So, You’ve Received an Audit Proposal Letter, What Are The Next Steps?
An audit proposal letter is sent out to a taxpayer in the midst of the audit process. It typically follows the CRA informing a taxpayer that they are under audit and affording them an initial opportunity to provide substantiating documentation.
The audit proposal letter outlines an auditor’s findings, their proposed adjustments, and the legal bases they relied on in proposing to make such adjustments.
When a taxpayer receives an audit proposal letter essentially telling them that they now owe thousands of dollars, it can, naturally, be incredibly distressing. However, it’s important to know that the audit proposal letter is not the end of the road. Rather, it’s another opportunity for a taxpayer to explain why the auditor’s preliminary findings are incorrect, and why they should decide differently.
Typically, when a taxpayer receives an audit proposal letter, they are notified that they have 30 days to respond. This short timeframe can leave a taxpayer scrambling for how to respond, so we’ve prepared a list of tips that can set you up for success.
Tip #1: Maintain Good Books and Records
While this is a piece of advice that looks better in hindsight for most taxpayers currently under audit, for anyone who has yet to experience this process, keeping thorough documentation is a good rule of thumb for an individual taxpayer, and absolutely essential for corporations. Keeping substantive records can make the audit process much smoother, and result in less stress for everyone.
Tip #2: Be Thorough, But Specific in Your Response
It can be tempting to respond to the audit proposal letter with everything. However, if you send in absolutely every document you have, regardless of its relevance to the nature of the audit, you’re less likely to make your point and more likely to drown the auditor in paperwork.
As such, it’s better to employ a more targeted approach when responding to the CRA. Rather than giving them everything you’ve got, address each of the auditor’s preliminary findings individually, explaining why each finding is incorrect and using the supporting documentation you have to back yourself up.
Tip #3: Know What You Don’t Know
An audit proposal letter can often include references to various statutes such as the Income Tax Act, or the Excise Tax Act, which can be intimidating, lengthy pieces of legislation. If you feel that you do not understand what the auditor is trying to convey, call them up and ask them to provide an explanation.
Additionally, if you feel that you need assistance with interpreting the legal aspects of the audit proposal letter, or that you don’t have the legal knowledge to address the audit proposal letter in its entirety, it may be time to call a lawyer.
While the audit process can be a stressful one, there are steps that taxpayers can take both before and during the process to mitigate this stress successfully.
Disclaimer: 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.
Ashuthi Kanneganti