Navigating the tax audit process
When most people learn they’re being audited, their immediate reaction is to feel scared and unsettled. As someone who worked as an auditor at the Canada Revenue Agency (CRA) for six years, I have a good sense of what clients are facing in the audit process, why they end up there and how they can steer this process in the best possible direction. I also understand where auditors are coming from – hint: they’re not the villains you may think they are – and what can be done to make the process more comfortable for them, which can only lead to a better experience for the parties involved. In recent years, I’ve also served as an advocate, strategist and supporter for clients dealing with the audit process. Drawing on all that experience, this article aims to clear up confusion and offer advice to make this stressful process feel a little more routine.
Understand why you were selected
From the moment most people are selected for audit, they feel as if they are undergoing some kind of personal attack, but you shouldn’t take this selection personally. In reality, these selections are made somewhat automatically by software that detects abnormalities through a series of matching tests. For example, if your business is registered for HST and you declare income that is subject to HST, the software will detect if no HST has been reported. In other words, the selection process isn’t random. Once the system makes a recommendation, a person takes over the screening process to ensure an audit really is the appropriate response. Of course, once you are selected for an audit, you are within your rights to ask the CRA why you were selected, and this knowledge will help direct the work you do to prepare for the audit.
Preparation and representation
Going into the audit process, it’s crucial your books and other records are ready. But even if everything is in order, there’s a good chance you’ll feel nervous about representing yourself. Fortunately, you do have the right to be represented by somebody else. Even if you choose not to go that route, it’s wise to seek advice from a professional in advance. An auditor will want to review some very specific documentation, and you are unlikely to anticipate their needs and requirements without the help of an expert. If you choose not to engage an expert but appoint someone in your organization to respond, make sure you pick one person who knows the HST process well, rather than have more than one person respond to the CRA’s questions. This will give you greater control over the flow of information.
Be nice
While you might view your auditor as an adversary, be nice and treat them like a person because they really are just doing their job. Try to build a rapport, rather than be defensive. In my time as an auditor, I encountered hostility on a regular basis, but this is not the best way to express your nervousness. When people are nervous, they can come off like they have something to hide, even if they don’t. At the same time, nervous people may talk too much, which can cause you to reveal information carelessly and lose control of the audit. Both you and the auditor will have a better experience if you try to relax. It’s worth remembering the auditor is also nervous in most cases, and their job isn’t to bring harm to you or your business. They are simply there to promote fairness in our tax system and ensure everybody is paying their fair share of tax.
Minimize suspicion
Throughout the audit process, be sure to respond to the auditor’s questions and requests in a prompt manner. If you are often late or unprepared, they will likely suspect you are careless, irresponsible or have something to hide, which could lead the process toward an unfavourable outcome. In contrast, a pattern of prompt responses and thorough record‑keeping positions the auditor to give you the benefit of the doubt. It’s also wise to avoid answering questions unless you are confident you have the correct answer. If the information you share is incorrect or inconsistent with details shared by your representatives, this can also plant suspicion. Rather than invite the CRA to go down a rabbit hole that doesn’t exist, it’s always best to defer to your advisor when you are uncertain about the answer to a question.
The Taxpayer Bill of Rights
If you are genuinely concerned you are being treated unfairly during your audit, it’s important to know your rights and consult an expert to guide you on next steps. There is something called the Taxpayer Bill of Rights – which the CRA is bound by – but I’ve only had to remind an auditor of this once, and that was because the CRA contradicted its own technical position with a client years after an initial ruling. In other words, they did not apply the law in a fair and consistent manner, which is contrary to the bill. However, in most cases, it’s best to cooperate with the auditor to resolve any issues you’re working through at the audit stage because any appeals process is expensive, time‑consuming and stressful.
Baker Tilly Canada’s Ignite series features insight from audit, tax and advisory experts that covers a range of topics affecting financial planning for individuals and businesses both today, and in the future. From SMB advisory and wealth management to tax policy and digital transformation, Ignite articles aim to inspire action.
Melinda Fleming
Melinda Fleming