1. Consult a tax lawyer. It goes without saying that due to the complicated nature of a tax audit, it is highly recommended to find a good tax lawyer to represent you during the tax audit. Tax auditors are trained to look through your financial records with a critical eye to find errors and omissions that could lead to a reassessment where you could end up paying more in taxes, interest charges, additional penalties, and not to mention possible criminal charges. Given all that is at stake (your financial welfare, your business’ survival, your mental wellbeing) it simply makes sense to have a trained legal professional on your side. If anything, seek a free legal consultation with a tax lawyer if only to find out what you can expect, the options you have at your disposal and to have your questions answered by an experienced legal professional who is trained to defend your interests at all possible legal means.
2. Do not volunteer any information to the tax auditor. The auditor will have a lot of questions for you and many specific requests. There is no need to volunteer any more information than you need to since you never know how that information can be used against you. It is best to stay quiet and only answer the specific questions asked of you and only hand over financial records specifically requested. Do not make conversation. Do not get drawn into what may only seem as harmless chit chat with the auditor.
3. When in doubt, remain silent. If you’re in doubt about answering a specific question or handing over some information because you fear that it could be incriminating, then consult a tax lawyer immediately. It is better to take note of the question or request and let the auditor know that you will be getting back to him or her with the reply shortly. It is a good idea to have a standard reply ready for such questions: “I am going to take note of the specific question you are asking me, just to make sure I understand it correctly, and I will get back to you shortly with the answer.” If they insist on getting a reply right away, simply restate what you have said with a little variation: “I understand that you would like to get your work done quickly, and believe me I want you to get it done as quickly as possible too, so I will take note of your question and get back to you just as soon as I possibly can.” If they keep insisting, keep repeating your answer. The CRA agent will realize sooner or later that you will not budge on your position. Afterwards, call a tax lawyer immediately to find out what potential risks there are in answering the question or handing over the information to the auditor.
4. Don’t let your guard down. Tax auditors are not your friends. They may try to speak casually to you, to make small talk, but do not for a moment let your guard down. Always remember that they are there for one thing and one thing only, to find mistakes in your tax return.
5. You have rights, learn them. The Canada Revenue Agency has published the Taxpayer’s Bill of Rights, and although some of these rights are not legal rights that have the force of law behind it, it is still a good idea to know the principals behind which the CRA hopes to conduct their tax audits. See the section on Taxpayer’s Bill of Rights found here.
6. Do not be afraid to appeal the results of the audit. If you believe that the audit was done unfairly or the CRA agent made a mistake in his or her assessment, then speak with the auditor to try to reach a compromise. If this doesn’t help, speak with the auditor’s manager. If the result is still not to your liking, then go through the appeals process outlined here.
7. Be organized. It is your legal duty to keep and maintain the financial records that would serve to prove the amount of taxes you should be contributing. Keeping those financial records in an organized format lends credibility to you as a responsible citizen and taxpayer. Making it harder for the auditor to go through financial information because the information is kept in a disorganized fashion will only lead the auditor to assume that a mistake was committed by you or that you are trying to hide something from the auditor and are thus attempting to make it hard for the auditor to find that mistake. If anything, this will only encourage the auditor to work even harder to find an error or omission in your tax return.
8. Make copies of all of the financial records being asked of you and keep all of the originals. Do not assume that the CRA agent will care for your financial records in the same way you would. These records could still get lost or misplaced and you will nevertheless be held responsible for those missing financial records.
9. Be polite. Yes, you are likely feeling very stresses out about the whole ordeal and perhaps are frustrated or even angry that you were chosen to be audited. However, taking it out on the CRA agent will get you absolutely nowhere. Tax auditors get yelled at all of the time and it would likely be very refreshing to encounter a taxpayer who is polite and refrains from rude or confrontational conduct. Behaving civilly will definitely not work against you, but rude or outright abusive behavior is very likely going to play against your favour. This in no way means that you need to be friends with the auditor and take him out for a cup of coffee afterwards, but you could consider offering him a cup of coffee and a muffin when he arrives in the morning. It couldn’t hurt.