Government audits often turn up unreported earnings, benefits
nobody wants to hear the words "The CRA will be conducting an audit." After all, who wants a Canada Revenue Agency (CRA) auditor going through all of their books and records, possibly finding errors and perhaps charging penalties and interest? Even if there are no problems, it can still be a lot of work to pull everything together.
To make sure employers are complying with payroll responsibilities, the agency regularly reviews’ payroll accounts and conducts trust account examinations and employer compliance audits. In 2013-14, the CRA carried out over 493,000 payroll account reviews and 865 employer compliance audits. While no figures on trust account examinations were provided for 2013-14, the CRA did 48,000 of them the previous year.
In a webinar, the CRA explained that for both an examination and an audit, it looks at an employer’s books and records to make sure it is properly deducting, remitting and reporting source deductions and to see if it has any unreported employee income. The agency also checks the organization’s GST/HST documents to make sure it is charging, recording, reporting and remitting tax as required.
The CRA also reviews employee benefits to make sure that if any are taxable, the employer is properly assessing them. It may also review the status of workers to determine if they are employees or self-employed.
While exams and audits are similar, the CRA says an audit is a more thorough review. During an audit, the CRA takes a detailed look at two calendar years of an employer’s records.
The agency says many employer examinations and audits uncover unreported taxable benefits and other income, resulting in employers having to pay additional CPP contributions and EI premiums and the CRA reassessing employee tax returns. In its 2013-14 report, the CRA says it found $958.6 million in source deductions non-compliance by examining employers’ books and records.
Besides looking at records related to source deductions, the agency will want to see documents such as appointment books, logbooks and vouchers, to determine if they support the employer’s payroll records.
The CRA examines electronic and print records. Employers are generally required to keep records for six years from the end of the last tax year to which they relate. Electronic records and supporting documents must be in a format CRA software can read. Any encrypted records must be unencrypted and the CRA may photocopy printed records.
Instead of scrambling at the last minute, employers should regularly check to make sure they are properly documenting information and keeping detailed records even if they are not being audited, says Carswell payroll consultant Elle Kamensky.
"Keep your records organized and easily accessible."
It’s not just about T4s or timesheets, says Annie Chong, manager of Carswell’s Payroll Consulting Group.
"Go back to the beginning when (a) person is hired as a new employee and make sure that there is a contract of employment in place that defines what an employee’s responsibilities are, what they are going to be earning in income and how that translates into source deductions and taxable benefits."
Once the CRA completes a trust accounts examination, it will provide the employer with a statement of account, followed by a notice of assessment, setting out whether the employer owes any amounts for source deductions and whether any penalties or interest will apply. The employer may have to amend T4 and T4A slips and the agency may reassess employees’ personal income tax returns.
For an employer compliance audit, the CRA auditor will give the employer a proposal letter at the end of the review that sets out any adjustments. If the employer does not agree with the proposal, it has 30 days to respond. Afterwards, the auditor will send the employer a final letter that explains the results of the audit and whether there are any further adjustments. Then, the CRA will send the employer a notice of assessment.
If an employer does not agree with a notice of assessment for an examination or an audit, it has 90 days to file an objection. Whether or not an employer agrees with an assessment, it should pay any amounts owing right away to avoid further penalties or interest.
To determine which employers to audit, the agency says it uses a risk-assessment system that "selects files to audit based on a number of conditions such as the potential for errors in tax returns or indications of non-compliance with tax obligations. The CRA also looks at the information it has on file and may compare that information to similar files or consider information from other audits or investigations."
Employers can reduce their chances of being audited by following good payroll practices, says Chong, such as making sure employee payments and deductions are correctly calculated, taxable benefits are properly assessed, remittances are paid on time and year-end reporting is done accurately and on time.
To help ensure they comply with the law, Chong and Kamensky suggest employers conduct internal audits of payroll processes.
Chong adds that small, targeted audits are also helpful. This could be done in the fall before year-end processing gears up or close to Jan. 1 or July 1 when payroll changes often occur.
"Once you have implemented the new tax rate or information, take a handful of employees and conduct your own audit. Calculate an employee’s pay, making sure that what is deemed pensionable, insurable, taxable or things that are subject to a tax break are set up properly on your payroll," she says.
"You can cross-reference this against the CRA’s PDOC (Payroll Deductions Online Calculator) because what you want to do is to compare and make sure that the net values, based on how it is set up on your payroll system versus if you were to do this manually, match up. Any discrepancies will allow you to go back and fix whatever the issues are."
Payroll professionals should also regularly check records to make sure they match the information the CRA has on file.
"Every time you remit to the CRA and you get the statement back from the CRA, there is an audit process there, too, because you want to ensure that you are reconciling against the CRA statement so that you are not understating on your deductions. You can do this on a monthly basis or a quarterly basis, depending on how frequently you remit to the CRA."
As part of an internal review, Chong suggests employers make sure departments that deal with employee information regularly communicate with each other and know each other’s responsibilities. Otherwise, problems could arise in a CRA audit.
Employers sometimes get into trouble when they pay incentive gifts and awards (such as employment anniversaries) through accounts payable and do not inform payroll, she says.
"The AP folks are processing these invoices (for the gifts or awards) and HR is presenting them to the employees, but payroll doesn’t get the records," says Chong.
If the gift or award is a taxable benefit, payroll does not have the chance to assess it or report it on an employee’s T4.
Poor records or not knowing the rules are not excuses.
"The CRA doesn’t care if your AP folks or HR folks don’t talk to your payroll people," Chong adds.
It is not just the payroll department that needs to comply with CRA rules, but the entire organization, she says. However, payroll has a key role to play in educating other departments.
"Payroll has a responsibility to communicate with the internal players what the rules are," says Chong. "Taxable benefit assessment, for example. If you are going to be processing something in AP, (payroll) needs to know that (to) figure out whether some of that has an impact on an employee’s T4."
By regularly checking to make sure payroll is processed correctly, relevant information is shared with payroll and the employer is keeping accurate and detailed records, employers can help to ensure a CRA audit will run smoothly, she says.
"Even if you are audited by the CRA, you don’t run the risk of being caught for not doing something if you are doing it correctly from day one."