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Advice from tax lawyer, accountant crucial during CRA audit

For taxpayers on the receiving end of one of the thousands of audit letters the Canada Revenue Agency (CRA) sent this year, it is essential to first understand what the taxman is asking for — and seek professional advice, Canadian tax lawyer David J. Rotfleisch tells Global News.

“A CRA audit is a lot of process, paper, and powers-that-be,” explains Rotfleisch, founding tax lawyer at Rotfleisch & Samulovitch Professional Corporation.

Although anyone can be audited, Rotfleisch says the taxman often focuses on certain categories of taxpayers or elements of a tax return that raise a red flag.

Often, he says, this includes self-employed individuals — as their tax returns can be more complicated — those in the construction, retail or restaurant industries, given the CRA’s increased scrutiny on these heavily cash-based sectors, or individuals who frequently report rental or business losses.

Others in the CRA’s crosshairs may include taxpayers whose income doesn’t match their postal code, which will lead the CRA to wonder how you can afford to live where you do, those with offshore assets, or individuals who have received international wire transfers of $10,000 or more.

Rotfleisch says that some letters from the CRA asking for a second look at your taxes may not be an audit, but are instead a tax review notice, which is the most common type of interaction people will have with the agency after submitting their return.

During this type of review, the government wants to look over the records and receipts used to claim expenses, says Rotfleisch. Often, he says, after you show them the necessary paperwork, the matter is over.

However, he cautions, these tax reviews can turn into full-on audits if an individual fails to reply to the CRA, or if the agency doesn’t like the response.

Usually, says Rotfleisch, an audit will start with a letter advising you that the process is underway, specifying the years the CRA wants to examine as well as the documents and records it wants to see.

At this point, taxpayers can make submissions, and the auditor is required to “review and respond to those submissions, dealing with every point of accounting issue and every tax law concern raised,” he tells Global News.

Audits, Rotfleisch notes, usually take several months to complete, but can last a number of years in complex cases.

As such, he says, taxpayers should always hire professional help in these situations — ranging from a certified accountant in the case of a simple audit, to a tax lawyer if the matter involves any legal issues or a complex tax pattern. Any audit can be full of “pitfalls and traps” for taxpayers who try to deal with it on their own or rely on the advice of improperly qualified tax preparers, he says.

A straightforward audit, Rotfleisch says, might involve a disallowed tax deduction or credit for which you are clearly eligible and have the paperwork to support.

“That’s a simple submission — it’s numbers and receipts — your accountant can definitely handle that,” he says.

In some cases, he adds, an individual will need a lawyer and a certified professional accountant (CPA).

In those instances, Rotfleisch says it is crucial to hire the lawyer first as that guarantees privileged communication that the CRA won’t be able to use against you. The lawyer can then extend that privilege to exchanges between you and the CPA.

Once the audit process is completed, the CRA will send the taxpayer a notice of assessment or reassessment, indicating taxes owed as well as any interest and penalties, says Rotfleisch — individuals are then given 90 days to file a notice of objection.

In one case, he says, it took a notice of objection before the CRA granted a client $900,000 worth of GST/HST refunds and interest for a matter involving the export of second-hand vehicles.

Ultimately, Rotfleisch says in the article, the key is to promptly collaborate with the CRA without volunteering information the agency is not entitled to.

“You want to co-operate as you’re required to co-operate — not beyond that,” he says.

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