Just like in the United States there is the Internal Revenue Service (IRS), up in Canada, tax returns are governed by a government entity called the Canada Revenue Agency – also known as the CRA.
If you fail to file your taxes, file your taxes late, provide inaccurate information or attempt tax fraud or evasion, the CRA is responsible for investigating, correcting, penalizing or prosecuting the taxpayer.
If you do find yourself at the receiving end of a tax audit by the CRA, there is no need to assume that you are under criminal investigation.
Receiving notice of a tax audit is vastly different from being placed under a tax criminal investigation.
And, when you do receive a notice of audit, the process of clarifying any confusion is fairly straightforward.
The Difference Between CRA Tax Audits and Tax Criminal Investigations
In Canada, income earning residents are responsible for filing their tax returns correctly and on time. The CRA is responsible for making sure that taxpayers properly and accurate file their taxes every year.
In order to do so, the Canadian Income Tax Act grants the CRA the ability to conduct tax audits. This can include inspecting accounting books, records, documents and even physical businesses and homes.
If the CRA finds a problem with a return, they conduct a tax investigation (or “audit”) to reassess returns as well as issue fines, penalties and interest.
In extreme cases, a tax criminal investigation can be conducted to determine if a taxpayer should be prosecuted for tax evasion or tax fraud.
There is a legally significant difference between the consequences of tax fines, penalties and interest (which are monetary) and the consequences of tax evasion or tax fraud (which is up to 5 years in jail).
For this reason, tax audits and tax criminal investigations are treated differently based on the Canadian Charter of Rights.
Tax audits focus on determining the accuracy of a tax return whereas investigations are focused on finding criminal activity related to tax evasion.
What to Expect from a CRA Tax Investigation
If you have been selected for a tax investigation by the CRA, there is no need to panic. This simply means that they wish to verify information on your tax return to ensure the return is accurate.
Your income tax return may be selected by the CRA for review randomly or they may have noticed discrepancies between the totals you reports and those submitted from a third-party (such as your employer).
Changes in your financial activities, such as an increase in medical expenses, can also cause the CRA to investigate your return.
Generally, once you submit the information they are looking for, and the confusion is cleared up, the issue is resolved.
However, if you choose not to co-operate, the CRA is likely to go ahead and make adjustments based on the information they have. This could lead to you owing more in taxes.
If you have been notified by the CRA that you are under audit or review, be sure to follow these steps:
1. Read the letter carefully to ensure you know exactly what they are asking for.
2. Submit the requested information.
3. Check for another letter outlining the CRA’s reassessment details.
You then have 30 days to dispute or else the new tax assessment is processed.
Should you disagree with the updated assessment, you can dispute directly with the CRA. If this doesn’t solve the issue, you can file a notice of objection which will go to an appeals officer.
However, if that doesn’t work, you can always plead your case to the Tax Court of Canada where the issue can be further escalated to the Federal Court of Appeal and eventually the Supreme Court. On the other hand, if you need any help in the United States with regards to the IRS, contact us.