Conquering the Tax Audit
So you are getting an audit. What do you do? What you do not do is allow an unsupervised audit. This generally leads to a disaster. The auditor’s job is not to be fair. Their job is to find as much tax owing as possible and unsupervised they will surely find a lot. Here are the steps we suggest to reduce the costs and tax exposure that an audit may cause.
1. Appoint somebody to oversee the audit.
Some clients prefer to supervise the audit on their own. Sometimes this works , sometimes it does not. We recommend that you should have your accountant or at least an experienced bookkeeper supervise the audit.
2. Determine the cause of the audit.
The most common are: late filing of HST, Corporate tax, Personal tax and payroll remittances. Non payment of the above will also cause an audit. The next greatest cause are unusual occurrences. If there are large fluctuations in revenue, expenses or profit/loss then a Canada Revenue look see may be coming. If your GST/HST revenues reported do not match your Corporate Tax return this might be a trigger. In some instances it is just the industry you are in that is getting a general audit and there is nothing you can do to avoid it. In general, sloppy bookkeeping usually leads to an audit.
3. The initial written request.
CRA should send a formal written request advising us specifically what they would like to look at. Sometimes we have to actually request them to do this so we can prepare for the audit. Based on this request we gather all the information requested and set a date , time and place for the auditor to come.
4. The audit.
The auditor will come in and begin auditing the information given to them. In many cases they will request more information during the audit. It is important to supervise what the auditor is getting and make sure they do not misunderstand the relevance of the information they have. The auditor is entitled to look at all of the corporate records and also may wish to look at the owners personal bank accounts. In general the auditor is looking for unreported or suppressed revenue and overstated expenses. Many of the auditors are very competent and will understand the material given to them. We have however come across some auditors who were not competent and one who did not understand double entry bookkeeping. This careful supervision at this point is very important and may prevent misunderstandings between the auditor and the company being audited.
5. Informal questioning.
At some point the auditor will come forward with informal questions regarding the audited material. We make sure that all of the questions are answered and that the auditor understands our point of view on any discrepancies that have been found.
6. Auditors formal proposal
Some time after the auditor has left they will send the taxpayer a formal proposal letter that outlines any changes the auditor would like to make due to the tax audit. This should be carefully scrutinized to see what the net tax affect would be to proposed changes. This is the final point in which we can influence the initial out come of the audit. We make our final submission to the auditor providing information which could change the proposal from the auditor.
7. Auditors new proposal
If we have provided the auditor with valid new information then it is highly likely that the auditor could use this information to resubmit a new proposal which would reflect positive changes. It is at this point that the auditor will probably not accept any further information and will finalize the audit results. There are times that we are at an impasse with the auditor and willfully go on to the next step.
8. The assessment
We now receive the new assessment after the audit. We carefully go over this assessment and see if it reflects what we feel is the correct assessment. If it does not we have to make a decision if we should go on with the process. If there are small discrepancies sometimes it is more economical to stop at this level. If the size of the discrepancy is large we may go to next level.
9. The Notice of Objection
We are now finished with the auditor and if we still are unhappy we can file a notice of objection. In the notice we lay out our case very briefly and mail this in to the local office of the CRA. We are now dealing with a different department who many times are much more professional and business like in it’s dealings with the taxpayer. Once we file an objection we await communication from the appeals officer assigned to the case. This can take many months. When contacted we are given a chance to lay out are case in great detail. This our last and best chance to win our case. We are given a chance to present more factual information if we have it and we can quote tax rulings and other examples to this case. The appeals officer makes a decision and the final assessment will be produced.
10. Tax Court
If there are still large outstanding issues then Tax court is the last resort. Tax lawyers are very expensive. If the amount of tax in dispute is very large and the taxpayer still feels they are right then this is where to go.
So this is a very brief explanation of the process. An understanding of this process will help any taxpayer who has a problem with Canada Revenue. Of course avoiding the audit would be the ideal situation. Please see our article on this issue.