Whenever someone submits a tax return, there is always a chance of an audit. Although the Canada Revenue Agency (CRA) only audits a small percentage of businesses every year, it’s still good business practice for you to take steps to help your clients avoid audits. If their return does trigger an audit, you need to be by their side, helping them through the process.
Educate Your Clients About Tax Regulations
As a professional accountant, you probably want to help your clients get the lowest tax bill possible, but of course you need to do that within the confines of the law, following all relevant tax regulations.
For example, if you have a client who wants to take the home office deduction, you can remind them of the criteria for making that claim. Similarly, if you have a client with a lot of entertainment and dining expenses, you may want to go over regulations related to deducting expenses with them. Educating your clients is part of your role as a tax professional.
Tell Your Clients About Red Flags
There are certain red flags that can trigger audits, and you can better serve your business clients by keeping them informed about these triggers. If someone reports unusual income for their postal code, that can trigger an audit. For instance, if your client is living in an extremely affluent neighborhood but reports only a small amount of income, the CRA may want to dig a little deeper regarding your client’s income.
Offshore assets, international wire transfers over $10,000, and excessive business losses are also red flags. The CRA is more inclined to audit tax returns from self-employed individuals and from businesses in industries such as construction, retail trade, and restaurants. If your client has one of these issues or runs a business in one of these industries, that doesn’t mean that they should change what they report on their tax return. It simply means that they need to be very well prepared for potential audits.
Focus on Record Keeping
In the case of an audit, accurate records are the essential ingredient for successfully managing the process. To better protect your clients, stress the importance of keeping accurate, well organized records. Let them know that they may want to keep additional supporting records beyond just ordinary receipts and invoices. For example, if your client is claiming advertising expenses, then they may also want to keep a copy of the publications where their ads appear. If the CRA ever questions a particular advertising deduction, the publication can help to back up your client’s legitimate business expense claim.
Recommend Record Keeping Solutions
You may want to recommend specific tools or apps to help your clients with record-keeping. An example of a helpful app may be one that enables your client to easily record expenses. Ideally, work to ensure that record-keeping apps your client uses easily and smoothly sync with their basic accounting software. Reliable accounting software such as QuickBooks easily interfaces with a large number of accounting apps and tools.
Your clients can also benefit from getting your advice on how to make records more accurate. For example, if you have a client who tends to record expenses months after they happen, you can point out to them that more timely expense recording helps to avoid errors. If your clients have lots of employees incurring business expenses, you may want to suggest an automated workflow that helps to eliminate mistakes and expense accounting errors.
Be There for Audits
If the CRA audits one of your clients, reassure them by committing to be with them and guide and assist them throughout the process. Whether the audit is at your client’s home, their business, or at a CRA office, proper professional service for your client requires you to be there. During the audit, you should help your client to answer questions and field any concerns expressed by the auditor.
Even if every detail on your client’s tax return is correct, an audit can still be a scary experience for your client. You can lessen their fears by letting your client know what to expect and by helping them to prepare.
Help Clients Prepare for Audits
Your clients probably know that they need to provide financial records from their business for the audit, but they may not know that they may also need to provide personal financial records. For instance, if the auditor thinks that your client is hiding revenue, then they may ask to see your client’s personal bank account statements. In a case like that, the auditor may examine the bank account statements checking for things such as such large, unexplained cash deposits.
The auditor may even ask for financial information from other family members. If your client doesn’t know this is a possibility, they may panic during the audit. By fully informing them of possible inquiries before the audit meeting, you can help to make the process as easy and anxiety-free as possible.
Advise Clients of Their Rights
Auditors are not allowed to threaten taxpayers with gross negligence or civil penalties. Let your clients know that this is not allowed, and if it happens, help your clients contact the CRA and appeal the audit. The average taxpayer is usually not aware of their rights during an audit, so as their accountant, you need to advise them accordingly. If you and your client do not agree with the auditor’s assessment, then you can help your client appeal the audit.
An audit is the biggest fear of most taxpayers. As an accountant, you have the professional responsibility to educate your clients about audits. Help them be prepared to easily survive an audit by keeping accurate and detailed tax records. Finally, commit to be with them and help them through the audit process.