AUDIT is a SCARY word!!!
Why does the word “AUDIT” scare most taxpayers?
First, there is a misconception with the word AUDIT. Let me clarify between what CRA does and what Professional Accounting firms do.
Accounting firms use the word audit when performing an audit of your financial statements. For business purposes, an audit of your financial statements is generally done when required by investors, shareholders, bankers, etc. It is generally performed using a random sample of transactions, analytical procedures, discussions with shareholders and key staff, etc. NOT every single transaction is checked.
My focus here is on CRA Audits. Most taxpayers assume that when CRA audits them, it means that every single receipt, piece of paper, transaction, bank statement, credit card statement, etc. in your home and in your business will be rummaged through. Although there is a possibility, it is EXTREMELY RARE. In my 13+ years of Public Practice experience, I personally and professionally have not EVER had this happen to a client. I have heard from CRA and other Professional Accountants that this CAN happen however will generally only happen when there is an intentional crime committed.
So now that you know YOU won’t likely be FULLY AUDITED unless you are guilty of committing a crime, let’s understand what AUDIT is and what actually happens during a CRA audit.
For personal tax purposes, CRA calls these audits pre-assessment or post-assessment reviews.
A pre-assessment review is when you file your personal taxes and upon submission to CRA, they decide they want proof of what was filed. With this type of review you will not receive your refund (if you are supposed to get one & yes, if you owe, you are still required to pay on time) until you supply the supporting documents they have requested. A letter is sent to you within a few days of filing which will explain what information is being requested. Generally speaking, they will request for 1-3 different items…but NOT every tax slip or receipt for ALL that was filed on your tax return. i.e. they may request your childcare receipts.
A post-assessment review is performed a few months after you file your taxes. Again, CRA chooses a random sample of amounts, categories or line items which they want supporting documents for. When they request the information, you generally have 30 days to reply otherwise they will automatically deny the deduction or credit amount originally filed and claimed.
With both types of reviews, the audits are generally random however some can be triggered by the dollar amount or by key areas that CRA has chosen to get additional information on for that year. Documents are generally submitted by fax, mail or uploading through CRA’s website. It is RARE that they would visit your personal residence or your Accountants office for this type of audit.
This year, I have noticed an increase in the post-assessment reviews for taxpayers who claimed employment expenses. Although they have also been asking for medical and moving expenses too.
For other tax areas, there are a few other types of audits; i.e. payroll, GST/HST, etc. Again, they are generally looking at one area and not the ENTIRE corporation. I.e. with payroll, they might be looking to make sure that automobile benefits are being recorded properly, if taxable. With GST, they might be looking to ensure that you are only claiming 50% of the GST on meals.
Secondly, I find most taxpayers who are afraid of AUDIT do not use a Professional Accountant. They either do it themselves, use a non-designated professional and/or are uncomfortable asking Professionals in their network for advice.
Not every taxpayer can handle all tax situations using a DIY approach. Don’t be afraid to ask for help. We, Professional Accountants, exist to help you, TAXPAYERS!
I hope I have taken the SCARY out of AUDIT. Please let me know in your comments below.
Keep calm and call your Designated Accountant!
***This blog is for information only and not to be used as tax advice or planning without first seeking professional advice. Information is subject to change without notice.