Tax Return Audits. What do these actually look like?

[treadstone68]

I've read a few posts here that talks about some sellers getting auditted, but it doesn't really go into details.  What does an audit actually look like.  Do two men in trenchcoats show up at your door like in the movies?  Or is it as simply as a letter saying you need to provide proof/receipts for "X, Y and Z"?

While I'm here,  also would a bank account with a few thousand dollars moving in and out (while the balance slowly rises) trigger an audit, or does the TaxMan only have visibility of interest earned on that account? I have a side hustle where I consign items for people, so once in a while $1500 could come into my account, but later $1450 is sent out to the consignor (original item owner).

[recped]

First you get a phone call (or maybe a snail mail letter).

First step is usually a bunch of questions and then if the auditor decides they want to see all your documentation they will show up at your door.

They will want to see some or all of your bank statements, sales records, purchase records, expense records etc. Usually they would inform you in advance of the specific information they will want to see. If it's a thorough audit they may want all your records from the past 7 years.

They will park themselves in your "office" (or kitchen table) for a couple of days or a couple of weeks looking over all your paperwork and then ask many questions about anything they can't figure out on their own.

It's not a pleasant experience!

GST audits are similar but they will only want documentation on the amount collected and the ITC's claimed. If you are not registered for GST then this type of audit isn't likely to happen.

They also do audits on Customs matters to ensure they were properly declared. If you do not import goods related to your business then this type of audit isn't likely to ever happen.

[sin-n-dex]

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@treadstone68 wrote:

I've read a few posts here that talks about some sellers getting auditted, but it doesn't really go into details.  What does an audit actually look like.  Do two men in trenchcoats show up at your door like in the movies?  Or is it as simply as a letter saying you need to provide proof/receipts for "X, Y and Z"?

While I'm here,  also would a bank account with a few thousand dollars moving in and out (while the balance slowly rises) trigger an audit, or does the TaxMan only have visibility of interest earned on that account? I have a side hustle where I consign items for people, so once in a while $1500 could come into my account, but later $1450 is sent out to the consignor (original item owner).

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I'm going through an audit next week (and can let you know what they ask). It started with a letter asking for receipts to substantiate deductions. This is for a LLC, not my own personal taxes, so the request is different, I'm part of this because I'm their record keeper and had to provide receipts (and may need to answer specific questions or dig stuff up during the call, the audit is occuring over a MS meetings call).

They will review what's submitted and come back with further questions. We are eligible for the SRED tax refund and have made major changes to how we operate the LLC, so it's leading to questions to find out why these changes were made.

Anyway that's the best I can do for telling you what happens during an audit, it starts with providing receipts for specific things.

C.

[sin-n-dex]

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@recped wrote:

First you get a phone call (or maybe a snail mail letter).

First step is usually a bunch of questions and then if the auditor decides they want to see all your documentation they will show up at your door.

They will want to see some or all of your bank statements, sales records, purchase records, expense records etc. Usually they would inform you in advance of the specific information they will want to see. If it's a thorough audit they may want all your records from the past 7 years.

They will park themselves in your "office" (or kitchen table) for a couple of days or a couple of weeks looking over all your paperwork and then ask many questions about anything they can't figure out on their own.

It's not a pleasant experience!

GST audits are similar but they will only want documentation on the amount collected and the ITC's claimed. If you are not registered for GST then this type of audit isn't likely to happen.

They also do audits on Customs matters to ensure they were properly declared. If you do not import goods related to your business then this type of audit isn't likely to ever happen.

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Parking in my house won't be a great idea, almost all my records are electronic. I have something like 1500 sales records for my business (showing proof of amount paid on each order and where I shipped it, in the event of a GST/HST audit where taxes were not remitted).

In the audit our LLC is going through we submitted receipts through the portal and will answer questions on a MS Meetings call.

C.

[fatdane · Accepted solution]

Over the years I have been audited for income tax 3 times, 1st in the early 1980's, second in the 1990's, last one around 2010.

First there is a snail mail letter, then a time for the ausitor to show up is arranged, normally by phone. In all 3 of my audits it was just one person that showed up. The 1st audit was lengthy and painful, the second saw no changes although the auditor did fine a few mistakes but it affected both sales and expenses so he was not goingto waste time recalculating things. The 3rd auditor had been told to spend 80 hours on me because I was a power seller and CRA wanted to develop programs for auditing power sellers.

When the 3rd auditor showed up he had a laptop with all my Ebay sales information, and he went thru my books to ensure that I had reported all my eBay sales. He also looked over my other selling venues and my other business ( Owning a taxicab). After 4 or 5 days spent on a rickety table in my basement office he asked if he could finish in his office and I gladly agreed to that. He came back 3 or 4 months later to return the records  he took with him and with a few questions. I managed to answer the questions to his satisfaction and that ended things.

If you are audited don't be a chatty Kathy. Answer the auditors questions if you can or refer him to your accountant.  Don't talk about your business and the way that you operate it. They listen and remeber what you have said. In my case I think early on he realized that my books were honest, and he also commented that the expenses of selling online were higher than he expected. When I asked if I could set up a company  in Luxembourg to avoid GST/HST as Ebay did at the time he was not amused( the devil made me ask) .

I hope that I will not be audited again before I shuffle off to eternity, but there are  worse things than an audit. If you do get audited hope that the auditor is middle aged or older and knows the real world. New auditors can be a pain in the backside.  Most important thing - don't try to hide any sales. 99 44/100 % of sales today are electronic and CRA can find them. Don't try to expense things that make on sense to running your business, ie if you are selling auto parts don't expense a trip to Cancun with your spouse.

