Tax audits. Successful defense tactics
Source: Yurist i zakon
Tax audits are always stressful for business. It doesn’t matter if the audit is announced or unannounced, but it still causes the taxpayer negative emotions and concerns about its results.
Before approaching a protection strategy, it is essential to decide on the taxpayer’s result from such defense. For the protection tactics to be effective, it is necessary to understand that it will most likely not be possible to avoid the tax audit act, because one of the main functions of the STS authorities is to replenish the budget, and just like that, the auditor will not come to check.
Therefore, the correct defense tactics should minimize additional tax charges and prepare an evidentiary base for challenging decisions/actions of the tax authority in an administrative/judicial procedure.
A tax audit protection strategy consists of several vital components.
First of all, it is important to know about it in advance for a successful audit. The first thing to do is to systematically check the schedule of audits for your company’s presence herein; such a schedule is published on the official website of the SFS.
There shall be a request from the SFS for the information provision and its documentary confirmation as for the unannounced audit.
As a rule, knowledge about a possible tax audit, preparing for it is much more thorough, and it is more comfortable to accompany it.
Each company has “vulnerabilities” that must be identified before the audit so that the auditors would not do this. As such, vulnerabilities may be considered business transactions with “dubious” counterparties, inadequate/incomplete registration of business transactions, non-documented expenses, and several other grounds for additional charges by the supervisory authority.
It is essential to analyze the counterparties for their appearance in criminal proceedings and pay special attention to the documentary registration of such business transactions. If the contract provides for additions, journals, reports – they shall be there. The audited company should also consider possible additional documents confirming the reality of its business transaction.
An audit of primary documentation shall also be performed. If the company has unconfirmed expenses or assets included in the tax credit but not used in business activities, it is important to consider these risks in advance. The lack of a signature, incorrectly specified details or the lack of logic in a business transaction can cost the company.
It will not be superfluous to make a list of possible questions from the SFS representatives and prepare answers to them, think over the schemes for concluding transactions and fulfilling their conditions. For example, the terms of delivery and transportation of goods along the chain – order, payment, transfer of ownership, transportation, etc. All these issues shall comply with the terms of the contract, the Tax Code of Ukraine, and the accounting rules.
The company should not ignore its employees, as employees are a great source of information for auditors, and therefore, all employees should be ready for the upcoming tax audit. To arrange such a briefing is a must!
During the briefing, it is necessary to explain that communication with the auditors is carried out exclusively by the director and/or lawyer, and the chief accountant. The rest of the staff should refrain from signing any documents and communicating with auditors.
Preparing for a tax audit is the best defense tactic. After all, risks identified in advance can be studied, and their share can be minimized.
Protective actions when accompanying a tax audit
It is essential to understand that the primary role of an attorney in a tax audit is communication. The attorney acts as a linking between the auditors and the business. Based on our practice, properly structured communication with auditors is of great importance for the audit’s course and results.
When protecting the interests of the taxpayer during a tax audit, the main purpose shall be achieved, which is the company’s business processes shall not be stopped, the accounting department continues to perform its functions, operational activities resume, and the attorney covers all the stress from the tax audit.
First of all, it is necessary to decide where the working place for the auditors will be during the on-site audit. It is recommended that the auditors are in a separate room with an authorized person who will accompany the audit, monitor the documents, and answer questions the tax auditors may have.
Next – to determine the order of interaction. You shall clarify which documents are required to start the audit and which documents will need to be provided – no necessity to be in a rush. Here it would be best if you kept in mind that the company can provide all the necessary documents during the entire period for the audit.
When preparing documents for submission to the auditors, it is essential to ensure that all signatures are present and all additions to contracts are available.
The supervisory authority still has the right to request an inventory. But it is crucial to remember that the right to demand and the right to perform inventory are different concepts. The participation of an auditor in performing such inventory is not mandatory since the norms of the Tax Code of Ukraine do not grant such a right to the supervisory authority and do not bind the taxpayer with the obligation to engage the supervisory authority into the inventory. It would be wise to conduct the inventory prior to the audit, and when a request for an inventory is received, submit the results of the inventory with a cover letter to the supervisory authority through its secretariat.
Tax audit act
According to the supervisory authority itself, 100% of tax audits always end with additional tax charges. Therefore, after the tax audit, it is crucial to receive the Tax Audit Act properly, considering that it shall be received anyway.
It is crucial here to pay attention to the last page of the Tax Audit Act, namely to the line saying that the taxpayer, by signing this Tax Audit Act, confirms that “All documents used during the audit are reliable, and the taxpayer does not have additional (other) documents that contradict the facts established in the Tax Audit Act.”
Therefore, when signing the Tax Audit Act, it is imperative for you to independently indicate that your signature on the Act confirms only the fact of receiving the Tax Audit Act, but you disagree with its content, and submit your objections in the manner prescribed by the current legislation of Ukraine. The same recommendation applies to all additions to the Tax Audit Act.
Filing of appeal to the Tax Audit Act
The taxpayers share the opinion that filing an appeal to the Tax Audit Act is a useless process because the supervisory authority that drew up the Tax Audit Act will not cancel its conclusions.
After Law 466 has been adopted, the procedure became more sophisticated. Now, the appeal to the Tax Audit Act, with all the documents and explanations, will be considered by the commission, which will be a permanent body, and its composition and procedure will be approved by the head of the supervisory body. This commission is called upon to impartially consider all the arguments and objections of the taxpayer to the audit act. The new collegial body is expected to be objective while handling the appeal.
Filing the appeal to the Tax Audit Act has several positive consequences for the taxpayer. First of all, it is time. When filing the appeal, the taxpayer may count for additional time to consider his position, evidence base, and a strategy to protect his interests in administrative, and especially – judicial, contestation of the tax assessment notice.
Due to the recent years’ practice, when considering the appeal to the Tax Audit Act, it is still possible to cancel those bizarre and fantastic conclusions of auditors, which sometimes are present in tax audit acts.
It is important to understand that the successful contestation of the tax audit results during administrative and /or judicial procedures largely depends on the proper execution of documents, competent and timely preparation for a tax audit, support of the audit, and a strategy developed in advance. Namely, successfully contested decisions on additional tax charges and the absence of financial losses for the Client are the main goals of a competent defense tactic.