So you’ve filed your taxes and received your notice of assessment, but now there’s another letter from the Canada Revenue Agency (CRA) in your mailbox with a request to see more of your paperwork. What do you do?
If you’ve claimed, say, a medical expense deduction and filed your return electronically, the taxman may ask you to produce copies of the receipts that prove that you’re actually eligible for the tax break in question.
All you have to do is have your papers in order and respond by deadline, usually 30 days from the date of the letter. The CRA will disallow your tax break if you can’t back up your claim and may decide to audit you.
You should keep your tax records for six years, in case you’re ever the subject of a review.
An audit is an examination of your books and records to see if you’ve actually paid all the taxes you owe.
The CRA may do a so-called desk audit if it wants to dig deeper into a particular aspect of your return. These examinations are particularly common if you have business income and declared losses or if your return shows real estate transactions, Rotfleisch said.
Then there are field audits, in which the taxman will physically show up at your home or place of work.
Now, let’s assume you’ve received the dreaded notice that you’re actually being audited. What do you do?
come to an idea of what your living expenses should have been for those three years,” Barrett said.
If the CRA believes you need $100,000 a year to sustain your lifestyle and finds that you’ve accumulated $200,000 worth of assets on top of that when you’ve been declaring an income of $75,000 a year, you’re in trouble.
The problem is, though, that net-worth audit calculations can be “way off,” Barrett said.
And there’s a risk that auditors will use a net-worth audit as a shortcut, instead of painstakingly combing through the available documents, he added.
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Understand whether you’re in it to win – or to settle
At the very beginning of the process, ask your representative what you’re chances are, Rotfleisch said. This may sound obvious, but if it’s clear that the CRA is right and you are not, the aim should be to simply rip off the band-aid as quickly and painlessly as possible. Respond to the taxman, admit your error, and pay quickly to minimize interest and penalties.
You can usually get a second opinion about your case from a tax lawyer in a one-hour consultation that will cost you between $200 and $1,000, Rotfleisch said.
Check in with your tax representative
Even if you’ve hired someone to help you through the audit, you can’t wash your hands of it, Rotfleisch said.
Especially in the period between May and June, accountants are often swamped, and it’s easy for some things to fall through the cracks, he added. If you aren’t receiving regular communication about the process, follow up in order to make sure things are moving along.
Appeal the case if it makes sense and it’s worth it
At the end of an audit, the CRA will usually tell you in a letter whether it found any mistakes and you owe more tax. You have 30 days to question those findings. The CRA will then take a second look and get back to you. If you still don’t agree with your assessment, you can challenge it in tax court, Barrett said.
Before you go to court, however, make sure that the amount of tax in dispute (plus interest and penalties) is worth your lawyer’s fees, Rotfleisch said.
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