The following is an edited transcript of an interview on CKNW 980.
There’s a time of every year where individuals and business owners are receiving letters from the Canada Revenue Agency. It’s audit time, and despite being common, it’s a scary situation to go through. Jeff Glasner is a Tax lawyer at Boughton Law, and we spoke with him to learn how people should handle those letters arriving in their mailboxes.
This is a bit of a scary time for some people out there. Why is that?
Jeff Glasner: It is, I can tell just by the phone calls I’m getting. You get that brown envelope in the mail, you open it up and then there’s something in there, there’s some numbers in there, they say they’re reviewing a particular claim or maybe a general audit of everything you have. It looks scary.
It sounds scary when you describe it like that. Obviously people call you right away because they’re panicking?
What do you tell them?
Jeff: I tell them that they’ve done the right first step, that they’ve opened the envelope, they’ve taken this on and they’re looking for help, because often it isn’t as scary as it looks in the letter.
What are the red flags you know of that the CRA looks for that might make somebody a bit of a target?
Jeff: Those change from year to year, but there are certain claims that often get looked at: childcare expenses, large donation receipts, employees claiming expenses like motor vehicle, people claiming their home office expense. Those are ones that are often looked at.
Let’s say somebody got this letter saying “We have concerns about your return”. How do you prepare? What’s the next step that you take?
Jeff: If they’re coming to me we’re going to talk about how that claim came about, why they thought they were entitled to it, and what sort of documentation they have to back it up. We’ll talk about how we’re going to respond to the CRA, whether we need to ask for more time and what kind of package we’re going to put together, because if they claimed it on their return, they had some reason for claiming it. If there’s any gaps in the documentation we’ll work with them to form ideas of how to fill that.
How much documentation do you need? Should you have everything?
Jeff: Does that put you in a better situation? Yes. Do you need it in order to have any success in handling one of these things? Not necessarily. I often tell clients when they call me, “You know what? I’ll work with whatever you’ve got.” They apologize for throwing out a receipt. I said, “There’s nothing to apologize for. We’ll work with what you’ve got and we’ll try to get you what you deserve.”
I think the question that a lot of us have when it comes to dealing with something like the CRA is, is there common sense used? Are they reasonable? Is it a scary process?
Jeff: Two questions, they’re definitely a scary process for a lot of people. Are they reasonable? Some of them are very reasonable. A lot of it is luck of the draw in who you’re dealing with.
That’s not very reassuring.
Jeff: I’ll reassure you a bit more in that get three kicks to the can really. If you look at a CRA tax dispute you often are starting out by dealing with a CRA auditor. You’ll go through that process. You may agree with what they do, you may partially agree, you may disagree altogether. After they issue a reassessment, you have the option to go further and object your assessment by dealing with an independent CRA appeals officer. You’ll then go through the same process again. You present your evidence, you argue if necessary, you present your case law. If you’re not happy with the resolution at that stage then you can file a notice of appeal to tax court.
Let’s talk about being proactive here. Let’s say I’m a small business owner. I don’t ever want to receive one of those letters. How do I make sure that doesn’t happen?
Jeff: I can’t give you any method to avoid receiving it, but if you want to be prepared for it, we’ve already talked about record keeping. That’s key. Keep everything. Keep it as organized as you can. If you don’t have the resources to keep it organized, throw it in a box and we’ll organize it later. That’s what’s going to prepare you the best.
You’re also going to want to have good people to assist you in the process, whether it’s an internal bookkeeper, an external bookkeeper, or your accountant. If you have good professional advisors that you can rely on, that’s going to make a lot smoother of a process.
The number one piece of advice that you give people is to open the CRA mail, which is that brown envelope. Does that mean that a lot of people don’t?
Jeff: It’s amazing. A lot of people don’t. They have their own issues with other things going on with their lives and their past experiences with the CRA. They just can’t handle the emotional commitment of opening that letter and having to deal with it.
Is that like out of sight out of mind?
Jeff: Exactly. Those letters almost always have time limits in them and you do need to respond. It’s one thing to be right, it’s another thing to go through the process to resolve your dispute.
So step one, open the envelope. It can never be really as bad as what you might think it is, right?
Jeff: You certainly need to open the envelope. You certainly need to open it. I can’t guarantee it’s not as bad, but I can guarantee you’re not going to get anywhere if you don’t deal with the issue.
