6 Tips to Survive an Audit
Nobody expects to be audited. But with at least 434,000 Canadians investigated every year many are left flat-footed when the inquiry letter arrives. Make sure you’re prepared by following these easy steps to securing an accurate and fair audit.
1. Be Audit Ready
The CRA can go back four years from the date you mailed your return, so be sure to keep proper files. Disorganized or incomplete records can cause auditors to assume you’ve either made a mistake or are hiding something.
Insider advice: There is excellent bookkeeping software (such as QuickBooks, Sage Simply Accounting or GnuCash), but a computer program will only be as good as your paper-based method. The best tool? A simple accordion folder with multiple pockets can help keep sortedout records in one place. Ideally, tax-return files should be separated by year and divided into main categories, including income, expenses/deductions and investments. Store all financial documents that you would need to prove the numbers on your return. By law, records must be stored in Canada, and can be ditched only after seven years.
2. Think Before You Speak
An audit doesn’t assume guilt, but don’t let your guard down. If an auditor puts you on the spot, you need to address the query, but you don’t have to do so immediately. After all, anything you say could be used against you.
Insider advice: If unsure about how to respond, find an experienced tax professional with expertise in the area you need help with. Referrals are a good place to start. Otherwise, contact one of Canada’s three professional accounting bodies: the Certified General Accountants Association of Canada the Society of Management Accountants of Canada and the Chartered Accountants of Canada.
3. Give Them Only What They Want
In your effort to be cooperative, you might be tempted to hand over all your financial records. Auditors aren’t supposed to be on an open-ended hunt, but anything you pass along can open the door to other questions. So don’t volunteer information. The auditor can always ask for more, but there’s no reason to offer more than what’s being requested.
Insider advice: Get the auditor to put his or her request in writing. In fact, keep track of all communication with the CRA. If there’s a document you weren’t able to track down, don’t disclose that fact. Often records that were requested won’t be needed based on the quality of other information you provide.
4. Keep Original Recipts
CRA officials are authorized to review the originals of all supporting documents, but never give up those originals. If they’re lost or destroyed, the CRA can say you never provided them.
Insider advice: If you’re forced to part ways with your precious papers, the CRA should give you a receipt for what they’re taking. Make sure the list is comprehensive, so there’s no dispute later on-and make copies of the documents.
5. Be Polite
Auditors are human. If you’re cordial with them, they’ll likely be civil with you. This isn’t just a matter of manners; auditors can exercise some discretion when it comes to allowing deductions and assessing penalties. Ask yourself if they’re likely to use that leeway for someone who is belligerent or rude.
Insider advice: Make a good first impression. Ensure the auditor provides a list of what he or she wants before visiting and prep everything as best you can, in a format that makes things self-explanatory. Ideally, the auditor should be able to review the records without you having to be present.
6. Know Your Right to Fight
If you’re one of the lucky few, the CRA will send a letter saying they’ve completed their audit and have no adjustments to make. Otherwise, expect a Proposal to Reassess letter apprising you of changes the auditor intends to recommend on your tax return. You have 30 days to dispute the letter, after which the CRA will issue a Notice of Reassessment that sets out the additional taxes you owe, along with any interest and penalties. If you still disagree, you have 90 days to file a Notice of Objection. If rejected by CRA Appeals, you can take your challenge to the Tax Court of Canada.
Insider advice: Audits can, and do, go badly. If you’re clashing with an auditor or feel mistreated, you’re well within your rights to ask to speak to a supervisor or even request a new auditor. For more details on the process, see Resolving Your Dispute: Objections and Appeal Rights Under the Income Tax Act, a CRA publication available on their website.