CRA In-Audit Conflict: Managing Risk & Taking Control

Key Takeaways for Leaders

• A CRA audit is not just a process - it's a conflict, unfolding in real-time. Leaders who treat it as routine compliance fail to recognize the trends, the CRA's approach, and the risks. 

• EY reports that 70% of the leaders report they lack appropriate visibility into their ongoing tax disputes. Recognizing conflict levels early, aligning teams, and responding strategically ensures control and minimizes financial exposure. 

• A structured CRA In-Audit Escalation Framework enables leadership to gain visibility and stay ahead. Our framework aims to help leaders and tax teams respond more effectively to in-audit conflict. It helps them recognize that by Level 2, the audit has already shifted against the business. By Level 4, CRA has framed the dispute, leaving few opportunities to influence the outcome.

CRA Audits: Conflicts Unfolding in Real-Time

The data shows that CRA is hunting more tax revenue. CRA audits are not neutral reviews – they are structured to challenge tax positions and extract revenue. Increasingly, CRA operates under a “review to contest” approach, focussing on reassessment rather than verification. Yet, leaders and tax teams often fail to recognize that a CRA audit is not just a process - it's a conflict unfolding in real-time. By the time most businesses recognize an in-audit conflict - often triggered by a CRA auditor's proposal letter - the CRA has already built its case, shaped the narrative, and structured the evidence to its advantage.

What Is an In-Audit Conflict?

An in-audit conflict occurs when a CRA audit shifts from a routine review to an adversarial process, where CRA builds its case before the business recognizes the dispute. Unlike post-assessment objections or litigation, in-audit conflict happens within the audit itself, shaping the outcome long before a reassessment is issued.

Key Characteristics

1. CRA moves from fact-finding to framing a dispute – Auditors begin shaping their position, selectively interpreting facts to justify reassessment.
2. Escalation happens without formal notice – Businesses may believe the audit remains routine while CRA applies structured tactics to solidify its position.
3. Engagement shifts from verification to contestation – CRA auditors no longer seek clarity; they seek to challenge tax positions and build a case for reassessment.

Consequences of Missing In-Audit Conflict

The failure to identify and address an in-audit conflict early carries significant risk. A sophisticated in-audit conflict strategy shifts teams from a compliance mindset to strategic conflict navigation, reducing procedural missteps, disclosure risks, and weakened positioning. Proactive monitoring and early intervention are critical.

In contrast, failing to recognize and strategically manage the in-audit conflict as it unfolds in real-time amplifies risks across the following dimensions.

•    Information Disclosure Risks – Without a strategic response, businesses risk unintentionally strengthening CRA’s case or exposing new vulnerabilities.

•    Lack of Alignment Across Teams – Uncoordinated or unsophisticated responses undermine credibility and weaken the company’s position.

•    CRA Defines the Narrative – When businesses fail to recognize escalation, CRA frames the dispute on its terms, justifying reassessment with little resistance.

•    Lost Procedural Protections – Delayed engagement weakens legal positioning and gives CRA a greater advantage in the short and long term.

By the time CRA issues a proposal letter or reassessment, control over the dispute has shifted; the company's opportunity to mitigate risk is reduced – and, in some cases, eliminated.

Data-Driven Reality

Data shows more audits and tax disputes. It also supports tailwinds support that “review to contest audits" are increasing too. Consider the following trends:

• Audit Volume & Intensity Increasing: A 2023 EY survey found that 79% of tax executives expect audits to nearly double in intensity and scope within the next two years. 
• CRA Overreach is Common: Between 2013 and 2018, 60% of CRA disputes resulted in some reduction – suggesting many assessments were overstated or based on flawed positions. 
• Timeline: High-complexity objections take 690 days to complete on average (Canada.ca) – nearly two years just for the objection stage. CRA’s backlog, and constrained resources. Also, Tax Court delays, worsened by insufficient federal funding, further tilt the power balance in CRA’s favour (Consider: National Post – Lawyers and advocates are losing sleep over federal courts funding crisis).
• CRA Attempt to Strategically Delay: CRA controls the audit and objection stages, and CRA will attempt to strategically extend proceedings, knowing businesses may settle due to financial and operational strain.

For deeper insight into how to overcome CRA and systemic delay, and take control, see our detailed analysis: CRA Objection: Strategic Disengagement.

