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How to Prepare for Payroll Tax Audits

Which would you rather endure: a visit to the dentist or a payroll audit? If you chose the dental visit, you’re probably not alone. But an audit can be pain-free if you’re properly prepared for it. Here’s how to make your business audit-ready.

Understand How Accounts Are Chosen for Auditing

The Canada Revenue Agency (CRA) reviews every individual file for errors and omissions. But being chosen to be audited doesn’t automatically mean the CRA thinks you’ve done something wrong. The larger purpose of the CRA’s auditing process is to ensure their systems and procedures work as they should and to encourage tax compliance.

To these ends, files may be chosen for audit due to information provided from outside sources and federal investigations, but it’s also possible to be chosen at random. Your company might be on the CRA’s computer-generated audit lists, or it might be chosen because you work in a particular industry. It may just happen to be the year that the CRA decides to audit shellfish harvesters, for example.

Understand the Payroll Auditing Process

If your payroll account is selected for auditing, expect to hear from an auditor. The auditor arranges for an audit to occur either at a Canada Revenue Agency office or your place of business. In either case, the auditor wants to examine your business records, including:

  • Ledgers
  • Journals
  • Bank accounts
  • Sales invoices
  • Purchase vouchers
  • Expense accounts
  • Payroll deduction remittances to the CRA

When the audit is complete, the auditor lets you know what adjustments need to be made to your return(s), or they inform you that no changes are necessary. You discuss any adjustments with the tax auditor or request some time to analyze them. An audit usually takes one to two weeks.

Speed Up the Payroll Audit with Preparation

The best way to prepare for an audit is to ensure your business records are complete, organized, and accessible. If an audit is being done in a CRA office, an auditor usually requests specific records, such as payroll information. Having all your records relating to payroll organized and up-to-date makes it much easier to find what the auditor asks for. Efficient payroll software will be handy in this case.

If your payroll audit is going to take place at your place of business, be sure to set time aside to discuss your business with the auditor. The auditor is also likely to want to tour your business premises in addition. Set aside an office where the auditor can work, preferably with convenient access to the files they need to conduct the audit. If you don’t have an office available, at least provide a desk with some privacy.

Make your employees available to provide information and assistance, and encourage them to respond quickly to all the auditor’s requests. The auditor may have questions related to their employment or the way you conduct your business. Speak to your employees ahead of time, let them know about the upcoming audit, and request that they cooperate fully. If you feel defensive yourself or worried about undergoing a CRA payroll audit, don’t let this attitude seep into your working relationship with the auditor. Remember, the role of the auditor is to figure out the amount of tax or duty that’s owed. In some cases, the auditor may discover that you’ve overpaid and are actually due a refund. Be cooperative during the audit for the best results.

QuickBooks Online can help you maximize your tax deductions. Keep more of what you earn today.

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