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AUDIT INQUIRIES REQUIRE CAREFUL RESPONSES

THE STAKES ARE HIGH WHEN CRA REACHES OUT. DO NOT WAIT TO SEEK LEGAL HELP!

In the lifecycle of every large corporation, receiving an Audit inquiry from the Canada Revenue Agency (CRA) is not a matter of if, but when. Whether it arrives as a formal “Request for Information” or a polite introductory letter from an Auditor, this document acts as the first shot across the bow.

A business’s first response to an Audit inquiry has huge implications for the scope and duration of the ensuing Audit. It also carries implications for the taxpayer’s future liability for taxes, interest and potential penalties. In fact, at the very start of just about any kind of CRA inquiry, the stakes are often higher than most understand.

In this Tax Audits 101 Series Report, we discuss these initial Audit inquiries, why the stakes are so high, and why immediately seeking Experienced Tax Counsel can minimize negative consequences.

What Will an Audit Inquiry Say?

Generally, an initial Audit inquiry from the CRA will frame the tax issues that may follow. For example, it will likely specify the tax year(s) under review, the issue(s) or line items under review, the deadline for responding and any specific instruction on what may be required in the response.

The first thing to check in an Audit inquiry is its response deadline. Such inquiries typically come with a strict deadline. Often, the deadline is 30 days from the date of the letter – and even at this early stage of an Audit, a late response can have significant consequences.

However, in large organizations, mailroom processing, inter-office routing and general office chaos can eat up valuable time. By the time someone even looks at the Audit inquiry, there may no longer be enough time to craft a fulsome but careful response. The remaining options are to rush out a less-than-ideal reply, or to face potential compliance measures like penalties or compliance orders.

Worse, the CRA’s new electronic portals, which may only be accessible to a few representatives of the business – many of whom forget to check regularly – have generally exacerbated the problem of Audit inquiries not getting the attention they deserve.

No More “Rubber Stamp” Extensions

Compounding these issues, the CRA has also been tightening its internal policies regarding extensions for Audit requests. Current CRA guidance suggests that requests for additional time should generally be granted only for factors “outside of the taxpayer’s control,” such as natural disasters, illness, or significant business disruptions. Simply being too busy is no longer a valid excuse.

Controlling the Scope

The way a business responds to an Audit inquiry can have huge implications for the balance of the Audit. How something is said can often greatly impact how it is perceived. This is exactly the point where professional assistance can help.

Critically, responding to an Audit Letter is not just about compliance – it is about containment. The CRA is happy to receive more than it asked for, and will absolutely take advantage of a business oversharing or providing inappropriate descriptions of the situation at hand. The best response, crafted with the help of Experienced Tax Counsel, is aimed at being entirely accurate, but narrowly and carefully giving the CRA only what it requests.

Takeaways

The receipt of an initial Audit inquiry is a high-stakes situation – more than most realize.  Complying with the response deadline, determining if an extension would be necessary/justified, and verifying the scope of the request will all have huge implications for the ensuing Audit.  Experienced Tax Counsel can help.  

For help with Tax Audit matters, please click here.

Download a PDF copy of this Blog here.

For an updated Index of our Tax Audits 101 Series Reports, click here.