Why is the government auditing my tax return? Now what?

April 30th has come and gone and every good Canadian has dutifully sent in their Tax Return. Some still have their fingers crossed and many spent their refund long ago on bills, extravagant dinners, Tim Horton's, a little vacation... but wait, why did I get this letter asking me for more information? The questions that jump to mind are "Why am I being audited?" and "Am I going to owe the government my refund back?"

A Review is Really Just a Spot Check of your Return

Because Canada has a "Self-Reporting" tax system every tax return is pledged with a promise that we have done our best, but could be subject to a random check at a later date. Most of the 25 Million filed returns are submitted electronically or with paper forms that don't require sending most receipts. Instead of burying the government in all those receipts, and leaving them with a serious storage problem, you are supposed to retain proof of your claims for possible future review for 6 years. 

There is also a big difference between being selected for Review (spot checking of your claims for everyone) and an Audit (full scale review of your tax filing/records, normally for businesses). However, nobody likes being scrutinized by the government and it generally leads to nightmares, profuse sweating and severe stomach cramps. And no wonder we are scared with what we see of the American IRS on our mostly american TV programming. So any letter asking for information is often perceived as the ominous and frightening "audit".

In reality, a full Audit is quite rare and the most common thing is for taxpayers to receive one of 4 types of review letters: 

• Pre-assessment Review Program - before they process your tax return
• Processing Review Program - after processing your tax return
• Matching Program - checking your return against T-slips issued to you for missing ones
• Special Assessments Program - targeted reviews of certain types of income/claims, like Tips or employment expenses

Most common is the 2nd and 3rd... and you will receive a letter between May and December to spot check submitted claims or inquire about differences between your income slips reported and slips in their system.

The letter will request supporting documentation for whichever claim is being looked at. And the practice is not to ask for more than 3 years back unless there is real grounds for a more serious look. These are usually a simple look at your receipts, and no government ghoul will ever show up with a warrant... they will just request the appropriate supporting documents to prove your entitlement to the claim, and if for whatever reason the papers aren't acceptable or you have claimed something in error, the worst case scenario is that you pay back the tax owing on that item. 

Why were you chosen? Well its really nothing personal. All returns are scanned by a computer system and the factors are:

• random selection - they will select 150,000 people with a specific claim for example
• comparison of information on returns to information received from third-party sources, such as T4 information slips - so something may not appear to match your slips
• types of deductions or credits claimed and an individual's review history - something that seems out of the ordinary for you or an unusual amount for you that could be an error, like a large claim for Spousal Support deductions, and you were never married... or something that you have had rejected before and claim again

Usually a review gives you 30 days to submit the paperwork, but if you need more time, call and ask for an extension. You can usually be granted one or two extensions with a simple phone request. If you fail to respond, expect a reassessment of your claim and to pay back any related tax owing. There are no penalties for the tax assessed resulting from this, but you will have to pay interest backdated to April 30th.

Keep in mind if you miss the deadline and get Reassessed, or if the government doesn't agree with your receipts its doesn't mean its the end and you have to pay... you can still request an adjustment to put it back in later with the proper paperwork for up to 10 years. Hopefully it won't take that long to find the right receipts wherever you stored them! 

If you are still not sure how to deal with a review or you have had your claim rejected, seek out help. Ignoring the letter or not sending correct documentation will result in a loss of tax credits that you may still be entitled to. 

Pain Free Tax & Bookkeeping handles reviews as part of the cost of doing your taxes, but we also help people who filed their own taxes or at other firms. We are very experienced in handling reviews and successful in getting valid claims reinstated after a rejection. And where the individual really isn't entitled, perhaps the tax return requires other changes because of it - such as changing the best amount for a pension split, medical, RRSP's, etc.

If you haven't yet filed your return, do so now to avoid being cut off of benefits such as Child Tax Benefit or Guaranteed Income Supplement.