Posted on Mar 25, 2014
One of the nightmares for every small business owner is getting that letter in the mail, or that phone call telling them they’re going to be audited.
Fear and panic will be your first reaction; a slew of four letter words will come next, followed by the temper tantrum! Let the whining begin!! WHHHHHHHY MEEEEEEEE??????
When your day comes,
and it will…
Take a breath
Don’t assume the worst
If you have an accountant or bookkeeper, get them involved immediately, misery loves company. Besides, they’ve probably been through it before; they’ll know exactly what to do. If you don’t use an outside source, you’re probably more familiar with your own paperwork and numbers, so you’ll do just fine.
Why does the government conduct audits? Well, they want to make sure you are paying the right amount of tax, ensure you can backup your numbers with the right paperwork, and confirm your numbers tie to what you reported. Think of an audit as validation that you are doing things right.
So, what if you’re not? An auditor is bound to find something wrong, you won’t be perfect. You’ll find out where you are making your mistakes and be shown how to correct them. Will it cost you some extra bucks? Sometimes! And as an added bonus, assessed amounts owing will have interest and penalties added to them. Oh joy! But sometimes, an understanding auditor might choose to overlook some inadvertent items, based on materiality (small amounts, not “material” in the grand scheme of things).
Audits can be performed in one of two ways, via a desk audit, or a field audit. A field audit is when you have an auditor come to your place of business. A desk audit is less formal; you send copies of all your backup documentation to the government, and they review it in their office. Any questions that arise are handled over the phone. Do you get to choose what type of audit you’ll receive? Nope. Nice try though.
Your audit notice will tell you the type of audit, and which years are being reviewed. Your responsibility will be backing up the numbers that were reported. Remember, it’s up to you, the business owner, to ensure the correct amounts are reported, you can’t blame a third party for filing incorrect information.
The scope of work will determine how long the audit takes. It could be anywhere from a few hours, to a few days, to a few weeks. It also depends on your auditor’s schedule as they typically have multiple files open at a time.
The notice will also include a list of the backup documentation that the auditor wants to see. This could include copies of your financial statements, bank reconciliations, customer, supplier, and expense invoices, shipping & receiving documentation, payroll records, journal entries, and detail behind the balances in your general ledger. Make sure this information is neat and organized when you hand it over to the auditor. Messy unorganized backup could mean lost deductions, resulting in money owing.
If you receive notice of a field audit, you will need to contact the auditor to arrange a time for the audit to begin (never is not an option). They are usually quite flexible with their schedules and will do their best to accommodate a time that will result in minimal disruption to your business. I recommend scheduling a time sooner rather than later. The sooner it starts, the sooner it’s over.
In the event of a field audit, resist the temptation to stick the auditor in the worst possible place in your building. I had to go through a GST audit several years ago; picture this…the guy that showed up was over six feet tall, had fairly broad shoulders, and was dressed in a nice suit. At one point during his career, he had to audit a bakery. The owner of the bakery was less than thrilled. On day one, the auditor was taken to the kitchen area; the owner grabbed a couple of plastic milk crates and a piece of plywood covered in flour…..the plywood was placed on top of the crates…presto…instant desk. The owner then grabbed another milk crate and flipped it over…presto…instant chair. (Can you picture a guy over six feet tall sitting like this? His knees would have been up around his ears!!) During his stay, the business owner was grumpy and rude; the end result – the auditor scrutinized EVERY piece of paper. This kept him there longer and resulted in him assessing EVERY last penny possible, items he typically would have overlooked, he didn’t.
So, here’s some advice, do what I did for every audit, provide the auditor with a good working environment.
Here are some more tips:
- Clear part of your schedule the day the audit begins
- Offer a tour of your place of business
- Introduce them to all points of contact
- Provide a large table or desk so they can spread out their paperwork
- Provide a comfortable chair
- Provide a clean well lit area for them to work
- Point them in the direction of the coffeemaker and restrooms
- Answer all questions honestly
- Have the requested paperwork neat, organized, and ready to hand off
- Set time each aside day to answer their questions
Once the auditor has concluded their work, they will advise you of any changes to your file. They will review the list of proposed adjustments (including interest and penalty charges), and answer any questions you may have. If you feel you can provide additional material that will alter their findings, you will be given time to do so. If they deem your new information to be suitable, they will make an adjustment.
Corrections to your file will be formalized in a Notice of Assessment or Notice of Reassessment. Any balance owing is due immediately; unpaid balances accumulate daily interest charges.
Should you disagree with the assessment you can file a Notice of Objection provided you do so within the proper timeframe. Once a notice of objection has been filed, a review of your case will take place (DO NOT use this avenue as a stall tactic as interest will continue to accumulate on the unpaid balance). If the objection is unsuccessful, and you still wish to fight, there are other avenues available. Ask your accountant or lawyer for assistance beyond this point.
Run your business as if you’re going to be audited someday. Keeping an accurate, honest set of books means you won’t have anything to stress about when you do get that phone call or letter.
Happy Auditor = Happy Boss.