Tax audits can be stressful. However, they are a necessary part of the tax system. The Canada Revenue Agency (CRA) uses audits to ensure that the tax system remains fair for all taxpayers.
During a tax audit, the CRA will examine an individual or business’ records and books. An auditor will then assess whether these records match the filed tax returns. Tax audits can help the CRA flag fraudulent transactions and ensure accuracy.
Receiving a phone call from the CRA about an upcoming audit might send you into a panic. However, there are ways to handle a tax audit effectively.
Below we discuss how you can avoid triggering a tax audit and how to handle one if it comes.
What can trigger a tax audit?
The CRA doesn’t audit all taxpayers since that would take a lot of time and resources. However, certain factors and actions could make you more at risk of getting audited.
Here is common CRA tax audit triggers and how you can avoid them.
The CRA wants you to provide exact amounts on your paperwork, down to the cent. For example, if an expense costs you $394.20, you must record that same amount.
Rounding it up to $400 could alert the CRA. Several rounded amounts in the same tax return are a red flag, implying inaccuracy that warrants an audit.
Excessive, unjustified expenses can increase the likelihood of a tax audit. Make sure to list and itemize each expenditure and the corresponding income. The CRA often has a baseline of industry costs and profits, and standing out from the norm could trigger an audit.
T-slips or tax slips are an essential part of each tax return. Forgetting or failing to attach them to your documents could warrant penalties.
Although some people could forget their T-slips due to honest mistakes, consistently missing T-slips could trigger a tax audit. Failing to include them in your returns could make it look like you’re trying to avoid disclosing your income.
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How To Handle a Tax Audit
If the CRA has contacted you for an audit, there is no need to panic. Make sure to read up and prepare. It can help to research and ask your accountant what to expect during an audit.
Read the notice and respond promptly
A CRA auditor will initiate contact through a phone call which begins the audit process. They will also send a letter containing the details of the audit.
Make sure to answer their questions as accurately as possible and provide access to your books and records if necessary.
Prepare and provide the required documents
During the tax audit, the CRA auditor will require access to the following documents:
- Business records (e.g., journals, ledgers, invoices, receipts, bank statements, contracts)
- Personal records of the business owners (e.g., credit card statements, bank statements for personal accounts, mortgage documents)
- Personal or business records of individuals/entities related to the business owners (e.g., spouses, family members, partnerships, corporations, trusts)
You can deliver these documents in person or submit them online.
Professionalism and courteousness can make the entire process easier. Work with the auditor during the process to ensure truthfulness and accuracy.
You don’t need to babysit the auditor, especially if they require an on-site audit. Run your business as usual, but remain accessible should the auditor have any questions.
Review their findings
After the auditor completes their audit, ask them whether you need to make changes or adjustments to your return. If there are no changes, the matter is finished.
If the auditor proposes some adjustments, review them and ask questions. Make sure you understand their requests. You can meet with your accountant to review these changes and decide whether to accept or challenge them.
Tax audits can be pretty intimidating. However, they are necessary to ensure fairness within the Canadian tax system. Working with an experienced accountant or tax professional can help you navigate this process more efficiently.