A Canada Revenue Agency (CRA) tax audit can be a very frightening and stressful situation. Who wants the CRA weeding through every nook and cranny of their finances, seeking exact details to gain greater insight into their tax return or even just a portion of it?!! Expenses claimed for meals, entertainment or travel all become subject to microscopic scrutiny and can make for a very nerve-racking experience.
MK & Associates, urges clients to not attempt to represent themselves in a Canada Revenue Agency audit, no matter how simple it may seem on the surface. Even if you honestly believe you filled your entire tax return out correctly, meeting with the CRA can be a very intimidating experience, and can lead you to say or do things that won’t work in your favor. This is especially true if you have to experience a face-to-face audit. If you think filing your taxes is bad, try attending a face to face audit!
More often than not, a CRA tax return audit will result in changes to the return. Whether these changes deal “good” or “bad” results for the taxpayer depends on each individual situation.
We advise that you hire a professional to represent you. MK & Associates offers comfort to clients by the very fact that our Tax Team has years of experience successfully dealing with CRA audits. You can face an audit with confidence when you know you have our experienced Tax Team on your side. Contact us today.
Tax audits can be very dangerous if you go it alone
When you file your tax return Canada Revenue Agency (CRA) will review it looking for mathematical errors and missing information. The tax department will compare your return to others in your industry if you are self employed. If you are an individual they could look at your charitable donations and compare them to your income to see if the total amount is reasonable. If your net income in your business as a percentage of your revenues is much lower than competitors in your industry then there is a greater chance of being audited.
Self employed taxpayers who report their own income and deductions are frequent audit targets. Employees that receive T4 income have little opportunity to underreport their income. Self employed taxpayers who report their own income and deductions have the opportunity and the motive to under -report income and over- report deductions. Revenue Canada will look at your expenses from year to year and compare them to other companies in the same industry. For example, if your travel increases by 300% one year it will attract CRA’s attention. If the gross profit has substantially fluctuated from year to year it can be a definite red flag with the tax department.
The taxpayer is required by Canada Revenue Agency to maintain proper books and records. Having a shoe box filled with receipts and then providing the box to an auditor is not acceptable to the government and it will further alienate the individual auditor assigned to the audit.
Audits are always stressful and time-consuming. It is taxpayer against the government and they make up the rules. If a taxpayer goes into the audit alone, they will easily be walking into a trap. CRA will be asking questions about what took place several years ago. CRA will send the taxpayer all kinds of questions in writing. If the individual answers the questions wrong, then the consequences can be disastrous. My firm represents the client and they do not have to meet the auditor or talk to the CRA. We get in between the client and the CRA and if the auditor has any questions on the file they must go through my office first.
The auditor’s job is to verify the numbers that were reported on the return to ensure that they are accurate and that the proper deductions were made. The taxpayer being audited must be able to prove how the numbers were computed and provide books, records and receipts that prove the income and deductions claimed. If the auditor has all of the receipts and the books and records are organized then the audit will go quickly. If the book s and records are a mess, then the auditor will have to increase the level of work because the taxpayer has lost credibility. In this area the taxpayer is guilty until proven innocent and must prove to the auditor the truthfulness of the numbers.
The auditor will probably request all of the bank accounts for the business along with the personal bank accounts. The auditor will compare the funds deposited into all bank accounts including personal accounts to ensure that the correct amounts were reported on the income tax returns. If the auditor determines that there is unreported income then CRA can assess the taxpayer an additional 50% tax penalty. If charges are brought against the taxpayer, then under summary conviction there can be an additional 200% penalty plus a two year jail sentence. Furthermore, there will be interest added to the penalties based on Revenue Canada’s prescribed rates for each quarter.
Credit card statements are not sufficient proof to CRA the taxpayer must keep the receipts. For example, an individual could purchase gas, groceries and maybe cigarettes at a gas station. Without receipts it would be impossible for the auditor to determine how much gas was spent as opposed to other items.
It is extremely stressful to go through an audit alone without proper representation. Most individuals that go through an audit cannot sleep at night and their mind is occupied on their problem 24 hours a day. Our firm mitigates some of the stress, because we get in- between the taxpayer and CRA to ensure that the audit is done in a timely manner and that our client ends up with positive results. Our clients can focus on running their own business and not worrying about complicated tax rules along with pouring over the books, records and receipts. Our clients will not have to spend hour upon hour sitting with CRA auditors going through the books and records.
Representing yourself can be very risky because the auditor know many more tax rules then the business or individual being audited. It is like playing poker with a seasoned player and you do not know the rules but the professional plays every day for years. Therefore, the auditor has a major advantage over the taxpayer.
In our office, we have been representing taxpayers for many years in dealing with the Canada Revenue Agency and have achieved excellent results. We always have the audit at our office and not at the client’s place of business or in their home. It makes taxpayers very nervous and it is disruptive when an auditor is around for days on end. During our initial meeting with the client we go over the returns and make sure that all of the information is organized prior to the audit by CRA. Once the client signs the authorization form for my firm to act as representative, we meet the auditor and work jointly with CRA to ensure that the audit is completed with minimal stress to our client. At the conclusion of the audit, we meet with the auditor to go over the findings. If there is a reassessment, we then meet our client without the auditor to ensure that they are satisfied with the results.
Once the audit is completed and if there is a reassessment, then we continue to represent our client with CRA until the tax debt is paid. We may work out with CRA a mutually agreed payment plan that our client and the CRA feel comfortable with.