Audits are a much-maligned, oft-feared, absolutely necessary part of our tax system. They have been vilified to the point that hearing the word “audit” elicits shivers down the spine, audible gasps, and resigned head-shaking. That level of vilification can make it hard to appreciate what exactly an audit is; why they exist, what the process looks like, and what to expect when you get audited. Understanding these things should make the process a bit more bearable, if not entirely pleasant.
The CRA does audits for a few reasons; on their website, they say it’s to “making sure the tax system is fair for everyone”. In more brutal terms, audits are used to make sure you’re not cheating on your taxes; they’re also used to make sure you’ve filed correctly. If there were no audits, everyone could just file their taxes however they wanted to, so they are actually a useful tool, and nothing to be afraid of if you filed accurately. Of course, mistakes can sometimes be made with the best of intentions.
When the CRA has chosen you for an audit, it’s because an evaluation of your taxes has met a certain risk threshold. You’ll receive correspondence from the CRA advising you of the audit, which will either take place at your residence/place of business, or at a CRA office. Audits that take place offsite are generally in a set number of centralized locations, so you’ll be asked to send relevant documents to that location, both digitally and physically. You’ll receive a detailed receipt of all the documents received, the auditor will make copies, and they’ll send you back your originals as soon as possible.
The CRA might examine a whole plethora of different records, from your previously filed taxes and credit history, to your personal and business records, to the personal and business records of relevant third parties who are not being audited. All of this means it’s essential to have great recordkeeping; it can also be incredibly useful to have an accountant. An efficient CPA accountant will help you understand what records should be kept, how to organize them, and how long you want to hold them for; they’re also less prone to mistakes than non-accountants, which makes it far more likely your audit will go smoothly.
Once your audit is complete, there’s really three possible results. The first is that everything looks good – no changes to your tax return, thanks for your time. The second and third are both reassessments. Reassessments where it turns out you owe more taxes than you thought are never fun; it’s always a good idea to hold savings in order to pay the CRA should such a reassessment arise. The third is the unicorn of the audit world – when it turns out the CRA owed you money, a positive reassessment. No matter what happened in your audit, you can always appeal the decision.