Your clients can’t avoid filing their taxes each year, but they may be able to minimize their risks for an audit with your help. Although the Canada Revenue Agency (CRA) only audits a small percentage of businesses every year, it’s still good business practice to take steps to help your clients avoid audits.
If their return does trigger an audit, you can help them through the ordeal by preparing them and being there throughout the process.
Educate Your Clients About Tax Rules
Your clients want to lower their tax bills as much as possible, but the deductions and credits they claim must fall within the federal tax regulations to keep it legal. Some clients may try to squeeze out some deductions that don’t quite follow the law. It’s your job as their accountant to help them fully understand all regulations and the potential consequences for not following those rules.
If your client wants to take the home office deduction, they need to understand the criteria for making that claim. Similarly, when your client has 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, and it ensures they maximize their deductions without bending the rules.
Tell Your Clients About Audit Red Flags
Certain red flags can trigger audits. You can better serve your business clients by keeping them informed about these triggers to help them avoid audit issues.
For example, if someone reports unusual income for their postal code, that can trigger an audit. If your client lives in an extremely affluent neighbourhood but reports only a small amount of income, the CRA may want to dig a little deeper into your client’s situation.
Offshore assets, international wire transfers over $10,000, and excessive business losses may also raise suspicions. The CRA tends to audit more tax returns from self-employed individuals and from businesses in 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 they should change what they report on their tax return. It simply means they need to be very well prepared for potential audits.
Focus on Record-Keeping
In the case of an audit, accurate records help your client successfully manage the process. As a regular part of your client interactions and education, it’s a good idea to stress the importance of keeping accurate, well-organized receipts and records.
Suggest your clients keep additional supporting records beyond just ordinary receipts and invoices. If your client claims advertising expenses, they may also want to keep a copy of the publications in which their ads appear.
That way, if the CRA ever questions a particular advertising deduction, the publication can help to back up your client’s legitimate business expense claim.
Recommend Automated Solutions
You may want to recommend specific tools or apps to help your clients with record-keeping. For example, expense-tracking apps ensure your clients deduct all business costs they qualify for, and they also serve as a record if your client faces an audit. It’s a good idea to recommend record-keeping apps that easily and smoothly sync with accounting software like QuickBooks.
That integration cuts down on manual entry of data, which saves your clients time, and it keeps everything in one spot for easy management.
Your clients can also benefit from getting your advice on how to make records more accurate. If your client records expenses months after they happen, you can point out that more timely expense recording helps to avoid errors.
When your clients have lots of employees incurring business expenses, you might suggest an automated workflow that helps eliminate mistakes and expense accounting errors.
Be There for Audits
If the CRA audits one of your clients, being there throughout the process gives them reassurance that can make the process less intimidating. 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, help your client answer questions and field concerns expressed by the auditor.
Letting your client know that audits are just an ordinary part of the CRA’s job can help alleviate anxiety. Explain that the CRA audits many perfectly honest taxpayers in order to find the few dishonest ones. By helping your client prepare, you have the data the CRA wants, and you can help your client relax a little.
You can start by reviewing your client’s bookkeeping and tax returns. This can help identify where your client’s record-keeping may be incomplete or need additional documentation.
For instance, if the CRA questions your client’s home office deduction, you can help them gather documents that directly support that deduction, such as measurements, utility bills, and records of business meetings. Spotting discrepancies before before the auditor does can help you improve the outcome of the audit.
It’s also a good idea to make sure your client comes to the audit meeting with all the usual records an auditor needs, such as bank statements, income records, and balance sheets. Your clients probably know 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.
If the auditor suspects hidden revenue, they may ask to see your client’s personal bank account statements to look for 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 make the process as easy and anxiety-free as possible.
Another way you can help is by acting as a buffer for your client by asking the auditor to provide their questions in writing before the audit meeting. Doing this gives you and your client the opportunity to carefully prepare answers to the auditor’s questions in advance. It can also help your client avoid making unintentional misstatements in the audit meeting.
Advise Clients of Their Rights
Auditors aren’t allowed to threaten taxpayers with gross negligence or civil penalties. Let your clients know this isn’t allowed, and if it happens, help your client contact the CRA and appeal the audit. Taxpayers aren’t always aware of their rights during an audit, so as their accountant, you need to advise them accordingly. If you and your client don’t agree with the auditor’s assessment, you can help your client appeal the audit.
You can help your client by reassuring them of your support, helping them gather necessary records, and acting as a buffer between them and the auditor. Having your client’s records handy can make the process easier. QuickBooks Online Accountant offers powerful tools for accounting professionals. Sign up for free.