What are some of the other mistakes that you think people make in terms of dealing with the CRA?
Jeff: They’re all along the same theme. A lot of people think they’re correct on a matter, and a lot of people are maybe correct that they are correct on the matter, but you still need to engage the CRA in the process, to respond to them, and show them why you’re correct. You can’t just ignore it and say, “I was right to claim that,” and hope that nothing bad happens because if you’re not going to respond, the CRA’s going to take the next logical step and they’ll assess why you did deny whatever you were claiming.
You have to participate in the process in some way, shape or form?
Jeff: Yeah, you do, or you have to have a representative, like a tax lawyer, or your accountant, to assist on your behalf.
You must deal with a lot of stubborn people, because I image that is probably people’s first reaction is, “No, I was right and they’re wrong, because it’s the tax man.” Everybody says that.
Jeff: It does happen. There’s a lot of themes to the telephone conversations I get.
Let me hear some of the other themes.
Jeff: A lot of people dealing with the process will tell me that they’re having trouble sleeping. It comes up all of the time. My response to them is, “It can be a drawn out process, but you’ve come to me, you’ve come to your accountant. You’re doing everything that you could possibly do to work and try to resolve this matter. So for that, at least, you can feel good about what you’ve done to this date.”
You talk about record keeping and how important that is. When it comes to record keeping is there some mistakes that people make? Do they throw away receipts? What are the most common mistakes when it comes to record keeping?
Jeff: There’s some people out there who think they only need to keep their receipts for a year or two, and then they get rid of them. Really, we should be keeping stuff as long as we can as long as we have room for it. There’s some rules about six years. There’s some rules about longer, but I would always suggest just keep everything for as long as you can. Again, if you don’t have the resources to organization it just throw it in a box, we’ll worry about organizing it if and when it ever comes up.
When you say keep everything you’re talking about anything that is related to expenses that you are claiming on your taxes?
Jeff: It’s both expenses, and if we’re talking small businesses, revenues as well. It means copies of your invoices to your clients, which you may think that you don’t need once they’ve paid your bill, but often it does come back into play.
What are some of the long-term implications of the audit process? If you go through it once does that make you a target that you’re going to have to go through it again?
Jeff: It could. There’s no guarantee one way or the other. One might say that “they’ve looked at my donation receipts for 2015 and I’ve showed them I had every penny of it then their resources should probably be targeted at other people,” but there’s other ones, like business audits, where I’ll do an access information request after the audit. I will see that they’ve put a followup notice in this client’s file to look at it again in 2017, 2018, 2019.
If there’s a problem, if it’s resolved successfully, is that okay? Sometimes these investigations are routine, and sometimes there’s a red flag, right? There’s a difference in the type of audits that they do?
Jeff: Right, certainly. If it’s an issue of law. I deal a lot with individuals claiming the Indian Act tax exemption. It’s just an interpretation of the law, whether it applies to their circumstances and if we’re at the appeals level and we are successful with the appeals officer convincing us the law applies to my client, he’s or she’s exempt from income, they probably won’t look at that again. If it’s someone with bad bookkeeping issues and they don’t have expense receipts, they may want to check in again in a couple years to see if they’ve improved.
Essentially then when you go do that interview process, when you work through the audit process with the CRA, you may inadvertently create more red flags for them to come back the next time?
Jeff: It’s part of managing the process. There’s a lot of discussion that goes on with the client before we start meeting with the CRA. We discuss what issues there may be and we anticipate the best way to mitigate the damage or result ahead of time.
Like “let’s go in looking organized. Let’s look like we have all these receipts. Let’s look like we were prepared for all of this.” That kind of stuff?
Jeff: That certainly helps, yes.
How long does this process generally take?
Jeff: Listen, I’ve spoke about three kicks to the can. Those three kicks can take four years. A typical audit could take anywhere from a couple months, if it’s just a desk audit on a particular subject, or it can take over a year if it’s multifaceted dealing with a small business.
Your best advice, Jeff, then if you’re the unlucky recipient of one of those envelopes at this time of year, is open it, take a deep breath, and then what?
Jeff: Open it, take a deep breath, talk to your accountant, talk to your tax lawyer.
Good advice. Jeff, thank you so much for that.
Jeff: Thank you.