Receiving a notice from the CRA that you’re being audited is not uncommon, and it’s important to remember that audits are a standard part of enforcing tax laws and ensuring fairness in the tax system. With the right preparation and understanding, navigating through the audit process can be managed effectively.
Here are some important steps to take after you’ve received a notice that you’re being audited, aimed at ensuring you’re well-prepared and can handle the audit with confidence.
Step 1: Take a deep breath
Receiving an audit notice from the CRA can be an intimidating experience for both individuals and businesses. Take a moment to relax and remember that an audit does not always imply wrongdoing. Often, audits are triggered by random selection, discrepancies between reported figures and third-party information, or deductions that are unusually high for the industry standard. Therefore, it’s crucial to approach the situation calmly and methodically, ensuring you are well-prepared to present your financial records cleanly and accurately.
Step 2: Understand the scope of the audit
Firstly, it’s important to understand what the CRA is auditing. The audit notice should specify whether they are reviewing specific aspects of your tax returns, such as income, expenses, or tax credits. For businesses, it might include corporate tax filings, payroll, or GST/HST. Understanding the scope helps you anticipate possible areas of concern and prepares you for detailed discussions. Additionally, be aware that audits can extend to interviews or on-site visits, particularly for complex cases, to closely examine your financial behavior and business operations. Carefully read the audit letter to determine the years and items being reviewed. If anything is unclear, don’t hesitate to contact the CRA for clarification.
Step 3: Gather your documentation
Documentation is your best defense in an audit. Collect all relevant records that support your tax filings. This includes invoices, receipts, bank statements, and logs for claims like travel and auto expenses. For businesses, organize financial statements, sales records, payroll documents, and any other pertinent information. Proper documentation validates your tax filings and serves as your primary tool for resolving discrepancies. At this stage, it’s a good idea to organize and possibly digitize your records for easy access and presentation.
Step 4: Review your tax returns
Before the CRA auditors arrive, review the tax returns in question. Understand the numbers and be prepared to explain how each was calculated. If you notice any discrepancies or errors, discuss these with your DMCL advisor to understand their potential impact. This review will help you feel more confident during the audit as you’ll be fully aware of the details and rationale behind each figure.
Step 5: Consult with your tax advisor
Meeting with a tax professional is crucial. A CPA familiar with CRA audits can offer invaluable advice and support. They can accompany you to meetings and help communicate effectively with the CRA. It’s important to note that anything said during initial audit interviews can be scrutinized later, so having an advisor present during such interviews can ensure accurate representation of your financial dealings.
Step 6: Respond promptly and politely
Throughout the audit process, it’s important to maintain a cooperative and respectful demeanor. Respond promptly to requests for information and be punctual for meetings. The easier you make the process for the auditors, the smoother the audit will likely go. Timely and polite responses can foster a cooperative environment and may even lead to a more favorable interpretation of ambiguous issues. Set reminders for deadlines and prepare documents in advance to avoid last-minute rushes.
Step 7: Understand your rights and options
You have rights during an audit, including the right to representation and to appeal decisions. Familiarize yourself with these rights by reviewing the Taxpayer Bill of Rights and understand the appeals process in case you disagree with the audit findings. Being aware of your rights ensures that you can advocate effectively for your position and seek redress if necessary.
An audit doesn’t have to be a stressful ordeal. With proper preparation and support from experienced professionals including chartered professional accountants, you can navigate the audit confidently and efficiently. Remember, the goal is to demonstrate compliance and resolve any discrepancies in a straightforward manner.
Disclaimer: Tax rules can be complex. This article is not intended as tax advice, and you should not make tax decisions based solely on the information presented. You should seek the advice of a chartered professional accountant before implementing a tax plan or taking a tax filing position.
Ellen Tran, CPA, CA, is a partner with DMCL Chartered Professional Accountants. She specializes in providing accounting, assurance and business advisory services to owner-managed businesses, private companies, not-for-profit organizations and individuals. She has extensive knowledge in private company financial reporting and taxation for both corporations and individuals.
Originally published by DMCL Chartered Professional Accountants.
