Managing corporate tax audits: Leading practices

When corporate tax audits are efficient and effective, everyone benefits. But the larger and more complex the audit, the higher the chances that delays or misunderstandings could prolong the process. Members of CPA Canada’s Industry Tax Committee got together to identify leading practices that can help corporate tax teams and their advisors improve their tax audit experience.

Before the audit

Preparing for the audit starts when you prepare the T2 or other return. It’s a lot easier to ensure that you have the right backup in the tax return production phase than it is to backtrack to retrieve information later – often years later – to satisfy a Canada Revenue Agency (CRA) request.

As you work through the numbers, anticipate what issues, transactions or business changes might catch a tax auditor’s eye. That way, you can ensure you have answers documented for any questions that might arise about the return and positions taken.

The tax return file should include final copies of tax return working papers, along with documentation of completed transactions. Ensure documents protected by privilege are well-marked and kept separate from unprotected ones. You will also want to see that your files are in line with your company’s document retention policy.

Since CRA policy is to request only factual information from taxpayers, be sure factual information about your company’s transactions is documented separately from any subjective analysis about the transaction’s tax treatment. When factual and subjective information are mixed in the same documents, the CRA may have little choice but to request them to confirm the facts at hand. (This policy change stems from the Federal Court of Appeal decision in BP Canada.)

Get to know your CRA audit team

At the outset of the audit, get acquainted with all the members of your CRA audit team. This goes beyond finding out the names of your large case file manager and field auditors.

A good practice is to hold an opening meeting that brings your company’s tax team, the one involved in the audit, together with your CRA audit team. You can set the stage for an efficient and effective audit by working with the CRA to:

• establish positive expectations for everyone involved
• discuss the audit’s scope, timing and expected end date
• set processes for information flow, including protocols for dealing with questions and media used to transmit data (e.g. paper, USB key, CD, upload to My Business Account)

In some cases, you can avoid tax audit issues by helping your audit team get to know your business better. An opening meeting gives you an opportunity to understand your CRA auditors’ knowledge of your industry and your company.

You can also inform the CRA about your company’s internal tax policies and controls, changes in the company or business environment during the years under audit, and its significant transactions and positions taken. If you have a complex group company structure, explaining the structure and the main activities of each entity (e.g., with an organization chart) may help the CRA understand how it all fits together.

Keep communication channels open

Once the audit is in full swing, keep in touch with your CRA audit team by requesting regular onsite status meetings with your field auditor, along with periodic meetings with your large case file manager and their team to manage expectations.

Discuss CRA queries with your auditor to ensure that you share the same understanding of the query, its scope and the time and resources you’ll need to devote in order to comply. Also, meet deadlines for responding to CRA requests whenever possible.

If you foresee that delays or issues could prevent you from making a response on time, communicate the reasons to the CRA as early as possible, and request an extension. You can help the CRA ensure its timelines are reasonable by informing them as early as possible of your tax team’s busy periods (e.g., financial reporting, budgeting and tax filing deadlines) and setting blackout periods for CRA requests as well as raising audit issues.

Understand the CRA audit process

Finally, you can better understand what’s driving your auditors’ requests and activities by learning the instructions they follow. The CRA’s Income Tax Audit Manual is publicly available, and this roadmap for conducting tax audits offers opportunities to build better relationships with your CRA auditors by improving your shared understanding of the tax audit process. See our previous tax blog for details on what’s inside the auditor’s playbook.

Keep the conversation going

We want to hear from you. What more can the CRA or corporate tax teams do to ease the tax audit burden? Post a comment below.

CPA Canada’s Tax Blog is designed to create an exchange of ideas on tax policy and practice issues, and their impact on those who practise tax. Your comments can provide helpful input into the public interest advocacy positions developed by CPA Canada.

Disclaimer

The views and opinions expressed in this article are those of the author and do not necessarily reflect that of CPA Canada.