How do I prepare for a government audit?
You have just been notified that your tax return is going to be audited ... what now? In the event Canada Revenue Agency ("CRA”) does come knocking on your door, here are some basic guidelines you can follow to increase the chances that you will come out of your audit unscathed.
It is a normal reaction upon receiving notice of an audit to panic and feel particularly singled out. However, as in most situations, panic can be counterproductive. A better course of action is to contact an experienced professional to get additional guidance as to how best to proceed to prepare for the audit as well as to get reassurance that everything will be fine.
In the event that you have any type of communication with CRA prior to your audit -- written or verbal, it's important that you act in a professional, business-like manner. Verbally abusing the auditor or becoming defensive is not a good way to start off your relationship with him or her.
Organization is very important.
Before the audit, take the time to gather all of your documents together and consider how they will be presented. While throwing them all into a shoebox in a haphazard fashion is certainly one way to present your documents to your auditor, this method will also be sure to raise at least one eyebrow ... and encourage him or her to dig deeper.
Also as you gather your information, you may need to re-create records if no longer available. This may involve calls to charities, medical offices, etc. to obtain the written documentation required for verification of deductions claimed. Once you are confident that you have all of the necessary documentation, organize it in a binder, separated by category as shown on your return. This will allow quick and easy access to these records during the actual audit, something that the auditor will appreciate and will give him/her the impression that you are organized and thorough.
Leave the face to face to a professional.
Make sure that you retain the services of a tax professional, most likely the person who prepared your return. Having a tax professional
appear on your behalf for your audit is beneficial in a number of ways.
- A tax professional is emotionally detached from the return and less likely to become angry or defensive if questioned.
- A tax professional can serve as a "buffer" between you and CRA – indicating that he/she will need to get back to the auditor on certain issues, can buy you extra time to prepare for an issue raised you didn't consider.
- A tax professional can keep an auditor on track, making sure all inquiries are relevant to the return areas being audited.
If you disagree, appeal.
If you disagree with the outcome of the audit, you still have the right to send your case to CRA Appeals division for review. Appeals officers are usually more experienced than auditors and are more likely to negotiate with you, if necessary.
As for the "best defense is a good offense" comment? In this case, this old adage applies to how you approach the tax return preparation process throughout the year, year-in and year-out.
- Good recordkeeping is key.
Maintaining complete and accurate records throughout the year reduces the chance that you will forget to provide important information to your tax preparer, which can increase your chances of audit. Good recordkeeping will also result in a more relaxed reaction to notification of an audit as most of your upfront audit work will be complete -- this is especially true if you audit pertains to a tax year several years in the past! Tax records should be retained for at least 7 years after the filing date.
- Provide ALL relevant information to your tax preparer.
When your tax preparer is fully informed of all tax-related events that occurring during the year, the chances for errors or omissions on your return dramatically decrease.
- Keep a low profile.
Error-free, complete tax returns that are filed in a timely manner don't have the tendency to raise any of those infamous "red flags" with CRA. During the year, if CRA does send you correspondence, it should be responded to immediately and fully. Don't hesitate to retain professional assistance to help you "fly under the radar".
While the odds of your tax return being audited remain very low, it does happen to even the most diligent taxpayers. If you are contacted about an examination by CRA, take a deep breath, relax and contact the office as soon as possible for additional assistance and guidance.
The information presented in this document is of a general nature only and should not be relied upon to replace professional advice. Before acting on this information, talk with a professional advisor as laws and regulations are constantly changing. Readers accept full responsibility; no document found here is a substitute for a consultation.