YOU have just received a tax audit notice saying you're going to be audited. What should YOU do?
Before I begin, I want to let you know that at the end of this article, you will have the opportunity to share YOUR audit story.
Tax Audits The Process
Receiving a Tax Notice
This is over simplifying it but the basic steps if you receive a tax audit notice are:
Tax audits do NOT go smoothly if you are disorganized and don't have supporting documents to back up your claim ... in other your words, the accounting for your small business was done sloppily or by a person without sufficient knowledge.
That's why you want to setup your accounting system to audit proof you and your business as part of your day-to-day operations. Small business bookkeeping is key. It's important to do it right and not wing it.
An excellent resource article titled Canada Tax Audit FAQ can be found at fightthecra.ca . The list of practical questions are answered by tax lawyers at Barrett Tax Law in user friendly language.
Read this story for just how bad CRA can make your life. This couple lives in the same area where I had my lakefront property for sixteen years (I've moved now) and their problems started in 1996.
I obviously don't know the details except for what CBC interviews divulged. But I suspect a lot of little things went wrong (from leaving the tax auditor alone with his records ... to the tax auditor taking the records and then losing them ...) and they just kept building on each other.
If he had found a way to pay the disputed tax liabilities while arguing his case, he would not have lost everything. The interest and penalties would have stopped and CRA would have had no reason to seize his assets and put them up for sale.
In "The Current" interview, he said his bookkeeper was a professional accounting firm so I'm not sure why he didn't have them represent him during his audit ... but in court it mentioned he failed to let his accountant know the CRA were auditing him.
It's now 2014, eighteen years later ... this is how the story ended. As the newspaper article states, "CRA had launched an investigation because of the number of personal items found when looking at his claimed business expenses [my emphasis] when a routine audit into his income tax was launched in October 1996. ... Unfortunately for Leroux, his bookkeeping methods were chaotic. ... in the end she [the judge] decided Leroux was not eligible for any damages, largely because he failed to file an appeal [my emphasis] before the amounts were registered against his property, waiting 18 months to take that action."
Have you experienced an audit? What did you learn that you can share about YOUR audit story?
Remember in the Canadian tax system, you are guilty until proven innocent. Your best defense is proving due diligence through accurate and honest bookkeeping.
Although this was a situation where everything seemed to go wrong, CRA does convict for tax avoidance and tax fraud. They actually publish their convictions on their website. Just go to the Media Room (or Newsroom .. they keep changing the name). You will find a link to convictions under Products for the Media.
If you have a professional represent you, they will look at prior year's returns for possible errors or omissions. They will determine your strengths and weaknesses and devise a strategy of how to approach the audit to your best advantage.
You may want to take some time and read Understanding Tax Audits in Canada.
I find when you understand the process, it is less scary. If you have
kept a good set of books, tax audits are more of a nuisance than a
If you want to know how a chartered accountant (CA) recommends you handle a tax notice and subsequent audit, check out Ken Davidson's October 2012 article titled Revenue Canada Audit: 5 Steps To Get You Through It.
Another article worth reading is the Financial Post's October 10, 2012 article title Small businesses need help when going up against the taxman. Towards the end of the article, it talks about your legal aid options with a new group called "Pro Bono Students Canada".
A January 2, 2013 article by Vern Krishna discusses discusses CRA's unlimited powers and right to seize documents. You can find this article at the Financial Post website.
Do you have a great story about what happened when you were audited by CRA? Did you change any of your procedures after you experienced an audit? In hindsight, do you wish you would have done things differently from the start?
... or do you have a CRA tax audit horror story? Share it ... please!
Get creative and add a picture if you think it will improve the presentation of YOUR web page.
Have you just gone through the audit from h***? Do you need to analyze what happened ... what went wrong?
Here is where my readers share their audit experiences ... what they learned ... what they wished they had done differently if they had another chance. :0(
You can help make Tax Audit Stories better by adding your comments and ratings to each contribution.
After The Tax Audit
I have a client that (prior to me taking over the books) was audited by the CRA. He received a Notice of Reassessment for 3 years with a large tax payable. …
CRA Auditor Makes Error
Check out this story published by CBC about a couple in trouble with the CRA because the auditor added personal loans / borrowed money as income ... and …
CRA Plans for High Net Worth Individuals Audits
In the Deloitte May 12, 2011 free newsletter Weekly Tax Highlights , there is a link to an article by Lorn Kutner titled The CRA places more scrutiny …
Combined Tax Audits
Can the CRA still do combined GST/HST and Income Tax Audits? I read on CRA site that they were discontinued in July of 2010. Hi Natalie, …
CTV's W5: A nightmare when the taxman got it wrong
Here is a link to a W5 report on CRA audits gone wrong. It aired on April 3, 2010. http://www.ctv.ca/CTVNews/WFive/20100401/w5_taxman_100403/
When the taxman calls,
we all cower
Sarah Hampson wrote an article for the Globe and Mail on June 1, 2010 titled When the taxman calls, we all cower . It is all about a letter she received …
How Not To Freak Out ...
During A CRA Audit
I found this article while searching for something else on Google, so I thought I would pass it along. I thought the audit story was terrific ... and …
CRA horror stories
Do you publish the stories that people have sent you? If so, where can I view them? Thank you & I like your site! No one has submitted any …
CRA has a webcast called What To Expect From An Audit that you may want to watch. It is located at cra-arc.gc.ca> Media> Videocasts> Videos for businesses> What To Expect From An Audit.