No one wants to be audited, but helping your clients get prepared ahead of time can ensure the process is as painless as possible for everyone. The Canada Revenue Agency routinely conducts business audits to help ensure all business owners are following tax regulations. The CRA used to conduct combined audits for both income tax and GST/HST, but this is no longer the case. Audits are now specific to either income tax or GST/HST, but not both.
Starting a Business With an Audit in Mind
In a GST/HST audit, the CRA’s goal is to confirm that a business is following the rules for collecting and repaying GST or HST (depending on the province). Businesses that earn over $30,000 a year must have a GST number and collect GST on all sales. Business owners also need to consider pension obligations for GST/HST.
The CRA may choose to audit a business in its first few years of operation to ensure the business is compliant right from the start. An early audit can help detect accounting issues and give the business the tools to improve its accounting practices as the company grows. It goes without saying that businesses should be prepared for an audit right out of the gate.
The easiest way to ensure a client is following the rules is to make sure they’re keeping detailed records of all transactions. As their accountant, you can pay special attention to GST/HST collection and remittance amounts, and alert your clients right away if you notice any kind of discrepancy.
You can also conduct a reasonability test. This means checking that the percentage of tax collected is appropriate for the amount of sales a company is making. If you test this out in the first year or two of a business, then you can help your client make adjustments to their tax collection percentages, if necessary.
Preparing for an Audit
Now is the time to make sure all relevant records are up-to-date and contain all the necessary information about any given transaction. Check everything: sales records, investment and loan statements, receipts, and invoices.
Another important thing to do is look closely at any unusual transactions that your client has recently processed. Auditors are going to pay attention to these, as transactions that are quite different from your client’s day-to-day dealings are where tax amounts can easily become skewed. What constitutes a unique transaction? Say your client is a custom furniture manufacturer that normally sells by the individual piece. A few months ago, they completed an order 10 times the usual size for a restaurant that needed a new set of dining furniture. You would want to double check that the company still charged GST/HST at an appropriate percentage.
Conduct During the Audit
While audits can be stressful, they tend to work a lot better when the company is honest and forthcoming about all relevant information. When the auditor visits, make sure your client answers questions to the best of their ability and is prepared to explain their accounting choices whenever necessary.
Encourage your client to request a wrap-up meeting with the auditor. While this isn’t a necessity, sometimes having a debriefing when the audit is finished can help clear up minor confusion or points of interest that would otherwise come up in the full audit report. The more issues your client can resolve by speaking directly with the auditor, the less they’ll have on their plate to respond to when the formal audit report arrives.
When the audit is over, the CRA representative should provide the company with an assessment that details any discrepancies and the changes the company must make to fix these issues. Help your clients understand this report so they can set their business up for success.