1. Get help.
The first decision to make when you get an audit notice is whether to handle it yourself or turn to a qualified representative, such as an experienced tax lawyer. Hiring a qualified representative costs money but, in the end, saves you stress, time and possibly money. Also, if there is gross negligence, a prosecution and large civil penalties might be averted.
2. Be prepared. Review your tax returns and gather requested documentation. If you discover a large understatement of income or overstatement of expenses, discuss this with your representative so that it may be disclosed to the tax auditor in such a way so as to give you the best chance of avoiding gross negligence penalties.
3. Don’t lose your self-control. If you attend the audit, keep control of your anger and resentment. Ranting and raving will likely make the auditor search harder for items where your income can be increased and your expenses disallowed. Nobody likes to be abused.
4. Don’t volunteer information. Just provide the requested documents. Be prepared to discuss only the matters in question. Don’t allow the audit to become a fishing expedition for the taxman to build a better case.
5. Don’t trust the “good cop” tax auditor. Unless a routine examination reveals the likelihood of unreported income, the Agency is not allowed to conduct an indirect determination of income and cannot demand that you complete a statement of your annual estimated personal and family expenses to determine how you lived on the income reported on your return. However, if, despite this warning, you decide to provide it, never allow the tax auditor to help you prepare this statement. The helpful auditor typically gets you talking about the high cost of living and that, in turn, convinces you to unrealistically maximize annual estimated personal and family expenses. The usual ploy is to suggest that you rely on Statistics Canada averages. The result is often an increase in the amount of your unreported income. Faced with this situation, the CRA auditor should be required by your tax lawyer to justify the decision to conduct an indirect determination of your income; otherwise, consider refusing to comply. If the auditor is able to justify this procedure, make it clear that you representative will assist you in preparing a realistic statement of your annual estimated personal and family expenses.
6. Don’t lose your cool. If the auditor indicates that he or she wants to disallow a deduction or otherwise increase the tax you owe and you don’t agree, state your disagreement calmly and only once. Remember, a tax lawyer can file a Notice of Objection on your behalf and, if that fails, take your case to the Tax Court.
7. Don’t be intimidated. CRA auditors may have the authority of the government behind them but they are not God. They are not always right or all-knowing. The tax audit is only the first level of review and there are ways to put a stick in the CRA’s spokes.
TRANSFER OF PROPERTY
If, because of the audit, you foresee a large tax debt, don’t transfer property such as a house to a family member or a friend. In this situation, both the transferor and the transferee can be jointly and severally liable to pay the tax debt. The liability can apply even if no tax assessment was issued. As long as the transfer takes place during or after the taxation year in which the tax debtor is liable, the transfer is caught.
IMPORTANT – Planning should be done and implemented before the CRA registers a lien against the real estate.
© DioGuardi Law
This article provides only an overview and does not constitute legal advice. You are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained in the context of your particular circumstances.