Tax audits are very stressful! No matter how hard you try to keep your books in perfect order, the idea of having an auditor hanging around, scrutinizing your finances can be anxiety-inducing.
Let’s be real – an auditor’s job is to extract more taxes from you, but being audited doesn’t mean the Canada Revenue Agency (CRA) thinks you have necessarily done something wrong. Usually, businesses are chosen for a reason; it could be based on your industry, on red flags in your tax audit (sorry – they don’t tell us what they look for) or the types of expenses you submitted. But often a business is selected at random.
Here are 10 things we think will help make a tax audit go smoother.
1. Understand what CRA is asking for and respond.
The CRA will send notification of an upcoming audit via a mailed letter. There are two types of audits: a desk audit and on-site audit. In both cases, you will be asked to provide specific information within a specified time period (usually 30 days).
Fair to say, at this point: don’t ignore it; it is not going away.
2. Make a list, check it twice.
The auditor can go back four years (unless they suspect fraud, in which case they can go further) and will look at multiple taxation years during an audit. Before the audit begins, you need to pinpoint:
- which taxation years are being audited
- what business is being audited (if you have more than one)
- what specific records the auditor wants to see.
Allow for time to have your bookkeeper or accountant gather the appropriate records. Having everything on hand before the audit actually starts will make the job easier (and faster) for the auditor.
Keep in mind that it is unusual for the auditor to look at records for the current year that haven’t yet been filed. Only provide records for the years under review and only the documents that that auditor has asked for.
3. Prepare and share the information.
Ask the auditor how the requested documents should be shared with him or her. Auditors may request documents be submitted on-line through Canada Revenue Agency’s “My Business Account” secured portal. CRA will not use e-mail, because it is not secured.
4. Pressed for time? Ask for an extension.
If you find the audit happening at the worst possible busy time, but you wish to be available when the audit takes place, ask for an extension. You will generally get it if the request is reasonable.
An auditor generally spends three to four days reviewing two taxation years; however, it could take as little as one day or go up to several weeks for an audit.
5. Once the auditor is in house, professional courtesy is key to smooth sailing.
- When dealing with auditors, be pleasant and courteous.
- Provide an empty desk in a quiet corner.
- Discourage staff from gossiping with an auditor.
- Baby-sitting not required! Run your business as usual.
- However don’t disappear outright – be accessible if needed.
- Limit questioning to three people: you, your bookkeeper and your public accountant.
6. Clarify your understanding.
It is OK to ask the auditor to give you a list of questions that he or she will need answered and review them with you at the end of the day. If you don’t understand the question, don’t try to answer it! Seek clarification and have your accountant give the answers if needed.
7. Review the findings.
At the end of an audit, ask the auditor if there is going to be a change in your tax return. If there are no changes to be made, congratulations – that should complete the matter. If there are changes to be made, get a full and complete explanation for each and every one. Advise the auditor that you would like an opportunity to consider them and then make a reply.
Go over the changes with your accountant and decide if you are in agreement or want to challenge. Some changes might appear small, but have more serious consequences as they may set a bad precedent for future years.
8. Challenge the changes if needed.
At the end of the audit, the auditor will typically issue a letter with the proposed adjustments. You will have 30 days to respond. If you believe the auditor is wrong then you, your accountant and the auditor should meet to convince the department of your position.
It may be the auditor and your accountant cannot agree. You can always request a meeting with the auditor’s superior to convince the department your original treatment was correct.
Once the proposed adjustment is finalized you will receive a new notice of reassessment. At this point, you have the right to appeal and file a formal notice of objection. This will mean reviewing the disagreement at a different level of the tax department with someone new. However, it is always best if things can be settled with the original auditor.
10. Reporting abuse.
Most auditors are reasonable; however, if the auditor is abusive or is making unreasonable demands on you and your staff, you and your accountant may want request a change in auditor. There is a Taxpayer Bill of Rights to which CRA is required to adhere in all its audits.
A tax auditor is pretty powerful when determining whether or not you are in compliance with the law. The auditor can look at third-party records and even those of family members, to see if anything is missing. If you feel you have been treated incorrectly, the onus will be on you to prove your case within the time period allowed.
The best preparation for a tax audit starts with sound thinking at the time you are readying your financial statements and tax returns. Competent tax planning and accessible records are your main sources of defense during an audit. It also pays dividends to have a strong relationship with open communication with your book keeper and accountant.
If you have questions about tax audits, or would like a copy of our handout “What to do when the Auditor arrives” contact your CFIB Counsellor.