How to Survive a Tax Audit

10 January, 2013

More and more people are creating what is called a “bucket list”. A bucket list is comprised of activities that they wish to complete before their life is over. Running a marathon, standing on the Great Wall of China, scuba diving off the Great Barrier Reef, or dinner in Paris, are a few activities that have made it to several lists. It is unlikely that getting audited by the Canadian Revenue Agency (CRA) would be on anyone’s bucket list. The fact is that each year private tax payers and businesses are audited by the CRA.
So what happens if you receive a notice from the CRA with those six little words, “it is time for an audit”?  Don’t Panic. All hope is not lost. There are ways to go through an audit and come out alive and well. In this article we will show you how to survive a tax audit.
Who gets audited?
The CRA has a few methods in place that determine who will be audited. In a few cases, the CRA acts on tips but generally the CRA does not have spies in every corner. They do not have time or the resources to listen to accusations from jealous competitors or neighbors. In many cases the CRA is looking for tax return with “abnormal exceptions”. These are returns that stand out when compared to similar returns in that particular industry, for businesses, or similar demographics for personal income tax filings.
In business, there maybe deductions that fall outside the normal deductions benchmarked in that industry. Perhaps, travel expenses are higher for a particular business when compared to similar businesses in the area because they may have been bidding for a contract overseas.
A family may have experienced higher than normal medical expenses for a child that was diagnosed with a learning disability and needed intense therapy during the year.
A Tax filing can be re-assessed up to 3 or 4 years depending upon the corporation, after the mailing date of the original assessment.
Types of Audits
There are two types of audits, a CRA office audit and a field audit. It is highly recommended that you have your professional accountant, like Numbers Plus, present during any audit. Wherever the audit takes place basically the same documents will be reviewed. For businesses, these documents may include but not restricted to the tax return, financial statements of the business, ledgers, bank accounts, sales orders, sale invoices, purchase orders and expense accounts. All of these documents will be reviewed in support of the items on the tax return. If the audit is conducted at the place of business, the auditor may talk to employees to obtain further clarification on any particular issue.
If the audit is regarding a personal tax return then documents such as travel receipts, medical expenses and any other documents that support the filing in question will be required.
What happens next?
After completion of the audit, the CRA auditor will prepare a list of adjustments for the return in question and preset them to the business owner or taxpayer. You should review these adjustments with your professional accountant as you may need to provide the CRA will additional documentation to clarify the issues in question. After reviewing the adjustments with your professional accountant you can meet with the CRA to come to an agreement. Once an agreement has been reached a new Notice of Assessment will be issued outlining the changes agreed upon.
What happens if we cannot agree?
If an agreement cannot be reached over the new assessment, the Taxpayer has the right to file a notice of objection form within 90 days from when the new notice of reassessment has been mailed.
The Appeals division of the CRA will assign an appeal officer who is not familiar with the case to review the assessment. Once that officer has made their ruling the taxpayer can agree or they can appeal to the Tax Court of Canada. At this point we highly recommend that your professional accountant work with your lawyer to determine the best course of action.
Keep the pain to a minimum
The easiest way to keep the pain to a minimum is to keep accurate, detailed and up to date records. If you cannot provide proper documentation for a deduction, then it is best no to claim it.
In all cases the CRA holds the business owner or personal taxpayer responsible for keeping their records up to date.  Tax records must be kept for a period of 6 years following the year that the records relate.
With the various software and computer hardware platforms in use today, the taxpayer is responsible to making sure the records can be converted to a readable format required by the CRA.
It is a safe bet to make that the tax audit experience is not high on anyone’s bucket list. However by following the steps mentioned and working close with your professional accountant, you can survive the audit with minimal expense and time spent.
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