The (lack of) Documentary Evidence Checklist where any audit has gone awry, the objection should be approached with two questions in mind: (1) what do we need to prove? and (2) how do we prove it?
In expense disputes, the case law indicates that a lack of documentation can be overcome with credible oral evidence.
The default position is almost always to try and provide some documentary evidence.
This checklist assumes that the audit result is a foregone conclusion. These are steps that might be taken after the audit
.1. Consider bringing a different advisor into the fold for the objection process. Often there are cost considerations that militate against using an additional or new advisor. My experience is that the initial advisor is often relieved to have a messy expense file moved to a different desk.
2. If the matter has a real chance of proceeding to Tax Court bring a tax lawyer on to the file at the objection stage.
3. Make an Access to Information request for the audit file
.4. Review the audit report and working papers. The specific inadequacies in the business records are usually stated very clearly in the working papers.
5. Start compiling evidence based on the comments in the audit report. The client should be given this task if possible. For example,
a. Can the client obtain copies of invoices from suppliers?
b. Can bank or credit card statements are used to trigger a client’s memory about various expenses?
6. How did the client pay for the expenses? Canceled cheques and credit card statements should be compiled.
7. Did the client pays cash for expenses and not obtain a receipt? Why?
8. For items like the failure to keep a vehicle log, can the client provide reasonable estimates based on secondary source information (i.e. a meeting calendar)? Is the client doing the same work today? Start keeping a vehicle log during the objection period.
Have a frank discussion with the client about credibility. Claiming a little $200 tap dancing lesson as a business expense can have the same effect as putting a little metal fork into a garburator.
10. Where documents supporting expenses cannot be provided, get the client to explain why not. This explanation should be provided to the appeals officer unless the explanation is something like “I made it up.”
11. Try to obtain the best evidence possible, but do not get bogged down in a search for perfection. Often partial writtenrecords can be bolstered by credible statements from the client.
12. Organise the compiled evidence in a meaningful way. Submit the material in a way that the Appeals Officer will understand.
13. Don’t bad mouth the auditor. Expect the Appeals Officer to consult with the auditor on the file.
As a final note, try and get a feel for the Appeals Officer assigned to the file. Some Appeals Officers see their role as being limited to ensuring accuracy. In our office, these Officers are called “confirmers.” Thankfully, they are a rare breed.
The Auditor-General has commented on the role of the Appeals Officer in 2004.67 Chapter 6 of the 2004 Auditor General’s Report stated as follows. Appeals officers are expected to do more than check the accuracy of an audit.
They are expected to try to resolve disputes administratively. If that is not possible, the taxpayer or registrant can appeal the decision to the Tax Court of Canada, which is a more expensive solution.
There are many ways to resolve disputes administratively, from simply explaining the basis for an assessment, to reaching a common understanding of the facts involved and the applicable laws, to agreeing on a settlement.