How to Prepare for Payroll Tax Audits

by Craig Anthony

2 min read

Which would you rather have, a trip to the dentist or a payroll audit?

If you chose the dental visit, you’re not alone; many other business people would make the same choice, given a chance.

After all, if you’ve been doing all the right things, brushing and flossing regularly, a trip to the dentist might be a completely pain-free experience.

But actually, an audit can be pain-free too, if you’re properly prepared for one.

Here’s what you need to know and do to make your business audit-ready.

1) Understand how accounts are chosen to be audited.

Sure, the Canada Revenue Agency (CRA) reviews every individual file for errors and omissions. But being chosen to be audited doesn’t automatically mean that the CRA thinks you have done something wrong.

The larger purpose of the CRA’s auditing process is to ensure that their systems and procedures are working as they should and to encourage tax compliance.

To these ends, files may be chosen to be audited because of “information from outside sources”  (CRA) or investigations, but also just picked off computer-generated lists or chosen just because the files relate to a particular industry. It may just happen to be the year that the CRA has decided to audit shellfish harvesters, for example.

2) Understand the audit procedure.

If your payroll account has been chosen for auditing, an auditor will contact you and arrange for an audit to occur either at a Canada Revenue Agency office or at your place of business.

In either case, the auditor will want to examine your business records “including your ledgers, journals, bank accounts, sales invoices, purchase vouchers, and expense accounts”, says the CRA, as well as all the information on file with the CRA, such as your payroll deduction remittances.

When the audit is complete, the auditor will let you know what adjustments need to be made to your return(s) or inform you that no changes are necessary. You will have a chance to discuss the adjustments if you want, or have some time to analyze them.

According to the CRA, an audit usually takes one to two weeks.

3) Speed up the audit procedure by being prepared.

  • The best way to prepare for an audit is to ensure that your business records are complete, organized and accessible. If an audit is being done in a CRA office, an auditor will usually request that specific records are sent in. Having all your records relating to payroll organized and up-to-date will make it much easier to find what the auditor asks for.
  • If the audit is going to take place at your place of business be sure to set time aside to discuss your business with the auditor and/or tour your business premises, as he might want to do these things.
  • You’ll also want to have an office or at least desk set aside where the auditor can work, preferably with convenient access to the files he will need to conduct the audit.
  • Have employees available to provide information and assistance. The auditor may have questions related to their employment or to the way you have conducted your business. Speak to your employees ahead of time and let them know an audit will be occurring and that they should be as cooperative as possible.
  • Don’t be defensive or uncooperative yourself. As the Canada Revenue Agency says, “The auditor’s role is to determine the correct amount of duty or tax payable. This means that your taxes could be reduced and you could get a refund as a result”.

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