A Framework Approach to In-Audit Conflict

Through our work representing businesses on high-stakes tax disputes at all stages, we’ve identified a predictable escalation pattern. CRA auditors start many audits with - or quietly shift towards - a “review to contest” approach. And we know these audits, unmanaged, do not remain static; they escalate throughout the audit itself – increasing financial, procedural, and strategic risk – often before leaders and tax teams recognize it. 

The CRA In-Audit Escalation Framework assumes that without a structured response, a company facing a CRA audit is more likely to default to excessive compliance, passive engagement, or uncoordinated responses – all of which escalate the company's risk and weaken its position.

Our framework aims to help business leaders and tax teams

• Develop a structured audit response plan before an audit occurs – Surface roles, escalation protocols, and engagement strategies to ensure alignment.
• Train teams to recognize early inflection points – Equip internal tax teams with the ability to identify when an audit shifts from fact-finding to a “review to contest” approach.
• Establish decision-making and engagement protocols – Clarify when leadership should intervene and when to engage external tax dispute counsel.
• Conduct audit response exercises – Discuss and refine processes and ensure teams respond strategically under real conditions.
• Integrate conflict navigation into broader risk management – Approach CRA audits with the same structured planning as regulatory reviews or litigation risk.

CRA In-Audit Escalation Framework

*This article solely focuses on in-audit conflict management, where early strategic engagement shapes the dispute before reassessment. We write extensively on the objection and Tax Court appeal stages. If interested, please explore our website and other articles, including CRA’s Objection Process: Full Engagement vs. Strategic Disengagement.

Internal & External Team CRA In-Audit Blind Spots

Identifying the point at which a CRA audit subtly shifts from fact-finding to case-building for reassessment is challenging.

A key challenge in tax audits is that internal teams (in-house accountants, tax professionals) and external advisors may not have extensive experience navigating complex tax disputes and their strategic dynamics. In fact, experience with other routine audits may create a false sense of predictability, leading teams to underestimate risk or fail to recognize early conflict escalation. Research suggests cognitive biases impair judgment in similar situations. 

• Availability Heuristic: Teams recall many “smooth” audits, underestimating the potential severity of some instances. (Consider: Journal of Accountancy – Eliminating biases that jeopardize audit quality).
• Normalcy Bias: Assumptions that “this audit” will follow previous patterns often lead to missed warning signs.
• False Consensus Effect: Internal and external teams may believe the CRA auditor is operating in a neutral way, when CRA is positioning to contest aggressively. (Consider: Association of Chartered Certified Accountants – Professional skepticism and cognitive biases in audit).
• Status Quo Bias: In tax disputes, tax teams may have competency blind spots and prefer to avoid adding an external advisor to the team. This can sometimes occur because the tax team or external tax planners are trying to protect themselves from accountability or liability. Consider: Journal of Risk and Uncertainty – Status Quo Bias in Decision Making

Strategic Action: Leaders Ought to Engage, Not Just Delegate

Tax disputes are business risks, not just compliance issues. When an audit takes an unexpected turn that leads to a suboptimal result, the company’s leaders - not the tax team managing it - usually bear the personal and business consequences.

Leaders need direct situational awareness to make high-quality decisions and adapt effectively in real-time. When the tax team waits until the CRA auditor issues a proposal letter or reassessment, the business reacts to the CRA’s agenda, not controlling its own.

By Level 2, leaders should engage tax dispute counsel behind the scenes to receive advice and prevent the CRA from shaping the dispute uncontested. By Level 3, we recommend direct intervention by tax dispute counsel, as the lack of a complete tax dispute strategy and positioning allows CRA’s framing to dictate the reassessment outcome.

Leadership and tax teams must collaborate to ensure they recognize escalation signals and risks throughout the audit.

Control the Audit, Control the Outcome

The data confirms that CRA is aggressively pursuing additional tax revenue, and experience shows a CRA audit is not just a process – it is a conflict unfolding in real-time.

CRA auditors will quietly and methodically gather information, shaping the dispute before businesses recognize escalation. Many leaders assume their tax teams have control – until they receive the CRA’s proposal letter or reassessments. By then, the company has lost the opportunity to shape the dispute, manage risk, and control the narrative. CRA has framed the case in its favour.

Proactive leaders build their capabilities and ensure key team members develop the skills, tools, and relationships to handle CRA audits effectively. When an audit arises, leaders stay engaged, help the tax team recognize early shifts in CRA’s approach, and ensure alignment throughout the audit.

Leaders who take this approach position their companies to control the dispute, rather than letting CRA dictate the terms.