The Tax Audit - Part 1 - Initial Contact

The audit process usually starts with that dreaded letter in the mail from the Canada Revenue Agency commonly called CRA.  The letter is usually a long winded affair that is overwhelming and intimidating.  It is also not written in either official language (English or French), but in Taxese or Accountese (tax or accounting language).  Further, the items requested are not always referred to in terms your average person understands.
It is important to note that there are two types of “audit”.  One involves you sending copies of documents in for review such as child care, Tuition and Education, RRSP’s, Equivalent-to-spouse, and many others.  The second type involves meeting with a CRA official locally and allowing them access to all your business and tax records.  While both must be complied with the second is much more onerous, time consuming, and potentially damaging.
The first type which is called a review or pre-assessment review is usually limited to one item on the tax return.  This means you know exactly what is at stake when you are contacted.  You know what the worst case is, which is paying tax on the amount that is in question.
The second, which is called an audit, is much more worrisome and daunting.  The reason the audit is more problematic is that you have no idea exactly what CRA is looking for or why.  All you get told is that the CRA wants to see every piece of paper you own.
The above is true for both Income Tax and GST audits.  Although the good thing about a GST audit is that the actual dollars involved are a lot lower.  GST is 5%, while Income Tax is usually around 25% or more when the provincial portion is included in the bill.
It is important that no matter which process you are confronted with, you respond within the timeframes indicated in all CRA correspondence.  Being late responding, or not responding at all will just cause more problems and result in a very negative outcome.
You do not have to go through this process alone, and I would highly recommend that you do not go through it alone.  Failing to provide clear and concise information in a timely fashion can result in denial of your claim, or disallowance of expenses.  Saying the wrong thing (not speaking Tax) can result in what you say being interpreted in a way not favourable to your situation.  For example calling something a donation instead of sponsorship or advertising can mean receiving a tax credit instead of a deduction.  For GST it means having the amount disallowed instead of receiving an Input Tax Credit (ITC).
In the next installment we will look at how to prepare for the initial meeting with a CRA representative.