
It may be that the auditor and your public accountant cannot agree. Arrange a meeting with the auditor’s Team Leader to convince the department that your original treatment is correct. Your Chartered Accountant should attend this meeting with you.
It is important to persist at the audit level. Certainly you have the right to appeal and file a notice of objection. That will mean reviewing the disagreement at a different level of the tax department with someone new. That may eventually be the only solution. However, it is far less expensive settling the matter at the initial audit level. Sometimes a compromise will satisfy both sides.
Your main defenses are good records, logical reasons for what you did and competent tax planning. The best way to prepare for the tax auditor is by sound thinking when your financial statements and tax returns are being prepared. The tax auditor has extensive powers. They can obtain any information to determine whether or not you are complying with the law. The auditor can also look at the records of a third party to see if anything is missing. If you feel that your treatment is incorrect, the onus is on you to prove it.
If you are facing an Audit, Ravinder Makkars’ professional advice will save you time, anxiety, and may help reduce the assessment if you are entitled to. Our specialties are Audit of Payroll, HST , WSIB, and Tax Audits .
For further information contact us at: 905-791-6666 or e-mail: makkarcpa@hotmail.com