Sending in your tax return only to have it flagged by the Canada Revenue Agency for an audit can evoke a whole host of negative emotions, according to Gary Chow, a tax principal at accounting firm Baker Tilly WM LLP.
"For anybody, it doesn't matter what year it is, getting a phone call or a letter from the CRA invariably elicits a very emotional response in the sense that people get anxiety, angry or frustrated. And quite often people ask themselves 'why me?'" Chow, who worked as a former CRA auditor in the 90s, told Yahoo Finance Canada in a phone interview.
The CRA's computer system combs through returns looking for deficiencies, inaccuracies and red flags, and pulls returns randomly to see if any supporting information is needed, agency spokesperson Charles Drouin says.
If information is requested but not provided or if there are other issues, the return will go to a CRA employee for an audit.
If the computer system determines your return appears correct, it will be processed automatically and a notice of assessment will be sent.
Factors that get flagged for reviews
A taxpayer's compliance history or an attempt to claim a deduction that has been denied in the past are some of the factors that could trigger a review, the CRA says.
Another issue could be non-compliance with COVID benefits. Drouin says the agency's computer system will recognize patterns of non-compliance with certain COVID benefits and begin to look for those red flags.
Meanwhile, Chow says the CRA can also compare certain lines on a return to broader norms.
"They'll compare what you reported to other people in your neighbourhood, in your city, maybe in your province and maybe across the country. So if your number there is somehow statistically, say, more than two standard deviations away from the mean or highly abnormal, you could get pulled," he said.
Tax credits such as the foreign tax credit or medical expense credit are also some "favourites" for the CRA to examine, Chow adds.
What happens when you get flagged
Drouin says Canadians whose returns are flagged for a review will be notified by snail mail or secured electronic mail via My Account on the CRA website.
From there, Canadians are advised to follow the instructions in the assessment letter and determine what exactly the agency is looking for.
When you're calmer, take a closer read of the letter and see exactly what they're looking forGary Chow, Baker Tilly
Sometimes, the agency is looking for proof of amounts being claimed, which should be submitted within 30 days. If no proof can be provided, the agency will adjust the refund or taxes owing.
Most of the time, proof in the form of scanned PDFs or possible photos of receipts could suffice and can be submitted through My Account, which is why Drouin says it's so important to set it up.
"My Account provides an area where you can do many things. People think it just tells them how much they're getting or what their assessment was. But this has evolved a lot over the last five years. You can go in there and pay your taxes through My Account. And you can read your mail through My Account," he said.
Only 50 per cent of eligible Canadians have their My Account set up, he says.
Chow's advice to those who receive a letter of a review would be to put it down.
"Take a breather," he said. "When you're calmer, take a closer read of the letter and see exactly what they're looking for. The way you get through all of this is to give them exactly what they're asking for."
Appealing your assessment outcome
Chow says he sees an increasing number of returns being denied and ultimately ending up in appeals.
"Things have changed over the years. What we're seeing in reality is that we have someone in the civil service sitting thousands of miles away, getting these files electronically. They take a quick look, and if they don't like what they see, they just deny and just move on, which is why so many files are landing in appeals, where they don't really give you a second chance," he said.
"I think in some respects, they were a bit more forgiving in the past and they would actually work together more closely with the taxpayer."
Typically, if a Canadian isn't happy with their notice of reassessment, they can appeal it themselves or go through a tax professional. If the changes to the assessment are big enough, financially, the case could end up in tax court.
CRA-related scams on the rise
The CRA wants to emphasize that it will never send text messages or links to click in their communications with Canadians.
The Canadian Anti-Fraud Centre reported phishing email scams claiming to be sent from the CRA roughly doubled to 1,360 in 2022, compared to 731 in the prior year.
"Especially through the last three years with COVID, people have taken advantage of that and the fact that people are getting money through all these different benefits that we launched," Drouin said.
The agency will provide phone numbers along with its mail communications. To confirm if it's a legitimate number, Drouin says Canadians can check the CRA website.
Michelle Zadikian is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @m_zadikian.