Tax Tips: How to Avoid a CRA Tax Audit

The Canada Revenue Agency audits people or companies whose tax returns seem suspicious. The CRA is more likely to audit small businesses and the self-employed than employees with a T4 slip.  Read on for ways to avoid a CRA tax audit, or at least, how to survive a tax audit.

CRA Income Tax Assessment and Audits

The CRA has access to data on a wide range of tax claims. Any real or perceived discrepancy in income tax returns could lead to an audit. CRA requests for information could also lead to an audit if the response seems odd.  Self-employed workers, sole proprietors, business owners and SMEs should seek tax counsel. It's best to get financial advice not just at tax time but for each fiscal quarter. Canada's tax laws are extensive and complex.  The CRA tends to check up on anything that seems outside the norm. This includes your deduction. Industry and demographic data show standard income and expenses. An expense figure very different from earlier returns could also spark an inquiry.  Lack of documentation to support claims when the CRA asks for them will cause problems. Audits may proceed due to lack of records.  The Canadian Professional Sales Association advises cooperating with an audit. Here are a few suggestions for handling a small business audit:

 
• Be polite and courteous every step of the way
 
• Know your rights: you may request an extension, for example
 
• Ask bookkeepers and/or accountants to have the records ready
 
• Ask which specific years the CRA wants to audit
 
• Provide records for those years only
 
• Maintain business activity during the audit but be available to the auditor
 
• Even if you disagree, settling at the audit level may be less expensive than appealing a reassessment
 
• Ask the auditor - at the end -whether you will need to change your tax returns, and if so, why.

Avoiding CRA Tax Audits

Providing complete and accurate records helps the audit go faster. It may take a few days or a few weeks. Finding out the result of the audit may take even longer.  Canada's Auditor General Michael Ferguson concluded in 2016 that the CRA takes too long to render decisions. Audit results can take several months. The CRA has a backlog that's valued at roughly $18 billion (as of March 2016).  The CRA offers taxpayers the chance to assess their own audit experience. A survey was designed with help from Chartered Professional Accountants Canada. Questions regard:

 
• The auditor's professionalism
 
• Whether the auditor answered questions about proposed changes
 
• Whether at least 30 days were allowed to respond to proposed changes
 
• If extension requests were granted
 
• Whether the taxpayer was informed of all obligations and rights
 
• Whether the auditor offered to adjust for any unclaimed benefits.