A tax auditor examines documents. - iStockphoto, courtesy Getty Images
Paying taxes can be stressful enough, but if you make a mistake on your form, the Canada Revenue Agency could come back at you with another daunting challenge: an audit — a detailed reassessment of your taxes.
The word has scary connotations, we know. Take a deep breath and read the basics of how an audit works.
Who gets audited?
Anyone can be audited, but some are far more likely candidates than others. Small businesses and self-employed people are prime targets, since they have more opportunities to exaggerate deductions and conceal earnings.
Salaried employees are less likely targets, since their taxes are already collected through payroll deductions and their employers file records with the government.
People with an income from corporations or trusts are also at risk of an audit.
Why does an audit occur?
An audit doesn’t necessarily mean you’ve done something wrong and the taxman is gunning for you. Audits are sometimes performed based on the likelihood that you’ve filed an inaccurate or incomplete return.
A self-employed person with some trust-fund income, multiple medical expenses and spousal support will have a far more complex return than someone whose entire income is a weekly salary. Of those two, there’s a greater probability that the former has made mistakes.
However, audits may also result from a belief of fraud or misrepresentation. The CRA may have information indicating that a certain taxpayer is cheating the system and will investigate.
Sometimes, the agency also conducts “audit projects” that tests certain groups known for non-compliance. For example, if information and past investigations show dentists are frequent tax cheats, the CRA may focus more on their returns.
How far back can I be audited?
The government has up to three years from the date of an assessment notice to go back and audit you.
How does it work?
There are two types of audits: desk and field.
In a desk audit, the agency will ask you to submit receipts or documents that support any questionable claims.
In a field audit, an investigator will visit your premises to look over your records. They won’t kick down the door and make demands though; an appointment is made and you have time to prepare the requested information.
What happens after an audit?
If the CRA finds discrepancies in your return, it will send a letter detailing its proposed adjustments and typically giving you 30 days to respond.
The letter is not the final word though; it’s still possible to present further information or arguments to plead your case.
If that doesn’t work, you can also file a formal objection to the auditor’s findings.
What are the penalties?
Anyone who fails to file a return faces a fine ranging from $1,000 to $25,000 and a possible 12 months in jail.
After that, the Income Tax Act prescribes a wide range of penalties based on the offence and how much money is involved.
Anyone who makes or okays false or deceptive statements on a return, destroys records or otherwise tries to avoid paying taxes faces a fine of between 50 and 200 per cent of tax that was lied about and up to two years in jail.
Claiming a refund or credit to which you’re not entitled merits a fine of between 100 and 200 per cent of the amount in question, plus a maximum five-year sentence.