Getting caught in a Canada Revenue Agency (CRA) audit is rarely pleasant, but the threat of both increased scrutiny and harsher treatment for small- and medium-sized businesses at the hands of CRA auditors is very real.
CRA calls businesses with revenue of less than $1 million, small enterprises, and those with revenue of less than $250 million are called medium enterprises.
CRA Increases Audits on Small and Medium Enterprises
CRA found the small and medium enterprise (SME) sector prone to a lot of non-compliance with tax legislation. Included in this category are self-employed people, small- and medium-sized corporations, partnerships and trusts.
CRA doesn't put much emphasis on sales and expense records of SMEs because of a perceived lack of sophisticated internal auditing controls compared with those in larger corporations. This is particularly true of businesses where cash transactions are common and total sales are under $1 million.
Auditors Armed with Aggressive Auditing Techniques
The auditors are trained on a multifaceted audit tool called indirect verification of income (IVI). IVI is designed to compensate for the perceived lack of internal audit controls in SMEs.
IVI uses techniques, such as:
- Net Worth Assessment
- Third-party Information
- Sales Projections Based on Key Input Costs
- Bank Deposits (including a review of personal bank and credit card accounts for all family members)
- Comparisons of Household Budgets to Statistics Canada Data
By eyeballing business and personal assets, as well as the flow of funds between various accounts and family members, CRA can estimate what it believes to be the business’s true taxable income level.
Getting Ready for a CRA IVI Audit
To prepare for a CRA IVI audit:
- Notify your tax preparer or accountant to arrange qualified representation at the audit
- Keep copies of all personal bank, investment, RRSP and credit card statements for you and your family together with your business records
- If asked to authorize a check of bank and loan records and safety deposit boxes, do so, but scratch out the line indicating you will pay for service charges.
All our Members receive audit protection. If you're ever audited or challenged on a tax return prepared by FBC, as a Member, we'll represent you - all the way to Tax Court if necessary. And, we'll cover the court costs and legal fees.
Are you prepared for an audit?