Canada: Don’t Be Caught Off-Guard: What To Do In The Case Of A Tax Audit

If you are concerned that you might be selected for an audit, how do you prepare for a possible visit?

Before you are selected for an audit
Now is the time to take some precautionary steps to ensure that you are prepared in the event that you are selected for an audit.

1. Review accounting and tax treatment differences

Certain transactions are reported differently for accounting and tax purposes. Review your accounting and tax differences to make sure you have suitable explanations to justify the difference in treatment.

2. Review significant transactions

Tax auditors will likely want to see supporting documentation for significant transactions undertaken in a given year. Review any significant transactions to ensure that you have the proper documentation in place to support them, such as invoices, legal agreements and resolutions.

3. Identify possible areas of non-compliance

Before you receive an audit request, if you identify any areas of non-compliance during your review of the books and records it may be possible to make a submission to the CRA's voluntary disclosure program (VDP). Submissions through the VDP program will help you avoid penalties and reduce interest associated with the non-compliance. Contact your public accountant to discuss your options and risk areas.

4. Review communication from your professional advisors

Certain correspondence between you and your legal counsel may be privileged, which means you do not have to provide the correspondence to an auditor even if he asks for it. You should communicate with your lawyer to ensure you know which documents are privileged and should store these documents separately. This way you can avoid unnecessarily turning over documents to an auditor when he arrives at your doorstep.

You have been selected for an audit

Knowing that you have been selected for an audit will undoubtedly cause you stress, even without good reason. Below are some general guidelines to assist you before, during and after an audit.

Before the auditor arrives

Once you are selected for an audit, the tax auditor will contact you to make arrangements for a convenient date to begin the audit. It is not unreasonable to request a later date if, for example, you have a seasonal business and you are in your busy period, or if you will be unavailable due to your travel schedule.

1. Questions to ask the auditor

As part of your initial discussion with the auditor, you should ask a few questions: What years are being audited? Where you have more than one business, which business is under audit? This will save you the hassle of gathering unnecessary information and will allow you more time to focus your efforts on preparing for the years in question.

2. Gather documents

Any documents that relate to the years in question should be gathered including, but not limited to, the general ledger, financial statements, corporate minute books, organization chart, legal agreements, other documents pertaining to items such as transfer pricing, management fees and so on.

During the auditor's visit

An audit may range from a few hours to several weeks depending on the nature of the audit and the complexity of the business under audit. Below are some tips on what to do during the auditor's visit.

1. How to treat the auditor

It is in your best interest to cooperate with the auditor and try to be as pleasant and courteous as possible. You should provide a clean and quiet area for the auditor to perform his work. The less distractions the auditor has to deal with, the sooner he can complete his work. Arranging a quiet area for the auditor will also reduce the opportunity for casual communication between the auditor and your staff, conversations that probably would not be beneficial to you. Additionally, you should make yourself available to answer questions or gather information as needed. Making yourself available ensures the auditor's visit runs efficiently; but this does not mean that you have to sit with the auditor at all times.

2. Limit your resources

You should limit the number of people that interact with the auditor. This will ensure that only relevant information is relayed to the auditor, and that individuals are not answering questions outside of their area of expertise. Generally, the auditor deals with the owner(s), bookkeeper, and the public accountant. It is also a good idea to let staff know that an auditor is coming. Inform staff of who the auditor should be dealing with and, in case the auditor is seeking information, instruct staff to direct the auditor to the above mentioned people.

3. Talk to the auditor once they finish

Once the audit is over, you should ask whether or not any adjustments will be proposed, so that you know if this matter is finished or if further action is required.

After the auditor's visit

Below are some tips on how to deal with proposed tax adjustments, if applicable.

1. Review the proposed adjustments with your public accountant

The auditor will discuss proposed adjustments with you and/or your representative. At your request, he will confirm the proposed adjustments in writing and give you a reasonable period of time to informally dispute the adjustments and provide further information to support your position. We recommend that you review the proposed adjustments with your public accountant and decide whether you agree with the changes.

2. Be persistent in your position

If you and your public accountant agree that the auditor has proposed adjustments that are incorrect, you should meet with him/her to petition for the position originally taken. If you cannot reach an agreement with the auditor, you may want to arrange a meeting with the auditor's supervisor. If neither of these avenues work in your favour, you may have to file a notice of objection. However, to save time and money, it is advisable to settle the matter at the initial audit level. A compromise might be the best solution.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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