Fighting Against CRA

What to do when you get audited

For most taxpayers, they will rarely have contact with the Canada Revenue Agency (CRA) other than a request for more information such as copies of rent receipts, property taxes and the most common request, medical receipts. However, there are times when the CRA will request more than just a simple letter where they may request a review of the books and then a full-blown audit. This is common with self-employed taxpayers, as there tends to be greater risk of errors in the books.

It is very important to maintain audit-ready books, meaning that everything is up-to-date, accurate and can be traced to the invoices, timesheets, etc. Making it possible that the auditor may simply give you a warning, on a non-material or may be an item subject to discretion in it’s nature, in relation the to business operation. During the preliminary test the CRA auditor performs, audit-ready books will increase the auditor’s level of assurance in the accuracy of your company’s books. It may possible to change the scope of the audit and time originally scheduled for it: a good thing for all parties.

Remember, it is the CRA auditor’s job to ensure that the taxpayer (both personal and corporate) pay their fair share of taxes as required by the law. Legislatively, an auditor must re-assess all errors noted regardless of the finding. Please note however, administratively the auditor has some discretion whether or not he or she will investigate further or document anything at all that was noted. Occasionally, there may be an overzealous or aggressive CRA auditor that tends to be very concerned about anything that is out of place, even if it’s not material at all. Sometimes the auditor may not be paying attention to the taxpayer explanations, may lack understanding of the business’ operations and/ or it may be a less experience or trained auditor. As a result, CRA may reassess you, and the amount may be much more then expected due to the penalty fees that increase with every tax year that has been reassessed, not to mention the ever-increasing interest charges. This means that the taxpayer could expect a huge tax bill that could have been avoided with proper books and supporting documents, but understandably we’re not all accountants and tax experts.

Fortunately, there are usually a few solutions or recourse that could be considered at times. While the taxpayer may have made some errors, there is also reasonableness involved in the assessment. For example, if the transaction is fairly complex, it is not reasonable for the average taxpayer to know the proper accounting so some penalties that may be applied to you’re account can be challenged due to fairness. However, it is the responsibility of taxpayer to be properly informed. There are also statute-barred limitations that may apply and this simply means a time period that prevents the CRA from assessing an individual or business. If it takes too much time, you may ask or appeal the assessment to have the audit denied. There are many other solutions that are available but professional help is often needed to ensure that the taxpayer receives the best outcome on their tax appeal.

Ensuring that your books are audit-ready is the best way (this is where your bookkeeping and accounting services come in) of taking proactive steps when it comes to your taxes. However, if you are getting audited and you’re being slapped with a tax bill that you feel you don’t deserve, see a tax appeal specialist to make sure you are well represented. Besides, there’s a reason why the Tax Court of Canada reverses CRA assessments on somewhat of a regular basis.