Common Reasons for Tax Audits and Reviews

The Canada Revenue Agency (CRA) selects taxpayers for audit and review by both random and specific selection processes.

Computer–generated Lists
Most returns are selected for audit review from computer-generated lists. For example, the computer system can compare selected financial information of taxpayers engaged in similar businesses or occupations and generate lists of returns with audit potential. From these lists the CRA chooses specific returns to be audited.

Audit Projects
In some cases, audits are used to test the compliance of a particular group of taxpayers. If the test results indicate that there is significant non–compliance within the group, the CRA may audit the group’s members on a local, regional, or national basis.

Leads
Leads include information from other audits or investigations, as well as information from outside sources, like the media, public record, or informants who have given the CRA reason to believe a return has been prepared incorrectly or not in compliance with the tax laws.

Secondary Files
Sometimes files are selected for audit because of their association with other previously selected files. For example, if you are in partnership with another taxpayer, and that person’s file has been selected for audit, it is usually more convenient to examine all the records at the same time.

Pre–assessment Review Program
The CRA reviews various deductions and credits on returns before issuing the Notice of Assessment and the refund, if there is one. The peak period for this type of review is February to July.

Processing Review Program
This program is similar to the Pre-assessment Review Program except the review takes place after the Notice of Assessment has been issued. The peak period for this type of review is June to November.

Matching Program
This review also takes place after the Notice of Assessment has been sent. Under this program, the information on an individual’s tax return is compared to the information provided by third–party sources, such as employers or financial institutions.

Example: the amount of income an individual reported on his or her tax return can be compared to the employment income shown on T4 slips that the individual’s employer has filed with the CRA or to the investment income shown on T5 slips.

The Matching Program provides support for other important programs such as the Canada Child Tax Benefit, the GST/HST credit, and the Guaranteed Income Supplement by correcting the net income reported by individuals.

Also, the Matching Program corrects errors relating to an individual’s RRSP deduction limit and spousal-related claims, including child-care expenses, provincial tax credits, and provincial tax reductions. The peak period for this type of review is September to March.

Beneficial Client Adjustments – The Matching Program administers the Beneficial Client Adjustments Initiative. Currently, this initiative identifies under–claimed credits relating to tax deducted at source and Canada Pension Plan contributions by comparing an individual’s return to third–party information. The CRA adjusts the return to allow the amount the individual is entitled to, and then issues a Notice of Reassessment and a refund, if it applies.