Audits can be scary—and for good reason. Your savings, business, house, and way of life are all at potential risk. From the very beginning, you’re playing defense and when it comes to the CRA, you’re guilty until proven innocent. The onus is on the taxpayer to provide supporting documentation and to defend the claims made.
One of the first questions most clients ask is how to avoid an audit. Our advice is simple: File on time, be organized, maintain your records properly and be reasonable in your claims.
Whether your audit ends up easy or a hardship is up to you. Take these two steps:
STEP ONE: Hire a professional to represent you.
STEP TWO: Start organizing.
Though you can’t always avoid an audit, you can survive one. We understand that when you don’t know what to expect, it’s easy to let your imagination take over. It’s not unusual to feel a bit worried about the outcome. But here’s the good news: While some audits can drag on for years, a routine investigation usually wraps up within three months.
What to expect
If you’ve already received a notice from the CRA, respond with the guidance of an accountant as soon as possible. Cooperation is key. If you don’t take action, you will be arbitrarily assessed by CRA and all expenses will be denied. For taxpayers who procrastinate, this quickly escalates to harsh penalties for tax avoidance and negligence. Be proactive, not reactive.
What most people don’t realize is that the CRA has nearly infinite access to your personal financial information. CRA has the authority to freeze your assets, including bank accounts and make a summary judgement which you will have to appeal. This applies to your organization or company as well. Showing up without clear and complete documentation is an expensive mistake you can’t afford to make.
You might be tempted to represent yourself. This, too, could lead to mistakes. Let a professional do the talking with CRA. We find that our clients typically volunteer too much information which complicates the audit even further. Therefore, we restrict the information flow to the auditor by being in the middle and fully representing our clients. In most cases, we handle 100% of the talking with CRA, while our clients focus on their business. Hire an experienced accountant to control the flow of information and protect you from revealing details the CRA might use against you.
On the subject of communication, document everything. When the pressure is on, misunderstandings happen. The more you have in writing, the stronger your position will be when it comes to a final settlement or judgement.
It still surprises us just how wide-ranging the level of skill is among auditors. Some are easy to work with and understand standard business transactions. Others are confused, inexperienced, or focused on obscure details. Plus, nobody is perfect. With big workloads and limited resources, auditors make mistakes too.
One last thing—We have found that most auditors have a soft spot for respect and preparation. If you show up prepared and with a respectful attitude, you can expect to be treated fairly by the CRA.