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Your controller rushes into your office to tell you that he just received a telephone call from the Canada Revenue Agency.
How should you react? Should you panic, plan a vacation? No … the best thing for you to do is stay calm and get yourself organized.
Your first step is to contact your tax advisor. They will then call the Canada Revenue Agency agent back to request that they send a list in writing of the documents they are requesting for the audit.
Once the list is received, you should review the areas of concern and exposure with your controller and tax advisor. You should also decide if you want to have the tax audit at your premises or outside your office, perhaps at your tax advisor’s place. Finally, this meeting should be held when you are ready. The tax auditor will suggest a meeting time that suits them. It is within your rights to delay the meeting until you and your tax advisor are ready. Don’t be rushed. The first impression or first submission that is made to the auditor is critical.
The advantage of holding the audit outside your office is that it provides you with better control, takes you away from direct communication with the auditor who tend to ask leading questions and prevents them from asking your employees questions as they go for coffee. Be wary of the overly friendly auditor. Auditors have a habit of taking the comments of your employees as gospel. Finally, in my experience, a tax auditor interacts differently with a tax professional as opposed to the client where they tend to be aggressive.
Once an auditor completes his/her work, they will issue a proposed Notice of Assessment and give you a deadline to respond. It is important that there be communication between your tax advisor and the auditor before this Assessment is issued, in order to understand the concerns and reduce the exposure if possible.
Once an Assessment is issued, you must work with your financial people and tax advisors to get the auditor the information required. The onus is on the taxpayer to do the work necessary to get the auditor to reduce the amount of the Assessment. If you need more time to respond to the auditor, ask for it. An auditor’s practice today is to deny any expenditures and put the burden on the taxpayer to correct. In a recent tax audit, the tax department reviewed our client’s accounting records and determined that they owed $200,000 in sales tax. To reduce this tax bill, our specialist was required to review the auditor’s project on a line-by-line basis. Upon review we noticed that the auditor double counted certain entries and failed to consider a remittance to the tax department.
The auditor’s work must be thoroughly reviewed. Often an audit is based upon a sample test. For example, they only look at two months of a client’s credit cards or expenses and apply this result over the term of the audit. This can be to your disadvantage if the two months picked have extracting errors. If the auditor is being difficult, then contact the auditor’s supervisor and, if necessary, their boss.
One must be persistent and patient to successfully navigate a tax audit. The auditor will be pushing to close the file as they have a time budget and are not always concerned whether the audit is reversed on appeal. Resist the pressure. Rely on the expertise of your tax specialists.
While you can always appeal a tax assessment, those related to sales tax and deductions at source are immediately subject to collection by the tax department. Also, large corporations must pay half of the tax liability even if it has been appealed. That is why it is necessary for you to reduce the tax exposure before a final Notice of Assessment is issued.
Once an assessment is issued, it can be appealed by filing a Notice of Objection with the Canada Revenue Agency Appeals Division. If you are unsuccessful there, there is an appeal to the Court. There are strategies to deal with both, which are the subject of another discussion.
Related Topics:Canada Revenue Agency; Tax Controversy; Audit
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