So you’ve received the dreaded phone call or letter that you’re being audited. You will never receive an email giving you notice for an audit from the CRA, these types of communication are a scam, and further contact should be avoided.
For most, receiving an audit notice comes as a complete surprise, and it’s nothing to worry about if you haven’t done anything intentionally wrong. However, not complying with your auditors’ requests and hiding information can land you in hot water.
Understanding why you’re being audited and what you need to do is vital for a swift and smooth process that gets the CRA off of your back. Below we will explore the audit process so that you can feel confident throughout this stressful time.
What Does it Mean?
Upon receiving your audit notice, you’ll find that your audit falls into one of three categories that each have varying degrees of implication on you.
This isn’t an audit to worry about; this usually means that there has been a typo or other human error mistake on your tax return. Simply refilling out the forms should be sufficient in fulfilling your audit.
This is where you’re required to do some leg work and collect requested paperwork and present them at the CRA office. An office audit is often an indication that there’s been an issue flagged with your deduction, such as business expenses.
A field audit is probably the most dreaded. With this audit, the CRA pays your home and business a personal visit. They have the authority to seek records from your property. You can request a change of audit to an office, but you’re not guaranteed that this will be granted.
Statistically speaking, the top 1% of earners are the group that faces audits more than any other earner. They have a 1 out of 6 chance of being inspected. The average American will most likely never be audited or know anyone that has because there is only a 1 in a 100 chance. People who claim to have no income at $0 are kept a close eye on with a 1 out of 20 chance of being audited.
Why Are They Auditing Me?
There are many possibilities as to why the CRA has called for an audit to happen. These reasons each come with their own seriousness attached to them. Human errors and mistakes are a natural and unintentional occurrence, whereas claiming false deductions is fraudulent behavior.
Failure to Report Additional Income
It’s normal for many people to work multiple jobs and seek income in other ways, such as freelance work and small side businesses. The CRA takes failure to report additional incomes very seriously and uses advanced software to detect this.
Claiming False Deductions
You must ensure that the deductions you file are accurate representations, and the numbers are legitimate. Failure to do so can incur a field audit to inspect such claims. If it’s deemed that your business deductions and purchases are not necessary or are out of the ordinary, then you most likely will trigger an audit.
Not inputting your information correctly and accurately can lead to civil penalties and investigation; this includes rounding numbers up to the closest whole figure. The CRA does understand human error occurs, but if they suspect fraudulent behavior is occurring, then they have the right to penalize you.
Claiming Excessive Charity Donations
The CRA has guidelines in which they can determine the average charitable donation against your income. Therefore, it’s very easy for them to detect inflated and false charitable deductions.
What Should I Do Next?
You should always comply with what your auditor is requesting from you. In regards to a correspondence audit, this may be as simple as redoing a form and mailing it to them.
For office and field audits you need to schedule a meeting with the CRA within a week. You’re within your rights to postpone this to give you time to get your paperwork in order, but there’s no guarantee this will be granted.
If there are gaps in your business account book, then you can reconstruct missing documents. From this, the auditor will decide if you can keep the deductions if they are then deemed reasonable.
It’s at this point where hiring a professional accountant may be a necessary cause of action to ensure that all of your documents are in order and your rights adhered to. Professionals at Faris CPA of Toronto recommend an in-depth analysis of the CRA audit in order to minimize tax implications.
It’s then a waiting game of up to 30 days to receive your report. You can either accept their findings, paying anything due, or reject an appeal. Your accountant can guide you on the most beneficial steps to take with your finances and situation in mind.
Going through an audit can be a stressful and confusing time. When your finances and freedom are at risk, it’s always best practice to hire a professional who understands the law and auditing processes. Remember to be honest always and take your taxes seriously!