The Tax Audit - Part 2 - Preparing for the Initial Meeting (full audits only)

The initial meeting can be a very nerve racking experience.  The very anticipation and dread that one usually reserves for a trip to the dentist is nothing compared to the anxiety a meeting with CRA can cause.  At least with the dentist you know what is going to happen, and that the dentist will try to be helpful and gentle with you.  Don’t expect either gentle or helpful when you get audited, if that is what you receive then count your lucky stars.  Make no mistake, the CRA’s job is to assess taxes and collect them, and they are very good at it.  You can represent yourself during an audit but I would recommend taking your spouse or partner with you (do not go alone).  I would also recommend getting professional help unless you have decent understanding of accounting, tax law, and exactly how your taxes were prepared (for example you did your taxes yourself).  Based on the stories I have heard and witnessed I highly recommend that you take a professional with you, preferably the person who prepared your return, or did your book keeping. 
Okay, enough fear mongering, but take what I said above seriously.  Let’s talk about the preparation part.  Before you meet with the CRA make sure you have reviewed the returns that they are interested in looking at, and that you track down all the receipts you have.  Make sure they are organized, itemized, and that they reconcile to the tax return.  If the word reconciled scares you get a professional to go with you.  Reconciling simply means making sure that the totals on your tax return can be easily traced to a stack of receipts.  The key word in the last sentence is easily.  If you or your representative put the number 532.50 on a line on your tax return, then you better have receipts segregated that correspond to the exact amount.  Those receipts should also be for the category they were filed under.  For example, don’t stick motor vehicle expenses in meals and entertainment just because they add up.  If you prepare your own tax return make sure you keep your receipts organized.  If someone else does it, ask them to keep your receipts organized.
Now that you are organized it is time to play auditor.  Taxes are complex and auditing is not.  Take a look at your tax return and see what numbers are the biggest or seem like they could have a personal component to them.  Now you have a pretty good idea of what the auditor will look at.  Now it is time to make sure you didn’t “accidently” include some stuff you shouldn’t have.  If you did it is too late now.   This is also a good time to remove any receipts that you put in with your business records for safe keeping.  That family trip to Hawaii that was not deducted, the purchase documents for the Corvette ,etc., get them out of your business records.    I have seen auditors assume (ass-u-me) that if a receipt is in the box then it is claimed on the tax return. 
Now it is time to get your mind as organized as your records (let’s hope your records are really organized or we are in serious trouble).  Make notes on what you do for your business.  Think about and make notes on how your business operates.  Think about who you sell to or provide services to.  List who you entertain and why?  How often and how do you invoice (middle and end of month, project completion, progress billing)?  When do you do your banking, how often do you go to the bank, do all your sales go into the business bank account?  How do you pay for expenses?  Do you use cash, cheques, credit card debit card, barter?  This is a short list of questions you will likely be required to answer, and should not be considered exhaustive.  These are your interview notes so you can keep organized and not get flustered, do not give these to the CRA.
Now that you are ready take a couple of deep breaths, relax and get a good nights sleep.  Stop worrying and tell yourself that you are prepared and that you are ready to go in to the meeting and win.  Think positive and be positive.