How does the CRA choose their audit targets?
- Computer-Generated Lists – the computer system selects financial information of taxpayers who work in a similar field and performs a comparison of the files, producing a list of returns that need further investigation. Most files that are selected for a tax audit are chosen in this manner due to the high standard of compliance within tax rules and regulations in Canada.
- Tax Audit Projects – the CRA will test the compliance of a particular field of business. And if they notice a significant margin of non-compliance in the selected group, then a tax audit of local, regional or national taxpayers in that group will be done.
- Leads – this includes information gleaned through outside tips as well as from internal investigations.
- Secondary Files – when the CRA is completing an audit, individuals or businesses associated with the primary target may also be selected for an audit.
How a CRA tax audit is conducted?
The auditor will contact you and request that all relevant records be sent to the office or else they will set up an appointment for your home, place of business or the office of your representative.
Once your file has been selected by the CRA the tax auditor should carefully review all relevant records. The following documents will be examined during a tax audit process:
- Information currently on file including all tax returns (this could be several years’ returns), financial statements, audit reports from previous audits as well as any other information that the CRA has on file.
- All business records including ledgers, journals, expense account details, sales and purchase invoices and bank/financial records.
If the audit is to be performed at your place of business, the auditor will want to speak to relevant employees, especially those involved with accounts. They may also want to inspect the premises to get a better feel for the business and how it works.
Field tax audits are serious in nature and should not be handled lightly or alone. It is important to have professional tax representation during these audits in order to ensure that your rights are protected and that the auditor does not inappropriately expand their tax audit.
Let National Tax Service assist you when the Canada Revenue Agency requests a review of your records.