Few things are more likely to send a shiver down the spine of small business owners than a letter from the Canada Revenue Agency (CRA) notifying them of an audit. According to estimates, approximately 30,000 audit letters were sent out in 2017. There’s no sure way to avoid being audited, but there are four main reasons why businesses find themselves facing small business tax audits:
Explaining Small Business Tax Audits
Sometimes, businesses are just randomly selected for an audit. The CRA’s computer system will select a set number of income tax returns that share a common parameter. To give a specific example, returns of companies with a massive increase in business expenses might be scrutinized one year. These returns will be forwarded to an audit supervisor to manually check. At this point, they will either be dismissed or sent to an auditor for scrutiny.
The CRA will look closely at all tax forms, comparing the information held in each. If the revenue you declare on your income tax form doesn’t match that on your GST/HST return, or information provided by employers, financial institutions and other third parties, you could be facing grounds for an audit. The CRA will also act on tips they receive anonymously. If your business is mentioned, an audit will likely be conducted no matter how spotless your record is.
Appearing as an Outlier
The CRA has processed millions of tax returns for companies in every sector over the years. They understand the regular norms of industries and expect to find figures that broadly match up with them. If your business is reporting income that’s significantly higher or lower than those norms, it’s naturally going to attract attention.
Cash Intensive Businesses
Unfortunately, some industries lend themselves to further scrutiny from the get-go. If you’re a business that deals mostly in cash, there’s plenty of opportunity not to be up front with your taxable income. In all areas of business, it pays to be honest about taxes. However, the likes of restaurants, hair salons and even home improvement contractors can expect a level of scrutiny that demands squeaky clean behaviour.
Honesty is the Best Policy
Sometimes, it’s impossible to avoid an audit from the CRA. Ensuring your records are meticulously updated and you’re honest in all your tax dealings will ensure any audits go as smoothly as possible. Have questions relating to your small business taxes? Why not speak to our Accounting Expert? These one-on-one consultations give you a venue to ask all the important financial questions you need answers to.