What to Do If You Receive a CRA Audit Letter
Getting a letter in the mail from the Canada Revenue Agency (CRA) indicating that your business has been selected for an audit or review can be unsettling. To the average business owner it easily translates to a fear of penalties, the payment of extra taxes or a long drawn out investigation. Despite these fears, CRA audits are a part of Canada’s tax system and being selected does not necessarily mean you have done anything wrong.
Your reaction in the days and weeks after will determine how easy this process is to undertake. Keeping yourself organized, remaining ahead of deadlines, and consulting professionals when necessary will make it easier to handle.
One of the first things you should do after receiving an audit letter is contact a business accounting firm before communicating directly with the CRA. An experienced accountant can review the notice, explain exactly what the CRA is requesting, and help prepare an accurate and professional response. Having expert support from the beginning often makes the entire audit process much more manageable.
Read the Audit Letter Carefully
Read thoroughly the letter of audit before collecting documents or talking to anyone.
The CRA will usually tell you what exactly they are going to review. The search could be for a certain tax year, GST/ HST filed, certain costs/business expenses, certain payroll records or something else on your tax return. Knowing this is important as it allows you to concentrate solely on the material requested by the CRA.
A note of caution to business owners. A business owner should not assume that the audit will not identify other issues with their business. Many CRA audits focus on a particular issue and the audit is limited to a time period.
Respond Before the Deadline
Within each CRA audit letter, there is a deadline by which you need to send certain information. If you ignore the letter or make that deadline is not met, then you could only make the matter worse.
Often, you can request an extension if you truly require the extra time to collect the records, but you should ask before the deadline has passed, not after.
Timely responses are seen as a sign of cooperation and facilitate the progress of the audit process.
Gather Supporting Documentation
Once you comprehend what the CRA is seeking, start gathering the required information immediately.
The supporting documentation would include any of the following; invoices, receipts, bank statements, accounting records, contracts, payroll reports, GST/HST returns, or any other documentation providing proof of the information stated on the return.
This phase is generally fairly straightforward for companies with well-established record-keeping procedures. For those with broken or missing records, a trained accountant can lend a hand in recreating the proper documentation.
What we want should be to deliver comprehensive, structured and correct documentation that clearly support the figures we analyze.
Avoid Providing Unnecessary Information
It is just as important to stay on track with the request as it is to cooperate with the CRA.
Offering to give copies of documents that were not asked for can lead to confusion or broadening the scope of the review. It is not about hiding information; it is about being responsive and professional.
Providing just the documentation for the specific audit being conducted will help to streamline the audit process and eliminate any confusion.
Let Your Accountant Communicate with the CRA
The appointment of an accountant or tax advisor can often be very advantageous. Where this is an option, the accountant generally seems best to be appointed as the main investigator.
A skilled representative is familiar with the CRA process and can communicate in correct tax language, rather than in a vague or incomplete fashion, assuring that the responses are succinct and thorough. This also minimizes the chance of making a hasty, incomplete explanation in a stressful situation.
By having a pro in the know how handle the communications, you’re free to keep minding the business while making sure the audit gets done right.
Understand What Happens After the Audit
Much is made about auditors giving business owners additional taxes or penalties when the audit comes back. However, this is not necessarily the case.
The CRA will review your file and upon finding no errors in your original return, the computer will close your file and no adjustments will be made.
If changes are suggested or requested, you will normally be given an opportunity to see the results, send in more evidence to support your case, or clarify any matters that may not have been dealt with properly during the review.
There is a provision to protest or appeal the assessment if you do not agree with the CRA findings. A tax audit is not the end all.
Improve Your Record Keeping
Either way, every audit is another chance to upgrade your business finances.
Most companies find weaknesses in their bookkeeping, check deposit process, expense reporting, or financial reporting. Years after the audit, it is wise to clean up the accounting system to prepare for tax filing and eliminate much anxiety if the company is audited again.
Another benefit of attaining good record-keeping practices early in the year is how much faster you will sail through your tax return.
Stay Calm Throughout the Process
Don’t take the audit personally, but do not see it as an attack either.
The CRA will choose organizations to audit for a multitude of reasons. Random selection are based out of a hat, while industry norms, statistical accumulation, or reporting preferences may drive other selections. Being selected to be examined does not necessarily imply any wrongdoing.
If you approach the audit in a calm, professional, and cooperative manner, it will probably be a less stressful experience than snapping or getting defensive.
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Focus on the Actual Scope of the Review
Many business owners assume if they go for an audit, they will be uncovering every financial transaction ever made by their business!
In fact most CRA audits are significantly less broad. An audit might look at just one type of expense, one year or one particular area of compliance issues.
Having specific knowledge of what the CRA is scrutinizing will alleviate some worry and enable you to craft a targeted response that specifically speaks to the CRA’s concerns.
Conclusion
When you receive a letter from the CRA regarding an audit, it can be stressful, but it doesn’t have to be. Audits happen all the time in Canada, but the good news is that with the right planning, chances are your company will be fine.
The best advice I can give for a difficult audit letter will be to read the whole letter thoroughly, answer it promptly by the deadline, and prepare clear records of your documents, provide only the information needed, and work with an experienced accountant will make the experience far less painful. Better yet, take what lessons you learn from the audit to improve your business management and records so that next time your business will be more prepared than ever and you will feel confident whatever may come.
