December 31, 2009 by Dan White.

The most common tax traps

Keeping bookkeeping audit ready while straightforward it feels quite burdensome to produce all the required documentation. Just remember that an audit is a process of elimination of business deductions by auditors. 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 consumption 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 supply, as well as to 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.

Unreported sales.

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.
Unique rules and regulations.

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 their 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 bookkeeping.

Assets.
The buying of selling of large assets will catch attention… E.G. was there 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.
Internet sales.
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.
Inventory shrinkage.
If inventory shrinks out of reason, it will draw attention.
Business Activity Questionnaires.
Any form you fill out and give to a government auditor is a risk of an audit. Before sending in forms to the government get good advice as to best package information.
Summary:
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 cost 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.

If you are being audited, be sure to understand that you need to have someone prepare your books and records in a way to protect your best interests.

To learn more, go to www.taxauditsolutions.ca

Give us a phone call at 905-668-4816 or email info@tax-audit-solutions.com

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December 31, 2009 by Dan White.

What you need to know about Tax Audits for the New Year 2010.

Times are tough; money is hard to come by. Small business knows this fact very well. So too does the tax departments of the world. CRA being in a cash crunch has targeted small businesses with a never precedent aggression. They want to do audits NOW! They don’t want the audit delayed. Delaying an audit only delays their cash flow.

CRA has a new level of aggression. Auditors pushed by team leaders are forgetting about the taxpayer’s bill of rights, the charter of rights and often the laws of Canada.

There used to be good concern for not getting audited, because the accounting industry is stuck in the Accounting Stone Age. Using generally accepted accounting principles, which often translates to a process of accounting for accounting sake and not for practical and logical reasons.

Accounting is done to track every financial transaction and how it relates to business. It is done so tax returns can be done and most importantly to be ready for a audit. Interestingly enough the most important reason is pretty much ignored. When an audit happens there is a panicked scurrying around, following the pages of audit requirements given by the auditors.

Auditors requests are pretty much standard across the board. So why is it that the statement is true but accountants and bookkeepers don’t just follow CRA audit requirements as a standard practice? The answer lies in tradition, a dumb tradition that has outlived its usefulness.

In an audit, the auditor will typically look for the following data.

Copies of previously filed sales/use tax returns with any related reports or work papers used to fill them out.
Detailed general ledgers and a chart of accounts.
Sales invoices.
Resale certificates and exemption letters collected.
Federal and Provincial Income Tax returns for the years under audit.
All purchase invoices.
Cash disbursement journals or check registers.
Asset depreciation schedule or fixed asset schedule.
Bank statements and cancelled checks
Cash register tapes.
Copies of Contracts.
Copies of lease agreements.
Articles of incorporation.
A business description.
A description of who does what.
All bank statements, both personal and business.

All the above CRA Audit documentation requires an audit trail.

In order to keep audit ready books, we had to develop our own software and procedures. Now begins the difficult task of reprogramming bookkeepers and auditors to understand that if books are kept audit ready, it then solves all the other requirements of good bookkeeping.

We enter the year 2010 knowing the following there will be more audits and we can expect the following:

1. CRA is ferociously aggressive in their desperate drive for tax dollars.
2. They are using Bedford’s laws… a mathematical analysis of probabilities of tax cheating based on the numbers in a tax return.
3. They have new data mining software that matches information from various sources back to tax returns that have been filed.
4. CRA continues to hire more auditors so that they can collect more money from a smaller source amount.
5. The transition to HST is triggering a 4 year window for Ontario and BC to backlog Retail Sales Tax audits.
6. Tax Audits are now being automatically generated by computers.
7. The bookkeeping by small business has been dismally bad, so they are going to fry this year.
8. The recession has made things a double bladed axe. Cash Flow Problems and CRA Cash Flow problems. This year will be a brutal tax audit season.
9. For your business you need to understand that CRA view you and your business as a cash flow revenue stream.
10. It is going to be a dirty year and small business needs to clean up their act.
11. Any business that files a tax return based on non-audit ready books is going to fry in an audit. I recommend having your bookkeeping redone to audit ready status. Pay me a little now or pay me a lot later. Those are the only two choices left on the tax man’s chopping block. The axe will fall on those who ignore this wisdom.
12. With lead sharing between government agencies, and the requirements to register for numerous government bureaucracies many more new audits will be triggered.
13. For every corporation formed, there is a new audit target established. Being incorporated is a very questionable activity for small business that does not have a big net income. Incorporation’s appear bigger, and the bigger they are the harder they flop.
14. Birds of a feather mining… if your clients or suppliers are getting audited this puts you on the radar for a relational audit.
15. Higher gross sales make you a bigger target, regardless of your net income.
16. Auditors and CRA investigators are trained to have their antennas up… just dealing with an off duty auditor could trigger an audit.
17. If a revenue department falls short of their revenue quota there will be a scramble to audit a lot of businesses to shore up the team performance records.
18. CRA auditors are now doing drop in visits to businesses, under the guise of being helpful, they are really looking for cues to justify an audit. I know of one picture framer who ended up going bankrupt following a drop in audit. He talked too much and caused himself a terminal problem. Friends drop in, so do enemies.
19. Bureaucracies have the memory of an elephant. Once flagged, you are under the microscope for life and can expect repeated audits. If you don’t have audit ready bookkeeping when you are audited, you have a Tax disease for life. And you have to fight like hell to keep your dollars so you are not seen as a willing victim.

This is the year to enter it ready for an audit. Also a year to await the three year statute barred window for sloppy past years tax returns. Each year you can breathe a sigh of relief as the three year danger zone decreases by a third.

The days of being able to be a sloppy bookkeeper are over. If you don’t have the time to do good books and can’t afford to hire a professional bookkeeper, your days in business are numbered. It is just as simple as that.

 To learn more about audit ready bookkeeping, contact www.taxauditsolutions.ca or email info@tax-audit-solutions.com

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