CRA Sent You a Tax Audit Letter. What To Do Next?

Table of Contents

• What is a CRA Audit?
• What Are the Common CRA Audit Triggers
• What to Do When You Receive a CRA Audit Letter?
• How to Prepare for a CRA Audit
• CRA Audit Focus - What is the CRA Looking for?
• What Are the Potential Outcomes and Penalties?
• How to Avoid Future CRA Audits?
• Conclusion

Did you receive a CRA tax audit letter? Although it’s an important letter and can be unsettling at first, there’s no need to panic. The most common reason why most people start worrying is because they’re unfamiliar with the tax audit letter from an organization like CRA.

The Canada Revenue Agency (CRA) conducts these audits to make sure that a resident or business entity is following the tax laws of the region.

What you should know is that receiving such a letter doesn’t mean you’ve done something wrong. It only means that your tax return is under further review.

However, if you know how the tax audit process works, it becomes easier to cooperate with the agency and get this matter behind you in no time. Depending on the situation, complexity, and timeframe of the audit, you may address the matter yourself, or you could contact a specialized accounting firm to ensure the audit is addressed as efficiently as possible with considerations for other points such as decreasing he likelihood for expansion of the audit period by the CRA or further audits being triggered on different tax accounts and/or legal entities.

What is a CRA Audit?

A CRA audit is a comprehensive examination of your financial records. Why? To make sure that the information you added to your tax records is accurate and in compliance with Canadian tax laws.

The CRA might select individuals and businesses randomly. This usually happens when there might be discrepancies in reported incomes, deductions, or expenses. And those discrepancies can be mistakes as well.

Therefore, CRA conducts these audits to make sure that its tax system has the desired level of integrity and up-to-date information with minimal chances of data errors. A tax audit CRA process reviews your documents, income reports, and so on to ensure accuracy.

One thing to note is that CRA can either conduct a simple desk audit. Or it can do a more comprehensive field audit where CRA professionals might visit your business or home.

How Far Back Can CRA Audit?

In a situation like this, taxpayers often ask themselves, how far back can CRA audit?

To answer your question, CRA can audit your returns for the last 3 years. This is the "normal reassessment period". However, the CRA can also audit up to 6 years or more if it suspects fraud, neglect, or misrepresentation.

What Are the Common CRA Audit Triggers

The very first thought in your mind as you see the tax audit letter is, why? Well, there are different reasons why CRA might send you the letter. Here are some of the most common CRA audit triggers:

• Large claims for expenses
  • To determine this CRA uses many factors such as:
    • Unexpectedly high expenses when comparing to income.
    • Significant variances when comparing to previous filings.
    • Expenses outside of industry norms
• Inconsistencies in year-to-year tax filings
• Frequent late tax returns
• Etc.

These are all red flags that can trigger an audit from the CRA. If you report income that isn’t consistent with what third parties (employers or financial institutions) have filed, the agency might issue an audit letter.

If you have filed claims for high credits or deductions that don’t match your income level or industry, then the CRA can also scrutinize your tax returns. Furthermore, if your business has been reporting losses over several years, then there might be a CRA business audit. It could be to indicate any potential inaccuracies.

Also, the CRA audit focus mainly narrows down to specific sectors and business types. Although the agency conducts audits across the board, some industries and sectors receive more attention than others.

What to Do When You Receive a CRA Audit Letter?

The first thing should be set aside a separate time and place to overview the audit request. Instead of panicking, you should remain calm and focused to offer your undivided attention. Then, here’s what you can do!

Review the Tax Audit Letter Carefully

The letter will outline the specific issues that CRA has with your tax returns. So, understand those issues in detail and along with any deadlines for timely responses. You should stay calm and take note of any documents or information the CRA has requested.

Gather and Organize Your Records

Make sure you have the necessary paperwork ready and at hand going forward. This might include tax records, receipts, bank statements, and correspondence tax filings. You should prepare everything in an organized manner to make it easily accessible for a timely response.

Seek Professional Assistance

In case you are having difficulty through the audit process, you can reach out to a qualified CRA tax professional.

Contact the CRA for Further Information

Often, many people dread even hearing about a tax authority like the CRA. However, you should approach the CRA in case you have any questions or specific requests regarding the audit. The audit notice usually contains contact information. However, make sure you have your tax identification number and relevant details at hand when calling.

