Audits 101: Everything you should know about business audits.
June 10, 2022
Tax season comes to an official wrap on the last day of April for individuals, or June 15 for Canadians filing on behalf of their business. But following the submission of tax returns, some Canadians find that tax season isn’t quite done for them – when they get hit with questions from the Canada Revenu Agency (CRA).
For individuals, the CRA or Revenu Quebec might get in touch to begin a review of their tax return. For businesses, they might hear from the government that they’re being audited. This blog will focus on business income audits. If you’re looking for info on individual’s tax reviews, we’ve got you covered here.
So, for those with business income being audited, let’s take a collective deep breath and dig into what an audit means.
Why are some returns audited while others aren’t?
The CRA audits returns for a few reasons. They might notice an error, or a frequency of errors in a filing. They might also notice that income being reported is inconsistent with business filings. They also look to see if they believe a person’s tax obligations are higher than what they’ve been paying.
If you consistently report business losses which you use to reduce other income, you can expect to get audited.
How does the CRA go about conducting the audit?
The CRA will send an auditor to your home, place of business or representative’s office to conduct the audit, which allows the auditor to ask and address questions quickly to get the audit over as quickly as possible. The audit can also be done at a CRA office if need be. If the office is outside of your region, you'll be asked to send in your supporting documents.
What exactly does the CRA need to see?
The auditor will look at a person’s documents and records to determine if the original filing was accurate, or if it needs to be reassessed. Some information they’re looking for includes:
- Previously filed tax returns
- Credit history
- Property ownership details
- Bank and credit card statements
- Mortgage documents
- Information from the auditee’s spouse, common law partner and/or family members that impact their return, information from a trust or corporation
- Any adjustments made by your accountant/bookkeeper that affects your taxes.
What happens if someone doesn’t have all the documentation being requested?
By law, Canadians are required to keep records for a minimum of 6 years. If someone realizes they’re missing a requested document, they can likely retrieve it from the issuing organization, such as copies of receipts from suppliers, or bank statements from your financial institution.
What happens if the person proves their original return was correct?
If the audit shows that everything from the original filing was correct, the auditor will send a completion letter indicating they have closed the audit. Hooray!
What happens if the CRA confirms a mistake in the filing?
Two things can happen if there was a mistake: either they find that the person owes more in taxes, or (less likely) the CRA could find that they owe the person a bigger refund. The CRA will issue a proposal letter explaining the reason for the reassessment, and the person will have 30 days to agree or disagree with the proposal.
What happens if someone gets reassessed but thinks the CRA is wrong?
If someone believes their return has been incorrectly assessed, they should begin the appeals process and file a Notice of Objection. If they're unhappy with an auditor’s behaviour, they can also lodge a formal complaint directly on the CRA’s website.
Tax audits might cause an initial panic, but it’s best to tackle it head on and get everything squared away in a timely manner to avoid any penalties. H&R Block offers support to small businesses. And of course, if you need help filing your taxes, you can choose from one of four convenient ways to file: File in an Office, Drop-off at an Office, Remote Tax Expert, or Do It Yourself Tax Software.