Blurb: For most Canadians, a tax audit is something they have little reason to worry about. However if you are self-employed, are in a high fraud-risk category or you don't declare all of your T-4 income, at some point you'll likely meet a tax auditor.


When the taxman decides to audit

By Peter Diekmeyer o Bankrate.com

While most Canadians are fairly trustworthy when it comes to paying their income taxes, part of the reason is that we know there is a chance that at some point we could be audited.

Fortunately, most of us will be spared this experience. There were only about 300,000 traditional audits conducted last year by the Canada Customs and Revenue Service. That's a drop in the bucket when you consider that there were 24 million personal income tax returns and 1.5 million corporate returns filed last year.

"For most Canadians who earn salaried income, there is very little opportunity to evade taxes," said Donna Labonté a spokesperson for Canada Customs and Revenue Agency. "Compliance rates are high. Our information is that 94% Canadians complete and file their returns accurately and on time."

Much of the increasing reliability of Canada's income tax system in recent years has been due to CCRA's T-4 matching program said Labonté.

Each year the program tracks approximately 1.5 million T-4 slips issued by employers, straight to the employee's tax returns, to make sure that the income was declared.

"Individual returns are for the most part accurate because we can confirm that the bulk of their income was recorded," says Labonté.

As a result, the vast majority of tax audits that CCRA conducts are on returns issued by small-and-medium sized businesses, where there is more scope for fraud, error or misinterpretation.

CCRA' audits are conducted either randomly or they focus on specific sectors such as a high fraud-risk community or a profession.

"There are certain red flags that we look for and trends we monitor," Labonté says.

"If you live in a community where the average house price is $500,000 and your annual income is only $25,000, you may get a polite letter from CCRA asking you how to demonstrate how you can afford your lifestyle."

But surprisingly, according to Labonté, the ultimate goal of most audits is not to recover money, although that clearly does occur. The ultimate goal is to ensure compliance.

For example, when CCRA staff got wind of the fact that there were high degrees of non-compliance among fishermen in the Atlantic Provinces, they send several audit teams into the region.

The first thing these teams did was to conduct meetings with industry personal to explain how the law functioned, and what fishermen had to do to comply.

If you do get audited, the first thing to remember is that the fact you are being audited does not mean you have done something wrong. In fact, auditors sometimes discover that you may have paid too much tax.

That's why it pays to cooperate with your auditor, so that he can do his job quickly and efficiently.

By law, you are required to keep copies of all of your books and records that helped you determine your tax obligations and entitlements. Make sure that these records are easily accessible to your auditor, and that you get him all the supplementary information he asks for. Be respectful of his time.

In general, the time an audit takes depends on several factors including how well your records have been kept, their size and their complexity.

During the audit, you'll have the opportunity to discuss key issues with the auditor. Use that time to ask any questions you may have. The auditor has likely seen many other taxpayers fitting your profile, and most auditors will be more than happy to give you tips or advice.

At the end of an audit, the auditor will tell you of any proposed adjustments or assessments and will explain the reasons that they were made. You'll usually have at least 30 days to respond.

If your return is adjusted, you'll receive a notice of assessment, and you may have to pay interest charges on the unpaid balance.
You may also contest the assessment as long as you do so within 90 days of the issue date.

Probably the most important advice regarding audits is that you should be prepared. Conduct your affairs and file your returns as though you will have to one day explain your actions to an auditor. Then, if he comes, you'll be ready.

 

For more information:

Tax audit FAQs:
http://www.ccra-adrc.gc.ca/E/pub/tg/rc4188/README.html

CCRA tax audit information circular:
http://www.ccra-adrc.gc.ca/E/pub/tp/ic71-14r3/ic71-14r3-e.html

 

-- Posted April 19th, 2004

Peter Diekmeyer is the Montreal Gazette's management columnist. He can be reached at: peter@peterdiekmeyer.com

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