[reallynicestamps]

A friend and customer was being audited as part of a court case over a business partnership, and as one of his suppliers ,we had two agents turn up without notice on our doorstep at dinnertime one evening.

They wanted to see any financial records we had.

I showed them three bankers boxes of assorted paperwork, mostly household, a few from DH's business , that were in the basement, and told them they could check his home office too, but that there probably wasn't anything there.  They took the boxes and returned them many months (possibly over a year) later.

The only problem was that my sister and her then husband were visiting at the time .

Fortunately, the ex-husband is an accountant and assured us that this happened to his clients all the time.

Which now makes me wonder about how good an accountant he was.

[regs43]

I was audited for GST/HST last year.

Lady called to inform me I would be audited, triggered becasue I sell 99% on ebay and collected $182 in tax for a large amount of sales and wanting a large refund. Then she uploaded the letter to my CRA email with the documents I needed to provide. I had 30 days to reply with the info it asked for.

She called back a few weeks after I uploaded my documents to say what i provided was good and I was getting my refund. Got the refund in like 3-5 weeks.

Thankfully wasn't that bad, still nerve racking and I didnt sleep well for a while as I was worried I made mistakes etc (I made a small one that didnt affect anything that she cared about). I will be pulling out the info asked for last year when I do my taxes soon so I am ahead of the game, as I fully anticipate im on the radar for a while.

[motomike_canada]

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@fatdane wrote:

New auditors can be a pain in the backside. 

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can confirm lol...  

I made sure to return the favour, once it was over. 

[motomike_canada]

On the flip side,  I've been called by CRA 2 or 3 times with questions about my GST/HST file and ITCs etc.
Each phone interview was very professional, and on one call we discovered a mistake I had been making, which was  a difference in understanding so he explained their position, and told me to correct it going forwards but he had no interest in persuing it further than that.   They're not all robots. 

[fatdane]

I have lost count of the number of times that CRA has called about GST/HST, especially when CRA should be sending me money.  When I explained that most of my sales were to collectors outside Canada they were content . One auditor did ask me what the breakdown of out  of Canada sales  vs Canada sales was and was content when I gave her the figures. The GST/HST people have only contacted by phone, and never wanted to come to the office.

[treadstone68]

Ah... SRED....   I worked in Tech and the only reason we had to keep timesheets (for a salaried position) was they were required by SRED.

[treadstone68]

I'm pretty sure Ebay collects GST on your behalf now, even if you are not registered under GST (my sales are well below the $30,000 threshold).  

[sin-n-dex]

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@treadstone68 wrote:

Ah... SRED....   I worked in Tech and the only reason we had to keep timesheets (for a salaried position) was they were required by SRED.

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We keep timesheets too. I worked as an admin (mostly bookkeeping) on and off, and they paid me a flat rate. My timesheet was baloney to account for time spent on tasks. I'm sure I did more than what was on the sheet, but since I was a part time and on demand, I didn't account for every 10-15 minute task I did once in a while.

I'm sure the audit will be fine. Since I did the books the way I know is right, and not with baloney transactions I was asked to put down, they will survive the audit and get their SRED refund. Last night I told the company CEO he can thank me for not listening, becuase the audit would have a much different tone if there were no receipts. At least I know there's a receipt or financial record for everything that happened on the books.

C.

[sin-n-dex]

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@treadstone68 wrote:

I'm pretty sure Ebay collects GST on your behalf now, even if you are not registered under GST (my sales are well below the $30,000 threshold).  

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They don't if you're on the dot COM site with a US location. (I haven't tried with a Canadian location to see what happens then).

If you sell more than 30K you have to register, even if eBay is collecting and remitting HST. I've been registered since 2015, I met the threshold with bookkeeping clients (at that time I wasn't very successful on eBay).

C.

[sin-n-dex]

@treadstone68 

I just finished the tax audit I was in an hour ago. It was for SRED, so they were auditing if the expense was SRED related or just a regular expense (not actually fussing over specific expenses in whether they are business related or not).

I can say one thing... if you're doing nothing wrong, have receipts for your expenses (reasonably so), and are not writing off stuff you're not supposed to be (like vacations to Cuba, a bathroom reno, etc), you will be fine.

The audit itself is brutal, but I think how bad it is depends on how many wrong things the person being audited has done when they start looking. I was only on the call to assist with providing information on finances and to listen and understand CRA's requests (for follow up documentation) and help this company see that through.

What did happen, was one small item that was not deductable as an SRED expense (over a misunderstanding of what could be deducted for an SRED tax return), became a prying into all sorts of other things and a slow unravelling of all the wrong doings of the company's books (not my fault, I don't work there anymore, but their accountant made some serious errors deducting things that were not deductable). And then everything was scrutinized, the two auditors are going to have a meeting to discuss the call, and then send a written demand of follow up documentation to further scritinze the business activities.

If you haven't done anything wrong, this will never happen to you. They will look at stuff, see everything is on the up and up, and move on to the next thing on their list. You will only get caught up in significant unpleasantness if you're doing something wrong (which is the case for today's audit).

If one thing good came out of this, I now know what happens in an audit (generally speaking) and know I can withstand a similar audit of my business and that it will go fine, so long as I have receipts to back things up. They also like spreadsheets summarizing expenses so they can scrutinize more carefully and focus on specific things instead of going through all your receipts and looking at every piece of paper.

I don't do this myself, but many of my bookkeeping clients did, is keep electronic receipts that are backed up in cloud storage in case anything happened to paper copies. It made it easy to pull up specific things or groups of things if requested by CRA.

Hope this helps, if you're not doing anything wrong, try not to worry, it will be fine.

C.