Important Tips for Handling Tax Audits
By Dr. Shahid Siddiqi
Retired Tax Consultant
For several taxpayers, the word "audit" can produce a feeling of anxiety. Not knowing what factors trigger a CRA (IRA) audit can often make it sound worse than it needs to be.
Here are some reasons why people get selected for audits:
1. Deviations From Average. Tax returns are selected for audits by computers through an automated process. The process groups people based on income, number of dependents, geographical locale, and other factors. It then compares individual returns to the statistical average for the group the tax payer belongs to. If it notices discrepancies from the averages it can trigger an audit.
2. Internal Consistency. The computer also checks the returns for internal consistency. If it finds an internal inconsistency that too is likely to automatically trigger an audit. For example, if the income listed from various sources (such as wages, interest, dividends, capital gains transactions, etc.) does not match the reporting statement (T4, T5, T3) submitted to CRA.
3. Errors. Similarly, if a return contains an item that is reported in an incorrect or an unusual place that too is likely to trigger an audit. In general, errors in returns are likely to trigger audits.
4. Annual CRA Focus. In any given year it is common for CRA to target specific professions and/or deductions for special scrutiny. If an individual has used a deduction, or belongs to a profession that the CRA has decided to scrutinize, then it is likely to lead to an audit.
Types of Audits
The purpose of all audits is to verify sources of income and validate deductions, exemptions, and credits. Within this broad scope there are three basic types of CRA audits.
1. Correspondence Audit. In this audit, the CRA sends you a request by mail to mail back proof or supporting evidence for a particular item on your return.
2. Office Audit. In this audit, the CRA requests that you meet with a tax auditor at a CRA office. The notice usually identifies the aspect of your return that is under scrutiny and specifies the proper documentation needed to settle the audit.
3. Field Audit. This is usually a little more onerous. In this audit a CRA auditor requests a meeting with you at your home or your office. Like in the office audit, the auditor reviews supporting documentation for specific items on your return. But beyond this the auditor might also be trying to evaluate whether your lifestyle is consistent with your reported income. A discrepancy here can lead to a more detailed audit.
With the information provided in this article, hopefully, you will feel less anxious if you receive an audit notice. In many cases it might be relatively easy to respond to the notice. An audit request does not necessarily mean you made a mistake, or even that your life will be scrutinized under a microscope.
Nevertheless, if you receive a CRA audit notice, to ensure that the process is handled in a smooth and professional way, it might be a good idea to hire a tax professional to represent you. This will give you peace of mind and prevent the audit process from distracting you from your normal business work.