When you’re full speed ahead working on your business, you’re probably more concerned about how you’re going to make payroll or buy your next pack of KD than you are about neat record keeping. It’s no surprise then that many entrepreneurs start sweating when they get that CRA audit notice in the mail.
With a little foresight however, and a handy app or two, you’ll be able to pass an audit with flying colours and put those hard earned dollars towards pay cheques and pasta instead of interest and penalties.
Use an accounting system
Having a basic accounting system may sound intuitive, but many entrepreneurs end up stuffing receipts into drawers and loosely recording them on spreadsheets with the hope that one day they’ll have time to deal with them properly. Unfortunately, auditors dislike shuffling through receipts as much as you do, and ultimately it’s your responsibility to produce support for your numbers– not theirs.
In many cases, you’ll also be asked for a general ledger – a record of all your income and expense transactions made to your bank, credit or personal accounts. Even if you’ve kept every receipt, you may be penalized from the get go if you don’t have a proper ledger.
While it’s always best to set yourself up with an accounting system before trouble hits, if you’re already in the midst of an audit, try importing your transactions into an online accounting app as it’ll make you look a lot more organized!
If you’re looking for some easy to use accounting apps, you’ve got a few great online options to choose from! Check out Xero, Quickbooks Online, Wave, Freshbooks or Kashoo or ask your accountant for a recommendation.
Upload receipts to expenses
The CRA requires you to keep records for six years. In practice, that means an auditor can ask you what you had for lunch five years ago last Wednesday. If you don’t have the receipt, not only will the expense be denied, but you will also have to pay back interest on the additional tax that you would have owed at the time.
There are a number of receipt management apps out there like Receiptbank that allow you to snap photos of your receipts then attach them to an expense in your accounting system – saving you in an audit in just a few clicks. If you’re already in the middle of an audit, trace your biggest expenses to receipts so the auditor can mark them off their list and hopefully look past the smaller stuff.
Support your estimates
There are a few deductions such as home office or mileage that are largely based on estimates. Auditors love going after these transactions since most people don’t really remember how they came up with them! To stay in the clear, always keep a copy of the calculations and support. For a home office deduction for example, you’ll need to show your total home expenses, supported by receipts, with the estimated percentage of space your home office occupies. For a mileage estimate, keep a customer list complete with their addresses or if you’re really diligent, a travel log. While keeping records beforehand is always best, if you’re already being audited, try putting together some support for your calculations so you have something to show the auditor.
It may seem like a lot of up front work to avoid and survive an audit. Yet the good news is that once you have a system in place, you’ll not only be able to audit-proof your books, but you’ll also gain a better handle on how your business is doing!