An audit by the Canada Revenue Agency can be stressful for a taxpayer, but a systematic approach to answering requests and an appropriate attitude about the process can reduce the challenges of the audit. The CRA conducts spot checks, reacts to inconsistencies in the information you submit and focuses on differences between your data and that of the people you deal with. The key is to respond promptly, supplying all the information necessary to clear up any problems.
Initial Audit Advice
The CRA advises you by letter that you have been selected for an audit and specifies the scope of the audit. You may be asked to submit particular receipts or records or all the receipts and records of a certain type, such as medical expenses, or you may be asked to prepare for an audit of your records in your home or place of business.
Certified financial planner George Caners, MBA, CPA, and author of the book, “So You Want More Money,” is based in Brockville, Ontario. He says a big factor in a successful audit is the attitude of the taxpayer. “The CRA has to audit the records of many honest taxpayers to find those who are fraudulently avoiding taxes,” he said. Caners said that in his experience, many audits focus on asking for receipts. “Just relax and submit what the CRA is requesting. You are helping the system work for those who file their taxes properly and helping catch those not paying their share,” he said. If you follow the instructions of the letter and send in the documentation the CRA wants, chances are it will be satisfactory.
The Audit Process
Based on receipts and records you submit, an audit may take place at the offices of the CRA or it may take place on your premises. In an audit focused on a specific area, the auditor makes sure that the totals you have declared and claimed are backed up by your records, and that the records reflect individual transactions that he can verify. For a more comprehensive audit, the auditor wants to be able to track income to where you have spent the money, saved it or invested it.
Your records must show that you have included and declared all income, and your expenses must be documented with receipts that have a reference to how they were paid, such as a cheque number, a bank reference or a note that they were paid by cash. The auditor does spot checks to see if the records are internally consistent and may investigate in depth if records don’t match. You may have to obtain additional documentation from the bank and from other people you dealt with if your records are incomplete. If everything is in order, no adjustment to your taxes is needed. If you made a mistake in your documentation or calculations, there may be a balance due or a credit.
CRA Documentation Requirements
The auditor reviews your original documentation, such as receipts, invoices, canceled cheques and bank statements, and your records such as tax calculations, accounting programs and bookkeeping. If you keep electronic records, you have to make a copy available to the auditor.
While the auditor checks your records and documentation, he will not do your bookkeeping for you. If records are incomplete, he will ask you to make corrections, obtain the required proof and carry out the required calculations. Incomplete records mean the audit will take longer and may be more extensive.
How To Address Problems
An audit often identifies issues that the auditor wants addressed. You may have revenue that the auditor believes is income or you may have claimed expenses that the auditor believes are not justified. For example, if you received repayment of a loan, it may look like income on your bank statement, and it may not appear in your records. You have to be able to document that a loan existed and that you received payments that paid off the loan. On the expense side, you may have claimed car expenses that the auditor thinks are too high. You have to be able to show where you went, for what purpose and why you believe the expenses are deductible. The key is to work with the auditor to demonstrate that you have valid reasons for your claims and document the reasons with detailed records.
The Results Of The Audit
At the end of the audit, all issues should be resolved. If you have to pay an outstanding balance, it will typically be because you made an honest mistake or interpreted a tax regulation incorrectly. If your documentation is in order and the auditor found no mistakes, no tax should be due. The auditor will usually advise you of his findings and confirm them in a letter. You have at least 30 days to respond and accept or question the findings. Although you have been audited, you still have to keep your records and receipts for a minimum of six years after submitting your tax return, and it is a good idea to keep the records of the audit as well.
References & Resources
- Canada Revenue Agency: What You Should Know About Audits
- George Caners, MBA, CPA; Brockville, Ontario