In a provincial tax audit, the Saskatchewan Minister of Finance examines a business’ financial records to ensure the business has reported and paid taxes correctly. Though businesses can take several steps to lower the chance of a business audit, they can never eliminate it. If you are an accountant or bookkeeper for a business that has been selected for a Saskatchewan tax audit, here is what to expect.
Reasons for an Audit
All Saskatchewan businesses must pay provincial taxes on applicable sales, as well as on the equipment and supplies they purchase or lease for their own use. To ensure that businesses are paying what they should, the Minister of Finance audits many companies each tax year. While reasons for sales tax audits may appear as varied as snowflakes, a business may be more prone to a tax audit if:
- It has been audited before and significant errors were found;
- It operates in a high-risk industry. Restaurants, the trades or other cash-based business fall in this category;
- It claims an excessive amount of tax-exempt revenue relative to taxable sales;
In addition, tax authorities are taking steps toward verifying transactions conducted via third-parties such as PayPal, and this means your clients that run an online business could find themselves under the tax agency’s magnifying glass. Lastly, while tax audits might be triggered by shady or careless actions by the business, sometimes they’re completely random. In a typical year, the Minister picks a specific number of businesses to audit from each industry. Even if a business has dotted all its i’s and crossed all its t’s, and turned in a pristine tax return, a chance exists that its number could come up.
What Happens During an Audit?
First, the business receives a letter or a phone call from an auditor that it has been selected for an audit. The auditor lets the business owner or person of record know what paperwork will be reviewed. During the audit itself, the auditor examines the business’ financial records for the current year and the two years prior. The auditor is looking to verify the following:
- The business properly calculated and applied taxes for all sales of goods and services;
- The business paid all applied taxes on time;
- For taxable purchases and leases, the business properly calculated all taxes due and paid them;
- The business correctly calculated, applied, and paid all taxes due on manufacturing labour;
- The business properly accounted for taxes on any fixed assets it acquired in the given year.
If everything checks out, the process ends there. However, if the auditor finds the business underpaid, he sends an Assessment Notice, an official form detailing what was found and how much the business must pay to satisfy the alleged tax deficiency. Typically, the business has 30 days from the date of the notice to pay the assessment, after which interest and penalties could accrue.
Records to Make Available
A tax audit is like a root canal; try as you might, you can never make it pleasant. But you can speed the process along and make it less painful by having the proper records available, such as:
- All financial statements (e.g., balance sheet, income statement);
- Up-date-accounting records, including the general ledger and any other journals (e.g., sales journal);
- Source documents (e.g., invoices, bank statements, cancelled cheques, purchase orders, contracts);
- Any document or correspondence regarding a tax issue.
The more thorough these records and the better they are organized, the smoother you can expect the audit to go. This is why it’s worth your time to take a day or two before the audit to be meticulous about gathering and assembling records.
Ideally, the audit ends with no issues found, and both you and your client can move on. But if the business receives an assessment notice, it’s important to address it quickly to avoid late penalties. Your client can appeal it or simply pay the amount due, which consists of the taxes the auditor claims are owed, plus:
- A 10 percent penalty if the taxes were never collected from the customer;
- A 25 percent penalty if the taxes were collected from the customer but not paid;
- A 100 percent penalty if evidence shows the business willfully failed to pay taxes;
- Interest assessed at the prime rate plus 3 percent, starting from the date the taxes should have been paid.
In rare situations, the Minister of Finance waives the penalty or interest or both. For instance, if you or another key member of the accounting staff had an unexpected absence due to illness or injury, causing your client’s books to become disorganized, the Minister might consider forgiving some or all of the interest and penalties.
What Happens Next
In most cases, your client pays the assessment and moves on, ideally with a commitment to update record keeping to avoid another such incident in the future. Occasionally, though, a business discovers new records or new information proving that its assessment should be reduced. If this happens, you should contact the auditor immediately on behalf of your client and explain the situation. The auditor can review the information, and ideally, make an adjustment to what the business owes.
A tax audit is never fun or pleasant, but when you work in accounting, it is a fact of life. By being prepared and knowing what to expect, you can make the process as painless as possible for your clients.