How to Survive an Audit
The thought of being audited is dreaded by most taxpayers. This fear stems from being unprepared. Often, tax returns are mismanaged, receipts are lost, and bank statements are unorganized. Audits are a central Canada Revenue Agency enforcement method. As such, it is in your best interest to protect yourself from an audit by being proactive and organized.
An audit can be random, but generally, the CRA chooses a file for an audit based on a risk assessment. The assessment looks at several factors, such as the likelihood or frequency of errors in tax returns or whether there are indications of non-compliance with tax obligations. For instance, certain heavy-cash based industries, such as construction and retail are singled out as a high risk for tax evasion. When considering an audit, the CRA also looks at the information it has on file for the taxpayer in question and compares that information to similar taxpayers or other audits. If you are being audited, the safest route course of action is to hire a professional, but in many cases that is not an option. If you are navigating an audit without professional help, here are a few tips to be prepared.
Know Your Rights
The first step in protecting your interests in an audit is knowing your rights. The relationship between the taxpayer and the CRA is governed by the Taxpayer Bill of Rights. These 16 express rights mandate the CRA’s commitment to serve you with a high degree of accuracy, professionalism, courtesy, and fairness.
If you feel mistreated or are conflicting with an auditor, you’re well within your rights to ask to speak to a supervisor or even request a new auditor. The Taxpayer Bill of Rights also provides the taxpayer with the right to file a complaint if they are not satisfied with their interactions with the CRA. For more information, see complaints and disputes.
However, while the Taxpayer Bill of Rights provides that each taxpayer is entitled to have the law applied uniformly, in practice the tax rules can often be applied inconsistently, thereby denying some what they are entitled to. In these kinds of situations we recommend a professional consultation from the early stages to avoid any arbitrary assessments and / or denial of deductions. Further, under the Access to Information Act, Canadian citizens, permanent residents, and any person present in Canada, is provided the right to access information contained in government records. This access to private governmental information is a way for individuals to hold the CRA accountable to their mandate of accuracy, professionalism, courtesy, and fairness.
Organize your Records
The Government of Canada recommends that you keep your books and records for a minimum of seven years. When dealing with the CRA, it is always important to have organized supporting documentation. Many people fail to keep complete records detailing every expense and deduction claimed in a tax return.
This daunting task can be made much easier by keeping tax returns in a basic accordion file, separated by year and divided into main categories, including expenses, deductions, and investments. This basic organization makes it easier for both yourself and the auditor should you be audited. It is also a good idea to keep original copies of your receipts.
Only Provide What You’re Asked For
It is important to be cooperative, but do not give up information that is not explicitly requested. An audit is not an open-ended hunt. When supplying information to the CRA carefully ensure you are complying with their requests, but do not over disclose information.
If you volunteer more information than requested by the CRA. For instance, providing tax returns for years that do not pertain to the audit could unnecessarily open the door to a reassessment of those years.
Always be careful to protect documents and information that would be subject to privilege. Communications between a lawyer and a client are privileged, meaning the CRA will not be able to use this information against you should you choose to retain a lawyer. Unfortunately, the same cannot be said about communications between accountants and their clients.
It is also recommended to keep track of all CRA communications, and preferably have all communications in writing.
Be Concise and On Point
When you are answering the auditor’s questions, answer as many questions with a yes or no response, and if you must provide more details, keep it brief and to the point. Find a balance between being courteous and focused. If you are uncertain about how to respond to a complicated question, do not lie; but seek the advice of an experienced tax professional.
Audits can be extremely stressful, often taking a toll on your physical and mental health. If you are concerned about handling an audit on your own, contact our firm for a free consultation so that we can help!
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.