Why do we audit and what is a tax audit? - Part one
Let's face it. Being audited can be overwhelming. Having the right information, and knowing what to expect, can help. These videos explain the CRA's tax audit process in three parts, and will cover:
- Why do we audit and what is a tax audit?
- What are your responsibilities and what happens during an audit?
- What are your rights?
Welcome to part one.
Why do we audit?
At the Canada Revenue Agency (the CRA, that's us), we are in charge of administering tax and benefits programs on behalf of all Canadians.
The Canadian tax system is based on self-assessment. Which means that people register their businesses as applicable, calculate their own taxes at the end of the year or at the end of the reporting period, and submit a tax return to the CRA along with any payments required.
To make sure businesses have calculated their taxes correctly, the CRA selects files for tax audits. It's one way of making sure that businesses fulfill their obligations and receive any amounts they are entitled to. This helps keep the tax system fair for everyone.
Tax audits are just one of the ways we make sure that businesses are applying the tax laws correctly.
And what exactly is a tax audit?
Usually, when we receive a tax return, it goes through an initial processing that checks basic information and calculations, and then from that, you receive a notice of assessment.
A tax audit is a more detailed examination of your books and records. It's conducted after you've received your notice of assessment to find out if you've calculated your taxes correctly.
First, we review the income and expenses you've reported - GST registrants might be more familiar with the terms taxable supplies and input tax credits. Then, we may compare these amounts with other sources we have on file to confirm that you've followed the tax laws and that your calculations are accurate.
We also make sure that you've reported revenues from all sources and that the expenses you claimed are deductible and supported by receipts. For GST/HST audits we make sure that GST/HST is collected and reported on all taxable supplies and that the input tax credits you claimed are eligible and also supported by receipts.
At the end of the audit, we confirm one of three things: that the previous assessment was correct and nothing more has to be done, or you have to pay additional taxes, or you are entitled to a refund. Most audits do result in a reassessment with more taxes being owed to the Government of Canada.
For more information on anything we've discussed in these three videos, please check out our audit pamphlet RC4188, What you should know about audits, or go to www.cra.gc.ca/audit.
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