A taxpayer’s worst nightmare, be they an individual or a business owner, is being informed by the CRA that they have been selected for a tax audit.
Even in the best-case scenario, if they have done nothing wrong and have all the records to back themselves up, the audit process can be arduous, and taxpayers are at the mercy of the auditors, who may make costly mistakes and treat them like criminals.
Therefore, it is simply not worth the risk of going into a tax audit without at least taking advantage of the accounting services from Tangs Accounting if you have received notice of an audit. It is essential to arm yourself with the knowledge to protect yourself or have someone with you who can fight back and safeguard you from paying an unfair reassessment. To prepare you for what to expect, here is an overview of the CRA tax audit process.
First Steps
When a tax return is chosen for an audit, the taxpayer is generally asked to provide initial information about their return and may need to complete a pre-audit questionnaire and/or follow-up information. During the audit, the auditor examines the return or line items, such as reported income or claimed expenses, and the taxpayer is asked to provide supporting documentation for verification. This often includes personal financial records such as bank statements, bills, mortgage papers, etc., business records like contracts, receipts, invoices, credit card statements, deposit slips and financial records of persons or businesses connected to your return.
During a CRA Audit
If the documentation provided does not align with what was reported in your return, the auditor will discuss the discrepancies with you. It is crucial to seek professional tax advice before and during the audit because your responses and everything you say during the audit may impact the repercussions you face. After completing the audit, the auditor will make one of two decisions: either no reassessment, if they can reconcile the information provided with the return, or reassessment if they are not satisfied with your answers or documentation and believe that the correct amount of tax was not paid. If the latter occurs, the auditor will recommend a reassessment of the tax return in a proposal letter that details the reasons for their decision and the amount of taxes they believe you should have paid.
Taxpayer Recourse After a CRA Tax Audit
While it is also possible for an audit and reassessment to result in a refund, the clock starts ticking as soon as you receive your proposal letter. You have only 30 days to notify the CRA that you disagree with the auditor’s findings, and it is advisable to seek the advice of an accountant to appeal the reassessment proposal at this point if you have not consulted one earlier. Failure to respond within the given period will result in the reassessment of your tax obligation according to the proposal, which will likely lead to paying more taxes.
