Tax audits, a fundamental aspect of the Canada Revenue Agency’s (CRA) enforcement of tax compliance, are a reality that individuals and businesses may have to face. Understanding what happens post-audit is critical for effective financial and legal planning.
A tax audit is an examination of an individual or organization’s tax returns and financial records by an agent of the CRA. The process is designed to ensure that every deduction claimed and all of a taxpayer’s income is accounted for regarding the tax return in question. CRA auditors have broad powers to make unilateral decisions and do not generally give an auditee the benefit of the doubt. If you’re facing a CRA tax audit, contact a CPA right away. They will protect your rights during the audit, use their experience to minimize the financial damage, and make the process a lot less stressful.
An Overview of the CRA Audit Process
The Canada Revenue Agency conducts tax audits for several reasons. One of the primary triggers for an audit is discrepancies or anomalies identified in tax returns, yet another reason to consult an accountant to help you avoid making tax mistakes. CRA audits can arise from random selection, comparison against similar or past returns, or information received from third-party reports and other sources, including social media posts.
In some cases, audits are initiated because of a history of non-compliance or late filings. It’s important to note that being audited does not always imply wrongdoing; often, it’s a routine process to ensure the accuracy and honesty of tax filings.
Once CRA audit procedures are initiated, they follow a structured process. Taxpayers are usually notified in advance with a formal letter, detailing the scope of the audit and requesting specific documentation. This documentation can range from receipts and invoices to bank statements and personal records. The depth of the audit can vary – some may be simple, requiring one or two specific documents, while others are more comprehensive, requiring boxes of paperwork and detailed financial records.
During a CRA audit, the auditor may ask additional questions or request further documentation to clarify or verify information. If you say something that makes the auditor suspicious, they can initiate further investigative actions. This is why it’s best to seek out experienced chartered professional accountants and have one represent you for the duration of the audit process. Not doing so is like representing yourself in a court of law.
An audit can be done through correspondence, at the taxpayer’s home or place of business, or at a CRA office. The length of an audit depends on several factors, including the complexity of the tax situation, the organization and availability of the taxpayer’s records, and the taxpayer’s level of cooperation.
The CRA issues its findings upon completion of the audit. If the auditor determines that the initial assessment was accurate, no changes are made. However, if discrepancies are found, the taxpayer may be subject to a reassessment. This reassessment may involve additional taxes owed, along with potential penalties and interest charges. It is vital for taxpayers to understand that a reassessment is not final and can be disputed if there are valid grounds.
Understanding Reassessment Resulting from a CRA Audit
After a tax audit, if the Canada Revenue Agency identifies discrepancies or errors in the original tax filing, it issues a reassessment. This document is an official revision of your tax liability and differs from the initial assessment you received after filing your taxes.
The reassessment notice is a detailed statement that outlines the findings of the audit. It includes several important components, such as:
- Summary of Reassessment. At the top of the notice, you’ll find a summary of the reassessment, including the tax year in question and the date of the notice. It provides a quick overview of the changes made.
- Details of Changes. This section breaks down the specific adjustments made to your tax return. It will list the items that were reviewed and any changes to your income, deductions, or credits. For each adjustment, the CRA will provide an explanation, which helps you understand why a particular change was made.
- Tax Calculation. Following the details of the changes, the notice includes a revised calculation of your taxes. This will show the new amount of tax owed or the amount of refund due, along with any interest or penalties that have been applied.
- Interest and Penalties. If the reassessment results in additional taxes owed, the notice will detail these charges, including the rate of interest and how it’s calculated, as well as the reason for any penalties.
- Explanation of Your Rights. The CRA includes information about your rights as a taxpayer, including how to object to the reassessment if you disagree with it. This section provides crucial information on the deadline for filing an objection and the process to follow.
- Contact Information. At the bottom, you’ll find contact information for the CRA. This is useful if you have questions or need clarification on the reassessment notice.
Analyzing the Reassessment Notice
When analyzing your reassessment notice, it’s important to review each change carefully. Compare the adjustments with your original tax return and supporting documents. If there’s something you don’t understand, don’t hesitate to contact the CRA or seek professional tax advice.
If you agree with the reassessment, the next steps depend on the outcome. If additional taxes are owed, it’s crucial to arrange for payment as soon as possible to avoid further interest and penalties. If you disagree with the reassessment, you have the right to file an objection within 90 days of receiving the reassessment notice.
Understanding your reassessment notice is key to effectively managing the outcome of a tax audit. It allows you to identify any errors, understand your tax liability, and take appropriate actions, whether that means paying additional taxes or contesting the CRA’s findings.
