If you have been selected for a CRA audit, you may be wondering what kind of tests they will perform.
While this largely depends on whether the CRA auditor believes your records are accurate and reliable, they are also required to perform a number of indirect tests to verify that what you have earned has actually been reported. These tests typically apply to owner-managed, small and medium sized businesses, where there are fewer internal controls in place.
There are two types of Indirect Verification of Income (IVI) techniques used in a CRA audit– supporting and assessing. Supporting IVI tests cannot be used to calculate a tax reassessment. These are merely used as an estimate to help the auditor determine whether there are amounts that have not been reported.
Note that for all small and medium businesses undergoing a CRA audit, the auditor must perform a bank deposit analysis, and either a rough net worth or source and application of funds test. Don’t be surprised if you are asked for any of the additional records noted above.
These are used when an auditor tries to add additional taxes or make changes to a previously filed tax return. CRA can assess additional taxes on bank deposits where the source of the income cannot be identified. They can also assess additional taxes based on net worth and projections.
If income has been underreported and the CRA auditor has to use an assessing IVI technique to determine how much was earned, gross negligence penalties could apply resulting in an even higher tax bill than anticipated.
If you would like more information or have any questions, feel free to contact us at 780.466.6204, or click here to send us an email.
Thanks to Stephanie Kwan of KWB Chartered Professional Accountants for providing this content.
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