Preparing for an Audit
Preparing for an audit is much easier than it sounds. If your taxes are indeed accurate, then you have nothing to worry about – unless you can’t prove that they are. Keep receipts and documentation organized and on-hand. If you can’t prove it, don’t claim it.
Here’s what the auditor will look at:
Income – CRA will compare the amount you reported with your bank statements and deposits. They’ll also look over your sales records, receipts and invoices. It is in your best interest to keep a written record of any money you received as a gift. Without proof, you may find yourself paying tax on them.
Interest and loans – When the auditor comes to visit, they will want to look over all of your loan paperwork, including deposits, bank and credit card statements, cancelled cheques and receipts. This is especially important if you own a small business, as you can deduct interest on business-related loans.
Payroll – Regarding payroll, auditors will examine everything, including:
Cancelled checks, tax returns, deposits, business records, any records showing provincial, federal and social security withholding, medical expenses, ta earned, compensation, advances and bonuses paid to owners.
Expenses and deductions – This section is carefully watched by CRA, especially if the numbers change substantially from year to year. Be sure to keep a log of travel expenses, meal and entertainment expenses and business expenses – and make sure that they’re legitimate.
Other – If an auditor comes to inspect your business, they will likely look into your personal finances as well. Be prepared to show documentation for both.
The auditor will likely compare your lifestyle to the income you presented to determine whether or not the two are compatible.