There are few words more fear-inducing for small business owners than “audit.” But don’t panic! The audit process itself isn’t as scary as you might think, and with regular upkeep of your books and payroll, it can be a relatively painless experience.
The easiest way to think about a payroll audit is as an inspection of payroll records. This is done to ensure compliance with tax and business law, employment standards law, and workers’ compensation requirements. Audits exist to verify that the information you submitted to the different agencies is accurate and that you are meeting your federal and provincial obligations.
“Canada Revenue Agency and Revenu Quebec are only two of a number of government agencies with an interest and the authority to audit your business’ payroll. Add in provincial employment standards inspectors, workers’ compensation board and payroll tax auditors and there’s no shortage of people interested in how well your t’s have been crossed,” says Lyndee Patterson, Senior Compliance Counsel, Ceridian.
Other bodies that may call for audits, though with less frequency, include provincial workers’ compensation boards, and – in the cases of Manitoba, Newfoundland, Ontario and Quebec – payroll tax remittance bodies, which audit to make sure employers are meeting their specific provincial obligations.
There are any number of reasons your file was selected for review – and they aren’t necessarily a sign that your business has done anything wrong. “Increasingly, information sharing arrangements identify potential compliance gaps,” says Patterson.
Greater communication between government agencies means there’s more risk of file discrepancies being caught. While there might be legitimate reasons for not registering in a province (perhaps you’re not in a mandatory industry), these discrepancies can lead to audits.
Repeatedly missing deadlines, late filings, large and unexplained changes in reported information or multiple employee complaints against your company can also lead a government agency to review your file more closely.
Patterson says many small businesses don’t avail themselves of the opportunity to consult with their auditor in advance of an audit. Simplify their review (and reduce their time spent) by understanding what they require and preparing the information they need from you to demonstrate that they’ve been diligent.
Take the opportunity before the audit begins to ensure your payroll accounts are up-to-date and ensure your records reconcile. Go through the previous years’ records as well to make sure there was no missed information. If you spot a discrepancy, be prepared to explain it to the auditor. At the end of a CRA audit, you will receive a letter describing the outcome.
There will either be no adjustment, an adjustment requiring more tax to be paid, or an adjustment entitling you to a refund. Penalties and interest can be applied. You can speak with the auditor to resolve factual disagreements and you have the right to appeal if you can’t come to an agreement.
Two critical steps for a pain-free audit are to validate your payroll, and make self-audits a regular part of your routine. “The single greatest way to keep the audit process painless is to keep on top of payroll matters and keep your accounts balanced and up-to-date,” says Carmela Pascoe, VP Customer Support, Ceridian. This means not leaving it until the end of the year. Make it a twice-monthly habit to regularly go over your books.
Patterson suggests, “At a bare minimum, small organizations should do a quarterly self-assessment of their payroll, paying close attention to discrepancies and making a paper trail for their future selves to appreciate. Larger organizations should be doing this more frequently.”
Understand the statements and report tools available to you, and familiarize yourself with your obligations as an employer. Maintain a list of new self-audit questions as raised by your employees, for example, “Am I eligible for overtime?” or “Is my vacation accrual correct?”