Few words strike fear into an entrepreneur's heart more so than the word audit. Many of us dread the day we get that letter, phone call, or (even worse) surprise visit from a representative of the CRA or IRS. Thankfully, here are five things you can do to greatly reduce your chance of receiving one of these impromptu visits.
1. Track every penny
The most important thing to do to avoid an audit is track every penny in and out of your small business. This leads to accurate reports and means you'll be paying the correct amount in taxes. Also, this means that you won't show erratic changes in your financial statements each time you remit. Wild changes in income and profit from month to month usually send up red flags in IRS or CRA systems.
2. Keep everything
Don't rely on the line items on your bank statement as proof of purchase. If the CRA or IRS ever asks for proof on something you submitted, having quick access to that receipt will keep them from wanting to dig deeper. And don't forget, digital copies of invoices and purchases are just as good as paper, so you can remain compliant without filling your office with shoeboxes full of crumpled receipts.
3. Review, review, review
You will have to send off all sorts of returns, reports, and remittances to the government. Don't just select the right reports, print, and send them off blindly. Take the time to review them yourself before they get sent off. A small data entry error may result in an inaccurate report showing you owe far more, or far less, taxes than last time. Unusual changes like this can attract unwanted attention from auditors.
4. Pay on time
This may seem intuitive, but make sure you pay all of your taxes on time, every time. When cash flow is tight, we can get in a habit of making payments late. Paying your phone bill a couple of days late isn't the same as being late on your taxes. Not only does the government charge high penalties, it also flags your account, which can come back to haunt you in the form of an audit later on down the line.
5. Answer your phone
Nothing makes the CRA or IRS angrier than people who screen their calls and don't return their messages. Personally, I have yet to work with a government employee who wasn't understanding and accommodating. If you can't pay your bill in full, chances are good that you'll be able to arrange a payment plan. However, this is only a possibility if you give them all the information they ask for, and give them plenty of warning if something is going to change.
While these tips can help you avoid an audit, they are also very useful if you are being audited. An audit doesn't have to be the end of your small business as you know it. If you have organized records, a bit of patience, and open lines of communication with the auditor, you should be just fine.
Based in Alberta, Canada, Eric Matthews is That Bookkeeper, a professional bookkeeper specializing in home and small business bookkeeping, consulting and tax preparation service for small businesses. Eric also operates the bookkeeping blog ThatBookkeeper.