Get Into the Audit Frame of Mind

Get into the audit frame of mind - photo by Julian Mason via Flickr https://flic.kr/p/n4TLXR

Being audited is stressful. In fact, many people have found that being audited ranks among the most stressful experiences of their lives. And it is often worse when you're a small-business owner, because while you're trying to deal with earning a living, putting food on the table and growing your business, CRA is breathing down your neck, asking for documents, giving you deadlines, sending you jargon-filled letters about which of your business expenses they want to disallow, and politely implying that you've somehow been dishonest.

Although the audit process is legitimate, the way that the process is set up and administered often seems designed to intimidate taxpayers into quietly paying whatever tax bill an auditor sends them in the hopes that CRA will just pack up and go away. In short, no matter what CRA's public relations brochures might say, the audit process can make you feel like a victim.

Avoid feeling like a victim

There is a strong psychological component to the audit process. Victims are not generally defined by a choice to fight back. When someone feels like a victim, they tend to be compliant, they tend to be scared, and, like the quiet kid backed into a corner by the schoolyard bully asking for his lunch money, they tend to pay up.

Ultimately, it is this sort of dynamic that causes the vast majority of stress during an audit. For this reason, the attitude you take into an audit will be one of the biggest factors in predicting both your success and your level of stress. And that's why we want to help you get into "The Audit Frame of Mind".

What is “The Audit Frame of Mind”? It’s more than just a positive outlook. Positivity alone won't help you win your case, any more than thinking happy thoughts will send a bully running off empty-handed. Rather, when we talk about "The Audit Frame of Mind", we're referring to an attitude of determination that is informed by a realistic understanding of what to expect from the audit process, and what you need to do to win your case, along with the willingness to see it through. And you're going to start learning what it takes right now.

Stop thinking of your audit as a 100-meter dash – it’s more like a marathon

The first thing you need to do is banish from your mind the idea that you just want your audit to end. The only way it will end quickly is if you bite the bullet and pay CRA whatever they ask of you; no questions asked. However, doing that could be like hanging a bell around your neck and telling CRA that you're a cash cow. This is especially true if your tax bill is large, or if it represents a large number of individual disallowed expenses. Furthermore, in these types of cases It is highly likely that you will find the audit just gets extended to one or more additional years, resulting in an audit that is longer – not shorter.

If you want to get through the audit process with the least amount of stress and the highest number of allowed expenses, you need to stop looking at the audit process as a 100-metre dash. Instead, start thinking of it as a marathon, because the entire process may take a few years to fully play out, though it will typically consist of just a few periods of activity with a lot of down-time in between.  

Plan to take your case all the way to Tax Court

If you are audited, you should automatically plan to pursue your case all the way to Tax Court. Don't worry though, because that's not nearly as scary as it sounds. Before we explain why it's not scary, let's talk about why it's generally necessary.

Why we believe going to Tax Court is often necessary:

The chances that you will get through an audit with all your valid expenses allowed is very slim. So slim, in fact, that if it happens to you, you should probably start buying lottery tickets and checking the ends of rainbows for large pots of gold. Extensively detailed records of your expenses might help in some cases, but they are no guarantee. An auditor may be just as quick to disallow your expenses because she arbitrarily decides they are unreasonable (more on this tactic here) or because she thinks you're lying about their relevance to your business (more information on this tactic here). The reason you’re so likely to have your expenses disallowed is that both CRA auditors and appeals officers are highly motivated to collect money from you. It is, in fact, their primary responsibility. They may sometimes completely ignore you, without even bothering to read the explanations you send to them. It might seem virtually impossible to convince them of anything, no matter how strong your evidence is.

Why we believe you shouldn’t be scared of Tax Court:

The audit and appeals process should be viewed as stepping-stones on the way to Tax Court. You should think of Tax Court as the place you're trying to get to — not the place you're trying to avoid.

Because CRA officers can be so difficult to work with and entrenched in their positions, trying to convince them to change their minds is often an exercise in futility and a recipe for increased stress. Instead, you must approach the process strategically and manoeuvre around them. In our experience, it is only once you get to Tax Court that you will be able to start dealing with people who show evidence of actually caring about the tax laws, instead of just caring about how much money they can squeeze out of you. That having been said, it's important to realize that, although you might appeal to Tax Court, you will probably never set foot inside the courtroom. The vast majority of cases are settled outside of court in meetings with the Justice Canada lawyer representing CRA[1], and the Tax Court strongly encourages Justice Canada to be amenable to a reasonable settlement[2]. Because of this, your interactions with the lawyer from Justice Canada will, in all likelihood, be the first positive experience of the entire audit process. Of course, there are no guarantees, but chances are that you will find the lawyer more willing to fairly consider your case than anyone you dealt with at CRA during your audit and appeal. If it turns out you actually need to proceed to court to resolve any outstanding issues, the judges typically are impartial and not biased in favour of CRA. We strongly believe that if you go to Tax Court with better arguments than CRA, you will win.

In Conclusion

To wrap up, let's review what it means for you to get into "The Audit Frame of Mind". You need to:

  • Avoid feeling like a victim
  • Stop thinking of an audit as a hundred-metre-dash and start thinking of it as a marathon
  • Keep a positive attitude
  • Be determined to stand your ground when you have either good evidence or a good argument (we'll help you with both)
  • Approach the audit and appeal process strategically (we'll help with this too)
  • Plan from the start to take your case all the way to Tax Court

Inform yourself on the relevant matters of law, build good arguments for your case, and be aware of supporting court decisions so you can come out a winner in the end (we're all about this stuff … it's the whole reason for this site)

Now you know what it takes. We're ready to start when you are.

 

[1] http://business.financialpost.com/2011/03/15/tax-court-sees-more-room-for-settlements/

[2] http://cas-ncr-nter03.cas-satj.gc.ca/portal/page/portal/tcc-cci_Eng/Process/GST#b

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left Audit Self Defense is committed to making sure you never have to pay more to CRA than you are legally required to, and to making sure you have the tools you need to calmly and effectively deal with CRA if they come calling. Do we want you to win your case? Absolutely! However, Audit Self Defense cannot guarantee successful audit decisions. Nobody can guarantee that.