You’re the chosen one: 5 truths of tax audits

Like driving-school trucks on a traffic-cone slalom course, any conversation I have about the business of trucking tends to swerve around the same basic issues no matter where I go: cost per mile, keeping proper records, and managing cash flow. And that’s fine. There’s no simple answer to these most basic of questions, which makes my job interesting. What really worries me is a trucker who thinks he has all the answers. Out there on the road, a little misinformation can become a full-blown myth in a hurry, especially when you’re talking about something as contentious as taxes.

Need an example? Steve Mulligan, who pens a column on tax audits in our May issue, can give you five:

1. I’m not turning a profit right now, so therefore I owe no tax. Lots of individual factors determine whether or not you owe taxes-your personal accountant or tax advisor can help you with your specific situation. Don’t kid yourself: in Canada, if you make money, you pay income tax. Period.

2. I don’t have to report the income until I receive it. For accounting and income tax purposes, income must be reported when it is earned not when it is received.

3. I didn’t expense it because I haven’t paid for it yet. Like income, expense items must be reported when they are incurred, not when they are paid.

4. My accountant is obligated not to tell. Client privilege applies to doctors and lawyers. The CRA can and does demand information from third parties. Indeed, CRA is able to acquire search warrants with ease. Investigators can enter any place where records are kept in connection with your business or employment. They’ll need a warrant or permission from you only if the records are kept at your home.

5. My dog ate my tax return. There was a flood. Locusts! In the absence of proper tax records, CRA can conduct a net worth audit. Auditors work backward from an estimated net worth against a formula that determines what income was probable. In other words, they’ll try to fill in the blanks themselves. When that happens, you’re probably better off taking another good, long, honest look through your shoebox or filing cabinet for the records you need. Otherwise, you lose.

If you’re selected for audit, remember the burden of proof is on you to disprove the auditor’s conclusions. “The CRA need only prove its case on a balance of probabilities,” Mulligan says. “Once this is done, it’s now your responsibility to prove them wrong.”

The successful truckers I know aren’t tax or financial experts, and more important, they don’t try to be. They learn to separate fact from myth by surrounding themselves with a good team of advisors, and most of all, by asking lots of questions.