With another personal tax season behind us, millions of Canadian taxpayers have filed their tax returns with Canada Revenue Agency (CRA). Most returns will be accepted without issue, but for some individuals and businesses, CRA will initiate an audit to review a taxpayer’s filing to confirm that their actual income and tax obligations match what was claimed.
During an audit, CRA closely examines a taxpayer’s books and records to make sure they have fulfilled their obligations, applied tax laws correctly, and received any amounts to which they are entitled. Audits are used to “spot-check” taxpayers to ensure taxes are being paid properly.
While CRA can audit any taxpayer, they tend to focus their audit efforts on businesses and the self-employed, as these two areas have greater potential for error. Although there is a high level of compliance with tax laws in Canada, the auditing process is intended to help maintain the fairness and integrity of Canada’s tax system.
CRA audit notices should not be ignored. If the response time requested by CRA is too short to be met, you or your lawyer can request an extension from CRA. Unless an extension is granted, the timeline set out in a notice must be met. Avoiding or ignoring an audit will not make it go away, and may make CRA less willing to negotiate with you later if they determine taxes are owed.
You have a right to have someone represent you, and retaining help from someone who is familiar with the Income Tax Act and tax law to assist you in an audit does not imply that you have done something wrong.
If you receive notice from CRA that you have been selected for an audit, your first move should be to contact your lawyer to discuss the letter. A lawyer with tax expertise can help you go through the letter to determine whether you will need an extension, what you need to provide to CRA, whether any information will be needed from your accountant, and how best to answer the questions asked. Do not give the auditor more information than he/she has requested or is entitled to, and do not volunteer information the auditor has not asked for.
If you are undergoing a desk audit, don’t submit any documents that do not pertain to the year under audit or were not specifically requested in the audit notice. Audits can take a while to complete, and additional information that was not requested can prolong the process.
When you are meeting with an auditor, you may want to have your lawyer present. Taxation is a complex topic and the rules and regulations can be confusing. Sometimes a wrong answer is given unknowingly because the question being asked is not fully understood. If your lawyer is present, he or she can ensure that questions asked are fair, and are interpreted and answered correctly.
In some cases, the auditor will need an explanation of how your business operates so that they can understand why things have been done a certain way. You may wish to have your lawyer to prepare this explanation or answer any questions the auditor has. Your lawyer can explain your business and highlight the relevant tax law provisions to ensure the auditor gets the information he/she needs, and understands how your business is complying with the Income Tax Act and regulations.
CRA has the right to review your records to substantiate information you have reported on your tax return, and to request additional information under s. 231 of the Income Tax Act. However, CRA is not allowed to go a fishing expedition for information that is not related to an audit or investigation already underway. You are entitled to ask CRA why they are requesting information. If you aren’t sure if the auditor is entitled to the information requested or if you suspect they are stretching, your lawyer can review the request, make a determination and respond to CRA in a way that protects your interests.
Organized, detailed records that are backed up with any supporting documents necessary for any amounts claimed are very important. If you fail to keep proper books and records, CRA may do a net worth assessment, which looks at the increase in your assets over time and assesses income tax based on that increase.
If you are uncertain what documents may be needed, your lawyer and accountant can help you figure out what you should be keeping as supporting documents before you need them for an audit. As CRA may request documents from up to seven years prior, it is best to keep financial records and books for at least this period in case you are ever audited.
The best recipe for a successful audit is to be professional and polite, know your rights, answer questions asked of you, comply with CRA requests where appropriate, and have clear, organized financial records. All of these are areas where a lawyer can help.
These same principles apply to pharmacy audits by NIHB, third party payers or governmental agencies. In the context of a pharmacy audit, consider applying the following guidelines:
- Upon receipt of an audit notice, read it closely to ensure that you understand it.
- Once you have a basic understating of the audit notice, locate source documents, such as the contract, for review.
- Respond to all audit notices in accordance with required timelines.
- Request extensions of the timelines if necessary.
- Locate and disclose documents that respond to the audit notice only once you have considered privacy laws and regulations.
- Seek out and retain professional assistance as necessary, primarily from legal, accounting and financial advisers.
- Maintain organized and detailed records at your pharmacy.
- All interactions with auditors should be professional and polite.
Audits and tax reassessments can be intimidating. Take the time you need in order to understand the issues. Ask questions. Obtain advice and professional assistance. Having a plan and basic understanding of audit processes will take some of the sting out of the auditor’s knock at your door.
This article first appeared in Communication Journal, a publication of Pharmacists Manitoba.