Ensure a Proper and Timely Response

Once you thoroughly review the audit notice and receive professional assistance, respond to the CRA as soon as possible. It is ill-advised to ignore or delay the response because that can lead to penalties. In some cases, a simple desk audit might turn into a comprehensive field audit due to negligence.

How to Prepare for a CRA Audit

You will need to prepare carefully for the CRA audit. It will help you not only avoid penalties but also ensure a timely and accurate response. A proper response will also take any stress off your mind as well. Plus, careful preparation will help you approach the process more confidently.

Gather All Necessary Documentation

We already discussed this point earlier - you need to have all the relevant documents with you. You should have all the necessary paperwork with you. This could include:

• Bank statements
• Expense receipts
• Income reports
• Previous tax filings
• Specific documents indicated in the audit notice.

Make sure all paperwork is accurate and up to date. That is one of the main reasons why a CRA tax professional might suggest thoroughly organizing and keeping complete financial records year-round.

CRA Audit Focus - What is the CRA Looking for?

You might be under scrutiny or review for unreported income. Or it could be unreported or misrepresented expenses, deductions, and inconsistencies in your tax filings.

Normally, simple errors or discrepancies can lead to CRA flagging an individual or business entity. It could be because you rounded off figures on your tax returns instead of stating exact values. Maybe, the figures contained errors or typos.

Either way, it could be a false red flag and the CRA might be ensuring that the entity under review is not committing fraud. You can check out Canadian tax laws for more details.

Does CRA Audit Your Bank Account?

Does CRA audit your bank account? Yes, the CRA could resort to that. We already mentioned that bank statements are important paperwork during an audit process.

The CRA typically ensures that your income deposits in your bank match your reported income. If you have a significant discrepancy, then it could raise a red flag which often calls for further investigation. Hence, a CRA audit letter.

That’s also why individuals should keep banking activities accurate with clear records to maintain transparency with the CRA. It helps you avoid CRA audit penalties and ensure timely responses in case of CRA audits or notices.

What Are the Potential Outcomes and Penalties?

It is helpful to know the potential CRA audit penalties and outcomes. In case of errors and discrepancies, the CRA might impose penalties. But that would depend on the severity of non-compliance. If it was unintentional mistakes like typos and so on, you might receive interest charges on unpaid taxes.

On the other hand, significant errors that appear deliberate to the CRA might lead to harsher penalties. You could face fines or even criminal charges in serious cases. This usually happens when there’s a suspicion of fraud which leads to proper evidence for such a crime.

You can avoid, or at least limit, these penalties by receiving CRA audit help from a reliable professional near you. Experienced and knowledgeable professionals can help you prepare an accurate response to the CRA tax audit notice as soon as possible.

What’s more important is that they can offer ongoing support to make your record-keeping and tax filing process virtually bulletproof.

How to Avoid Future CRA Audits?

Even though there is no silver bullet when it comes to CRA audits, one of the best ways is to practice foolproof record-keeping. It will help you organize and maintain documentation with all the relevant financial transactions in a way that makes it easily accessible. You should keep receipts with you to maintain accurate income and expense reports.

We advise researching the many accounting and bookkeeping software products to see what fits you best. These can streamline the process by allowing you to access and present records whenever you need them. You should also review your financial statements periodically to check for consistency. That way, you can detect discrepancies early on.

Don’t forget that there is a CRA audit time limit as well. The CRA can audit your tax returns for the last six years or more in severe cases. So, set a time or specific period to review your tax filings to ensure consistency in all relevant documents for those periods if you’ve received a notice.

Lastly, make sure you file your tax returns within the prescribed deadlines. See more details on the deadlines for individuals here and for corporations here.

Conclusion

So, receiving a CRA tax audit letter can seem daunting at first. But if you prepare thoroughly without leaving any gaps in your financial records, you can expect a smooth process. You should connect with a reputable CRA or specialist accounting firm if you require professional assistance.

When you know the CRA audit triggers and guidelines that the CRA follows, you can ensure flawless financial records in the long run. As a rule of thumb, create a clear and consistent record-keeping process. Moreover, use software to help you streamline the process.

Make sure you reach out to CRA if you have any queries. It will help you address any inconsistencies or information gaps on time for an accurate response.

Do you require experts to take care of CRA tax audit requests for you? Contact Prasad & Company LLP to get professional insights.