The most common tax traps
Keeping audit-ready books, while straightforward, can seem burdensome to produce all the required documentation. Just remember that an audit is the process of eliminating business deductions! There are numerous items and conditions that an auditor will commonly look for in order to catch you. Here are the top Tax Traps that are most likely to trip you up, and what you need to do to avoid them:
Having your GST returns not add up to other records
If your GST return does not match to your tax return, you are dead in the water.
Guessing at numbers
Guessing is sure fire trap, especially if the numbers look phony.
Expenses out of whack with conventional norms.
If for instance your entertainment expenses are high, that is a sure audit trigger.
The tax return numbers story does not make sense to the business codes.
Improper recording of consumable expenses
This is an easy and substantial tax grab for an auditor. Usage tax applies to the routine purchase of such items as consumables and office supplies, as well as the purchase of large fixed assets. Thus, there is the potential for CRA to assess a very large fee. Unfortunately, most people don’t know this until it’s too late. For example; when the auditor has come in, looked at a certain period of time, and then assessed back taxes and penalties retroactively. The only way to fight this is to maintain proper business rational statements to solidify business use tax rational. This is an area where most businesses stumble and fall and provides a lucrative source of revenue for the Canada Revenue Agency.
Exemption and resale certificates
If you don’t possess proper exemption certificates, you can find yourself needing to pay tax on items that you should not have to pay. If the resale certificates are not on file, the auditor will typically determine an error rate and project backwards to assess tax and penalties. If it’s proven that a resale certificate has been used improperly, the penalties can be substantial.
To avoid these situations, companies need an automated process to enforce exemption and resale certificate compliance for each tax jurisdiction in which they do business.
Mistakes happen and certain sales can go unreported. Sometimes even entire divisions get left out in error. The remedy is to rely on systems, not people.
Charging wrong tax rates.
Staying on top of these changes and instituting new rates at the right time is extremely difficult. The only good answer is to have real-time rates applied automatically from the day they are effective.
History of audits and assessments.
Bureaucracies have long memories. Once flagged, and if you were an easy target who did not hire a representative and you just coughed up dough, you will be under the microscope for life and can expect repeated audits.
Most auditors will make note of an error, and you may not realize that you need to make the time and commitment to address your bookkeeping going forward. If you don’t make the appropriate changes, then on a return audit, auditors can easily find the same repetitive infraction and assess penalties on it.
The best defense here is to have iron-clad processes and procedures and good business statement rationals. Adequate documentation makes an audit go much more smoothly, while poor record keeping will prolong an audit and ultimately bankrupt you.
Lacking documentation, an auditor will make a lot of assumptions where the onus is on you to prove the auditor wrong.
The best answer is always to accept that bookkeeping is as much a cost of doing business as gas is a cost of being able to drive an automobile.
The Tax Act has many twists and turns to its sales and use taxes.
Auditors are highly tuned into these, particularly when the rules are new, and are quick to spot non-compliance. Tax authorities often have special taxes that apply to specific goods. There are many food/beverage, gambling, cigarette/tobacco, soft drink, timber, and fuel taxes that can be uncovered during an audit. Tax authorities will also audit specifically for these types of taxes from time to time, which can open you up to a full-blown tax audit.
Sales tax accruals
Many companies don’t properly remit the sales taxes that they have collected. An auditor will look at federal tax returns, the general ledgers, invoice register, actual invoices, sales journals and summaries of sales by province to identify errors and omissions, and will then use the the number that provides the best assessment revenue for them. The best advice here, is to do the same thing yourself. You must keep audit-ready books.
The buying or selling of large assets will catch attention… e.g. was capital gains calculated, and was it reasonable to the situation.
A business acquisition can often mess up your accounting when it comes to sales and use tax compliance. You need a solid audit trail.
There is always the issue of previous tax liability: when you acquire a company.
As a result of CRA requiring eBay to release data to the taxman, demonstrates that you better treat your Internet the same as the rest of your business when it comes to bookkeeping.
If inventory shrinks out of reason, it will draw attention.
Business Activity Questionnaires
Any form you fill out and give to a government auditor carries the risk of an audit. Before sending in forms to the government get good advice.
The only good answer is to have real-time rates applied automatically from the day they are effective.
The recommendations for avoiding these tax traps are just a matter of using common sense.
You either need a highly skilled bookkeeper (not just someone who can do data entry) or you need to hire a professional bookkeeping service.
As a business owner, you need to do your part in the record keeping. You need to record business rationales for your bookkeeper.
You and your bookkeeper need a good working relationship with your tax preparer. Always remember that old saying of “garbage in is garbage out.” No tax preparer can do a proper tax return without first having proper bookkeeping.
Yes, good bookkeeping costs money, yet despite the economic reality, businesses cannot afford to simply roll over and let the auditors eat them alive. It is possible to protect your business from non-compliance and audits without breaking the bank.
THE BEST DEFENSE IS ALWAYS A GOOD OFFENSE and your best offense is truly audit-ready bookkeeping.