Surviving a Tax Audit

How do you survive a tax audit? Do you have any rights when you receive an unannounced visit by an authorized person from the tax department? In fact, you do but know that co-operation with a tax audit is required under the Income Tax Act.

Every person carrying on a business and required to pay or collect amounts under the Income Tax Act must keep records and books of account containing enough information to enable the amounts to be paid to be determined. You must keep this information until six years after the end of the taxation year to which those records relate.

If you have failed to deliver up the records in response to an audit request, the Income Tax Act gives the tax department the authority to search premises and seize records. You are allowed to retain copies of the seized documents and the tax department must provide allowed access for you and your representatives to inspect the seized documents as required at all reasonable times during normal office hours.

While surprise visits at your home by a tax auditor are unusual (a letter requesting certain files for inspection is more routine), an authorized person employed by CRA may "Öat all reasonable times, for any purpose related to the administration or enforcement of this Act:

1. inspect, audit or examine the books and records of a taxpayer
2. examine property in an inventory of a taxpayer"

Under these powers, the CRA is also authorized to enter into any premises where any business is carried on, property is kept or any other activities are undertaken in connection with the business or property, or books or records, and to require that the owner or manager provide reasonable assistance and answer all proper questions. If you have a home-based business, this includes your home.

The taxpayer does have certain rights including the right to see a written request for information (you should request this before you allow entry to your premises) and a list of issues to be answered. The tax auditor may not enter your dwelling without your consent unless a search warrant is produced.

In addition, you should know that third parties approached by the tax department are not required to provide information or documents related to business dealings with you or other unnamed persons or third parties unless authorization has been given by a judge to obtain this information.

You should also be aware there is significant co-operation between jurisdictions and also tax treaties that govern how you are taxed when you reside in more than one country.

A taxpayer who is being investigated by audit is entitled to be present and to be represented by counsel throughout the inquiry unless it is ordered otherwise. (The tax department would have to show that your presence would jeopardize the process in that case.) Likewise, those who act as witnesses, providing evidence in an inquiry, may be represented by counsel.

But forget about taking the tax auditor on in a duel . . . no taxpayer is allowed to physically or otherwise interfere with, hinder or molest an official of CRA (!).

Evelyn Jacks is the author of Essential Tax Facts and Master Your Taxes and President of The Knowledge Bureau, knowledgebureau.com.