What to know about audits

• The actual percentage of returns selected for audit is a guarded secret, but it would be safe to say that between 5 percent to 7 percent of personal tax returns are selected for review on a yearly basis. In 1999 the CCRA assessed about $5 billion in additional tax due to audit.

• If you do get selected for audit, remember the burden of proof is on you to disprove the auditor's conclusions. The CCRA need only prove its case on a balance of probabilities. Once this is done, it becomes your responsibility to prove them incorrect.

• Keep in mind that the CCRA may enter any place where records are kept in connection with your business or employment to conduct investigations. If the records are kept in your place of dwelling, the auditors need permission from you or must obtain a court-issued warrant.

• You are required to assist the auditor by providing all requested information and answering all questions pertaining to the audit.

• There is no client-solicitor confidentiality protection between an individual and his or her accountants. The CCRA can demand information from third parties.

• If an audit becomes a criminal investigation, you must be read your rights — and it's recommended that you seek legal representation.

• To satisfy debts, the CCRA can force the seizure and sale of personal property or garnish payments owed to you.

This brief list of things to know about a CCRA audit is only the tip of the iceberg when it comes to the powers that can be wielded. Believe it or not, in comparison to the IRS in the United States, the CCRA has far greater power and reach to enforce the tax law and collect outstanding taxes!

Avoiding an Audit

By far the best way to deal with an audit is to avoid it. To avoid an audit, you have to know how returns are selected for audit in the first place. The CCRA uses three methods to select returns for audit. The first method is the scoring method. The CCRA scores each return using criteria such as types of income and deductions and the dollar amount involved. When the scores reach a certain amount, the file is pulled for review. If the review indicates an error has likely occurred, and the dollar amounts are high enough, the return will be sent to audit. Returns are also selected for audit as a result of errors detected on initial processing or the inclusion of the return in a special project (see below).

Over the past few years, the CCRA has combined its audit division for income tax with its Goods and Services Tax (GST) auditors. Now, for people running a business, instead of seeing two auditors, you may only see one. However, he or she will look at both income tax and GST issues!

Scoring Your Return

Years of experience have allowed the CCRA to identify streams of income or deductions that are more likely to contain errors or misrepresentations. By knowing these areas, you will be better able to avoid initiating an audit. Basically, the CCRA divides potential problem areas into the following three main categories:

• Underreported income
• Overstated deductions
• Non-filers

Initial Processing Errors

Often an audit is triggered by processing errors found when the computer initially tries to assess your return. Examples of these errors include the following:

• Your return has no social insurance number
• The social insurance number provided is incorrect or belongs to someone else
• The T-slips are missing or do not match the slips sent in by your employer or other source.

Basically, these errors stop the computer from processing your return and cause it to be removed and examined. These errors are usually avoidable, and can be eliminated by your carefully preparing and reviewing your return.

Special Projects

An example of a special project is the underground economy project, in which the CCRA auditors go out looking for individuals who claim little or no income in specific areas of the economy (construction, home renovation, jewellery). Other special projects are the examination of all returns claiming deductions from tax shelter investments. Usually these projects are aimed at perceived abuses of the tax system.

Avoid situations that promote tax avoidance or evasion as a primary motivation. These areas are usually under close scrutiny by the CCRA and often result in audits of the participants. Cash or under-the-table transactions in the auto repair and home renovation industries are of particular interest to the CCRA.