How to prepare for a TAX AUDIT – Daily
Why does the word TAXES create such bad reactions? I want you to know that it does not have to be this way. That’s right – you read correctly! You can make this a FUN experience, sort of. The whole idea is to know what to change so that if anyone from the tax department ever contacts you, you will be relaxed. Does it mean you haven’t made any mistakes? Of course not. Your goal is to be one step ahead and that takes a different approach.
As you go about your daily routine, create your habits. Once you create your habits, they will create you. To be prepared, you will need to know some very basic things. To me, the most important thing I want to know is, “What does a TAX AUDITOR look for”? Your FRIENDLY tax auditor, and yes, I know what I just wrote, has a set of guidelines they must follow. Basically, they will review all of your sources of income and your claimed expenses and deductions. By the way, ALL sources of income are generally taxable. In Canada, insurance proceeds are not. So then, how should you prepare?
If you are an employee, your income information will be supplied to you by your employer. If you are self-employed, you need to keep good records. For the self-employed, an auditor reviews all of your bank statements and checks all of your deposits for what they perceive to be income. I know, this is rocket science right? So then, do you know where all of your deposits came from? Can you explain the difference, WITH back-ups, between moneys borrowed and earned? You see, borrowed deposits are not taxable and this is a biggie. If you cannot explain, you can count on all of your deposits being treated as income – ouch if you have deposits from borrowed funds. Oh, by the way, depending on where you conduct your business, you may be subject to sales tax and this sales tax is removed from ALL the deposits that were treated as income and now you owe more than you thought. Watch out as this too can hurt…………
I have been asked this question many times, “Vince, what can I write off?” The answer is everything – just kidding. For the self-employed and the commissioned person(s), generally, an expense has to have the “INTENT” of generating income. If it does, then you can deduct it whether you earned any income or not. For all of you that only have employee type income, you can only deduct expenses that your employer verifies as necessary in the performance of your job duties. Most of the time, this applies to sales people, but there are exceptions. Check with your employer and/or accountant to see where you fit. Whether you are an employee of self-employed, reimbursed expenses cannot be deducted.
Once you have determined that you can write off your expense, you need to know what to do with the receipt(s). First and foremost, you need to keep them, especially the itemized receipt. Too many people only keep the payment slip and it does not have the details. This is a biggie for those restaurant type of expenses. The next thing you need to do is to write on it who you met with and a brief description of the reason for the meeting. Again, rocket science – right? NOT! How long should I keep my receipts? Anywhere from 6 to 7 years and make sure that you can read them. It is very common now for receipts to fade over a relatively short period of time. There are many solutions to avoid this such as sending your receipts to a centre that scans and stores them for you electronically or you doing this process using your smartphone & saving them in a cloud. Please make sure the software you use stays current and the best electronic copies are those that are created as PDF files.
Now you should be able to stay ahead………
On your “NUMBERS” team,
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