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How to prepare for a tax audit as a self-employed person or small business owner

If you've just received an audit notification from the Canada Revenue Agency (CRA), your stress has probably just skyrocketed, even if you know that all your documents are in order. An audit is not necessarily a sign that you have made a serious mistake or done something illegal. But to make sure everything goes smoothly, it's best to know what to expect. And above all, how to prepare for it. <h3>Why did I receive an audit notice</h3> There are several factors that can explain why the Canada Revenue Agency decides to audit your business. First, be aware that certain sectors of activity are more at risk, especially those with a reputation for accepting payments under the table and therefore generating undeclared income. The CRA pays particular attention to these industries. But even if you're not in one of these sectors, you can be identified if the information your company reports is outside of tax standards: high or unusual expenses or deductions, income that is very different from your industry standards, or buying and selling significant assets. It is also possible that your company has been randomly selected to go through the audit process. In short, there is no way to guarantee that you will never be audited, but you can prepare for it effectively. <h3>What does the CRA check during an audit?</h3> To be prepared, you need to know how the auditor analyzes your file. First, they will review your tax return as well as your company's books and records. They will also look at your bank statements, both business and personal accounts, your financial statements, and any documents related to your assets, liabilities and <a href="https://www.momenteo.com/blog/as-a-freelancer-what-expenses-can-i-deduct">business expenses</a>. Their objective is to paint an accurate picture of your financial and tax situation. They will assess whether your declared income and your consumption habits seem consistent. If significant discrepancies are found, they will have to be justified. The auditor's job is not limited to analyzing your documents. As a business owner, you will have to meet with the auditor, who will also often talk to your accountant. The latter is a valuable resource in this process. They probably know the financial and tax details of your business better than anyone as they have access to your internal documents. <h3>How to prepare for an audit</h3> Receiving an audit notice is never pleasant, but there's no need to panic. By taking the time to get organized, you can approach an audit calmly and confidently. <ul> <li> Talk to your accountant. Ask them all your questions, without hesitation. Their expertise is invaluable in understanding the audit process and anticipating the auditor's requests. They know your financial situation better than anyone and will be able to guide you and your team to prepare the right documents, avoid mistakes, and reassure the CRA that your file is compliant. </li> <li> Gather all the documents requested by the auditor. Expense receipts, invoices sent to your clients, bank statements, etc. File the documents neatly. And above all, avoid saying that some are not necessary. Transparency is your best ally during an audit. Remember to keep a copy of each document, especially if they are paper format that the auditor may take with them for their analysis. </li> <li> Remember to answer only the questions you are asked. Do not add unnecessary comments or justify yourself unnecessarily. Provide the necessary information, but nothing more. This will prevent you from putting your foot in your mouth by unintentionally bringing up other issues that could draw suspicion. </li> <li> Keep documents supporting any major changes in income or deductions. Have you made renovations to your rental units? Have you purchased expensive new equipment for your business? Have you experienced rapid sales growth after launching a new service? These changes may be completely legitimate, but you must be able to justify them to the CRA. </li> </ul> <h3>4 Best Practices to Reduce Your Risk of an Audit </h3> Prevention is better than cure: some good management habits can reduce your chances of being selected for an audit. Here are a few simple steps you can incorporate into your routine to inspire confidence in the CRA. <ul> <li> Make sure you always report all your income. Every invoice you produce must be included on your tax return. The same goes for tax slips. Forgetting one can get you into a lot of trouble, since the companies and organizations that produce them also send them to the CRA. The slightest omission can therefore draw suspicion. </li> <li> Check the legitimacy of the charities you donate to. Some people try to reduce their tax burden by claiming donations made to fictitious or ineligible organizations. To avoid any problems, make sure the charity is listed in the CRA's <a href="https://apps.cra-arc.gc.ca/ebci/hacc/srch/pub/dsplyBscSrch?">official online directory</a>. </li> <li> Keep your bookkeeping up to date. Well-kept records make it easier to file your tax return... and defend it if an audit occurs. Keeping books in order gives a more professional image of your business and can reduce the chances of triggering a CRA investigation. </li> <li> Correct any errors as soon as you notice them. Because, yes, errors can creep into your tax returns. The most important thing is to be honest and correct the information as quickly as possible. </li> </ul> Preparing for an audit means reducing stress and staying in control of the situation. The CRA is not there to trap you, but to make sure that your finances are in order. By keeping your documents up to date, declaring your income rigorously and remaining transparent, you put all the chances on your side that everything goes smoothly. Quality accounting reduces the risk of error and makes it easier to keep track of your finances. Tools like <a href="https://www.momenteo.com/">Momenteo</a> can help you do just that. --- Roxane has always written and dreamed of making a living from her pen. Now a web editor, proofreader and author, we can say that it's mission accomplished.

Roxane