Facing a CRA audit soon? Understanding the process can make the experience less stressful. In this guide, we’ll outline the CRA audit process and give you tips on how to navigate the process successfully, including tips on how to manage interactions with the CRA.
This guide is part of our series: Navigating a CRA Audit: A Guide for Small Businesses.
Check out the rest of the series here:
- CRA Audit Survival Guide: Understanding Non-Compliance and Audit Triggers
- What to Do After a CRA Audit: Recovery, Compliance, and Rebuilding Trust
- How to Survive a CRA Audit: Steps and Best Practices
Reviews vs. Audits: Understanding the Difference
While both CRA reviews and CRA audits involve scrutiny of your financial records, they differ in scope and intensity. Both call for opening up the books, however, and the more organized you can be in maintaining accurate records, the more seamless (and successful) your audit is likely to be.
Reviews:
- Less comprehensive than audits
- Often focus on specific items in your tax return
- Usually conducted through mail or phone
- May be triggered by discrepancies or unusual items in your return
- Can often be resolved quickly with proper documentation
Audits:
- More comprehensive examination of your financial records
- May cover multiple years of tax returns
- Often conducted in person at your business premises
- Triggered by more significant concerns or as part of random selection
- Generally more time-consuming and resource-intensive
Triggers for Reviews and Audits
Common CRA review and CRA audit triggers include:
- Significant changes in reported income or expenses
- Inconsistencies between your return and information from third parties
- Operating in a high-risk industry (e.g., cash-based businesses)
- Repeated errors or late filings
- Tips from informants
- Random selection for statistical purposes
The Audit Process: From Notification to Resolution
Step 1: Notification
- You'll receive a letter from the CRA stating you've been selected for an audit
- The letter will outline the tax years under review and the initial information required
Step 2: Initial Contact
- A CRA auditor will contact you to schedule the audit
- They'll provide details on what records they need to examine
Step 3: Information Gathering
Prepare and organize all requested documents. This may include:
- Financial statements
- Bank statements
- Receipts and invoices
- Ledgers and journals
- Corporate minute books
- Contracts and agreements
Step 4: The Audit
The auditor will examine your records, either at your premises or their office. They may ask questions about your business operations and financial practices. Typically, the duration can vary from a few days to several weeks, depending on complexity.
Step 5: Preliminary Findings
The auditor will share their initial findings. You'll have the opportunity to provide additional information or clarification.
Step 6: Final Report
The auditor issues a final report detailing their conclusions. This may include proposed reassessments or adjustments to your returns.
Step 7: Resolution
If you agree with the findings, you'll sign an agreement and pay any additional taxes or penalties. If you disagree, you can file an objection or appeal.
Presenting Information to the CRA
When providing information to the CRA:
- Organize documents chronologically and by category
- Provide clear explanations for any discrepancies or unusual items
- Use professional presentation methods (e.g., binders, digital files)
- Be prepared to explain your bookkeeping system and financial practices
Specifically when dealing with a Scientific Research & Experimental Development (SR&ED) audit:
When asked questions about your claim, answer the question as directly as possible and only provide the necessary information. This may sound obvious, but the auditor will be following a standard procedure to ensure that your claim meets the five criteria for Scientific Research & Experimental Development (SR&ED) tax credit eligibility before proceeding. If you provide additional details or information not necessary to the SR&ED claim, the CRA could potentially use it out of context to motivate their reason for denying or amending your claim.
It’s also important that when defending an SR&ED claim, in particular, focus on the technology throughout the audit process. It’s easy to get caught up sharing the general project details and financial impact on your company but remember that the auditor is only interested in determining whether your claim meets the SR&ED criteria. They need to focus on technological advancement, whether your team overcame technical challenges or obstacles and whether it was done in a systematic process.
Interacting with the CRA During an Audit
Best practices for dealing with CRA auditors:
- Consider having your accountant or tax professional present during meetings
- Be cooperative and professional
- Respond promptly to requests for information
- Be honest and transparent
- Keep detailed records of all interactions
- Don't volunteer information beyond what's requested
- If unsure about a question, ask for clarification before answering
Your Rights During an Audit
As a taxpayer, you have the following rights during the audit process:
- The right to professional, courteous, and fair treatment
- The right to complete and accurate information about your rights and obligations
- The right to representation (by yourself or a third party)
- The right to lodge a service complaint or request a formal review if you're unsatisfied with the audit process
The Importance of Sound Bookkeeping Practices
Maintaining accurate and organized financial records is crucial for several reasons:
- It simplifies the audit process, reducing stress and time commitment
- Well-kept records demonstrate your commitment to compliance
- Accurate books make it easier to identify and explain any discrepancies
- Good record-keeping can help prevent errors that might trigger an audit in the first place
How Enkel Can Support You During an Audit
Professional bookkeeping services like Enkel can be invaluable during an audit:
- Ensuring your books are accurate and up-to-date
- Organizing financial information in a CRA-friendly format
- Explaining complex transactions or accounting practices to auditors
- Identifying potential issues before they become problems
- Providing expert advice on tax compliance matters
Enkel's Role in Serious Non-Compliance Cases
In cases of serious non-compliance:
- Enkel can help reconstruct financial records if needed
- They can liaise with your legal representation to provide the necessary financial information
- Enkel can assist in developing improved bookkeeping practices to prevent future issues
When Legal Representation is Necessary
In some cases, you may need legal representation during an audit:
- If fraud is suspected
- For complex tax disputes
- When facing significant reassessments or penalties
While Enkel cannot provide legal advice, they can:
- Work alongside your legal team to provide financial information and explanations
- Help translate complex financial data into understandable terms for your legal counsel
- Assist in preparing financial documentation for legal proceedings
Challenges in the Audit Process
Several challenges may arise during an audit:
- Time constraints: Audits can be time-consuming, taking you away from running your business
- Stress and anxiety: The process can be emotionally taxing
- Resource allocation: You may need to dedicate staff to assist with the audit
- Technical complexity: Tax laws and regulations can be difficult to navigate
- Financial strain: If reassessments occur, you may face unexpected tax bills
While legal and general bookkeeping services are critical in addressing many of these, it’s also important that these challenges don’t deter you from taking advantage of key funding programs like SR&ED.
At Boast, the entire aim of their solution is to take the strain out of claiming SR&ED, maximizing access to innovation capital for customers while turning the claim process into a passive exercise.
Best of all, should a claim get audited, Boast customers don’t have to lift a finger since the Boast platform has already integrated with the key systems necessary to access claim evidence and defend any CRA queries.
Post-Audit Steps
After the audit concludes:
- Review the findings carefully
- Implement any recommended changes to your bookkeeping practices
- Consider professional development for your accounting staff
- Regularly review your tax compliance procedures
- Consider engaging professional bookkeeping services to ensure ongoing compliance.
Conclusion
While a CRA audit can be a challenging experience for any small business, being prepared and understanding the process can significantly reduce stress and potential negative outcomes. By maintaining accurate records, seeking professional assistance when needed, and cooperating fully with the CRA, you can navigate the audit process more smoothly.
Remember, services like Enkel can play a crucial role in both preventing audits through sound bookkeeping practices and supporting you through the audit process if it occurs. By partnering with professionals and staying informed about your tax obligations, you can focus on what you do best – running and growing your business.
At Boast, we embrace a similar ethos, helping do the heavy lifting when it comes to defending your R&D tax claims so that you can focus on the day-to-day necessities of your business.
To learn more about Boast’s proven process for both compiling and defending SR&ED claims, talk to an expert today.
