Audit Proof Your Business

Making a simple oversight on a tax return is very easy to do, and almost everyone probably has at one
point or another, however, the consequences of such oversights can be costly. Take for instance, the
case of an upstanding restaurateur who sold some old, unused kitchen equipment to a friend who was
looking to set up his own business, but subsequently forgot to include that sale on his tax return. Just
his luck, that year the Canadian Revenue Agency randomly picked his return to audit. After a series of
visits by the CRA, the overlooked sale was discovered. To add insult to injury, the CRA kept returning,
digging ever deeper, forcing the restaurateur to account for years of past wages, interests, dividends
and deposits. This scrutiny can, and often does, go on for years.

Negligence due to error, is the number one reason returns are audited. Small business operators’ and
entrepreneurs’ tax returns are especially heavily screened by the CRA. They are also the ones who
can least afford the time, stress and distraction CRA audits can bring so it’s worth while to take the
precautions needed to file an audit-resistant return.

Audit-proofing your return does not mean to play it safe. On the contrary, you should claim every
deduction you are legally entitled too. You work too hard enough for your money, to be giving it
away unnecessarily. Nor should your tax strategy ever be based on fear. It should be based on sound
business practices. Reporting all income, documenting expenses and evaluating loses help the business
person maintain vigilance against an audit – vigilance that should continue throughout the year.

Here are 10 tips to help you avoid an audit.

Most audits are caused by a mismatch of information between the various slips and the main tax
form. There’s no more sure-fire way to get yourself audited than by making sloppy mistakes or leaving
unanswered questions. It’s even easier for the self employed who have so many items to claim. Take
the time to double check and ensure everything balances.

In a case where you disagree with an amount stated on a slip, bring it to the attention of the slip’s
provider and have them reissue the slip, rather than making note of the error on your tax form. If they
refuse, then reflect the slip amount on the tax return and attach a note stating the mistake made on the
slip.

The CRA is especially watchful of undeclared income when it comes to small business operators, so be
careful not to give them anything to question. Declare all income, and the CRA defines ‘All’ income
as ‘All’. For example, if the above restaurateur entered his business in a food contest and won a cash
prize, that’s still compensation that must be declared.

Don’t wait for the CRA to question you about oddball amounts. Give details. Add a sticky note, a
photocopy of documents or receipts, write explanations. Rarely will a highly detailed return be audited.

Don’t try to include unjustifiable losses, deductions or expenses. Declared everything you’re entitled
too, don’t let fear of an audit deter you, but make sure you can support the claim. For example, if you
decided to start a web-based business, made one sale in the first year and then moved on to other
things, yet you continue to write off servers, the IP address, and your merchandise for years afterwards
you can bet that will be sure to raise some eyebrows at the CRA. If you are not actively working on a
side or hobby business, don’t keep claiming as you are.

Keep impeccable expense records. While it may be a struggle for you at first, get yourself into the habit
of documenting all your business related expenses, keeping receipts and recording everything in detail.
One of the biggest struggles for small business owners during an audit, is dealing with the aftermath of
having kept poor records.

Automobile claims are a typical case. You may use the vehicle 80% of the time for business matters, but
once it is used outside of work, you need to have detailed records of when and how much, otherwise it
will be impossible to support your claims.

Entertainment claims are another sticking point with the CRA. Heavy Entertainers must be sure to keep
all receipts and document the when, where, who, why and how. So instead of just showing a couple of
tickets to a hockey game, you can show you took Heather Rice to the game prior to her acquiring your
services.

Take a second look at your expenses and claims, looking at it from the eyes of the CRA. Do the claims
seem consistent for the line of work you do. For example, if you have a chain of stores on both coasts,
then it’s reasonable you may have needed to fly a business affiliate over to Vancouver, however if you
own a small town convenience store, that same expense claim is going to require sufficient explanation
in order to avoid drawing unwanted attention.

Another typical mistake, especially for new business owners, is in not having a clear delineation between
business and personal matters. Take for instance a case where your business income goes into your
personal bank account. If audited, you may suddenly find yourself having to prove that the $4,000.00
gift from your elderly Uncle, wasn’t business income.

The home office claim is always a Red Flag for the CRA. Be sure you are clear on the rules regarding
home offices before claiming for it. Always maintain clear and sufficient records to support the claim.
If claiming home office expenses will give you deductions of $250 but you have poor records to support
your claim, you are probably best to not include it. For example, if the CRA asks for a receipt for the
home computer and discovers you purchased games along with it, you will suddenly be required to
make some uncomfortable explanations.

Audit proofing your return does not mean you should put in fewer deductions out of fear of being
audited. You should make every possible deduction you are legally entitled too, so you can have as
much of your hard earned cash back as possible.

If you’ve kept proper records and have taken the time to note all the oddball or eyebrow raising
deductions, chances are you won’t be audited, and if you are, you will be well prepared to go through it
with minimum fuss.

Whatever you pay in taxes, is money taken straight out of your pocket. Your tax return is your chance
to regain as much of your well deserved income as possible. Think about what you could do with that
extra money. Maximizing your return is not something you should be thinking about once a year, but
instead keeping as an eternal mindset, making everything you do tax-efficient and tax considerate.
Anytime you spend money, you should be aware of the tax ramifications – Buying a house? Getting a
divorce? Sending the children to camp? Hiring a babysitter? They all have tax ramifications. For tax
purposes there’s always a right way and a wrong way to go about doing things. The right way can save
you hundreds of dollars.

Using the above strategies will benefit you several key ways:

You will find you are taking deductions you never even considered taking before.

You won’t be afraid to take deductions, as you know you can back them up.

In the event you do get audited, you are set up to win and won’t be paying penalties and back
taxes they might have otherwise hit you with.

In case of an audit, you will be fully prepared for it and it won’t be a huge draw on your time and
energy, allowing you to instead focus on your core responsibility of running your business.

Best of all, it will give you peace of mind. Knowing that you have maximized the amount of
money being returned to you without having to worry about being ‘caught’ somehow for doing
so.

There’s an old Wall Street adage that goes, “If only I had tomorrow’s Wall Street Journal, today.” In the
same vein, many tax payers have come out of an audit wishing, “If only I had known yesterday, what

they were going to be asking for today.”

As business tax matters can be complex and constantly changing, it’s important you keep yourself
educated and up-to-date on what’s allowed or isn’t. Alternatively, allowing a certified tax professional
to handle your returns will ensure you receive maximum return while maintaining peace of mind.