(Originally posted on November 1, 2015)

 

Types of CRA Audits, and potential consequences

 

In the past couple of issues, we looked at what can cause an audit and the powers an auditor has; this month, we will look at the types of audits (yes, there are several) and the potential consequences of being audited.

 

1. Correspondence Audit

Likely the least intrusive and easiest audit to undergo, this audit generally targets the self-employed and small business owners.

The name of the audit describes how it is conducted – by correspondence. You will receive a letter from CRA looking for certain documents and information and then you submit the required information to the CRA. Done!

 

2. Office Audit

As the name suggests, this audit generally takes place in the local CRA Tax Centre office.

The taxpayer is notified by mail with a list of required documents and information, then you are to schedule a visit to the CRA office to present your documents and discuss your tax situation.

This audit generally pertains to the self-employed and small business owners earning less than $500,000 annually.

 

3. Field Audit

This is the most common type of audit; The process is relatively simple, one or more CRA auditors take part in the audit “in the field” as opposed to in the CRA office.

If your business is incorporated or a formal Partnership, this is the type of audit you would expect to have.

The process is relatively easy to understand, the CRA Auditor will send you a letter notifying you of the audit, then they will contact you to setup a time and date for the audit.

Prior to the audit, the CRA Auditor reviews your tax filings, compliance etc. at their office to become familiar with your business case.

Based upon the information available in the CRA Files, the auditor will come to the audit with a list of questions for the taxpayer.

It is in your best interest as the business owner to have a Tax Professional or Tax Lawyer present at this meeting to advise you on which questions you should or should not answer, how to answer and how to prevent answers that may be self-incriminating.

As the initial meeting begins, the Auditor may request a tour of the business, will likely ask some informal questions and general interest questions to get a feel for the nature of the business. Again, it is advisable to have a Tax Lawyer or Tax Professional present!

The Auditor with then begin their investigation of your records which will likely include sales invoices, purchase invoices, bank statements, credit card statements, tax returns and any other relevant information. How deep the auditor goes into the records is up to the auditor and their supervisor. The auditor may also request meetings with key employees (once more, have a Tax Lawyer present!), remember, the Auditor is there to protect their interests and the interests of the CRA, not you!

If it is determined that the information you provide is incomplete, inaccurate, or does not make sense, they can resort to the next type of audit:

 

4. Lifestyle (Net Worth) Audit

If your records, receipts etc. just do not add up and you cannot justify your lifestyle vs. your income, this is the Audit of last resort, and generally the most destructive.

Why? CRA will use information from Statistics Canada, your neighbourhood, lifestyle (travel / vacations etc.) the vehicles your drive, the activities you engage in and more to determine if your income justifies your lifestyle!

Let’s say you live in a million dollar home, pay property taxes of $10,000 per year, have 2 new cars, travel and vacation regularly, yet you only earn $50,000 per year. The Auditor could decide that you must be earning $200,000 per year to maintain that lifestyle and can assess you on the difference!

If the Auditor decided to assess you for 3 years, you could be looking at a tax bill in the neighbourhood of $200,000! (plus interest and penalties)

Remember, before you subject yourself or your business to any audit, contact a Tax Professional and / or Tax Lawyer.

Knowing your rights and responsibilities could save you thousands of dollars in taxes, interest and penalties.