Company actions during a tax audit

Despite the legislative definition of the specifics of scheduled or unscheduled tax documentary audits, companies often wonder how to act during such audits, what documents and in what way to provide, etc.

It is important to understand that familiarization with the basic requirements for a tax audit can often help a company avoid unwanted additional charges and ensure the availability of necessary evidence in the event of further appeals against tax authorities' decisions. 

In this regard, we suggest in this article to consider what steps should be followed in the course of scheduled or unscheduled tax documentary audits.

Conditions under which a tax authority may start an audit

Taxpayers sometimes hesitate to allow tax officials to conduct an audit. Questions usually arise regarding the documents that the tax authority must provide to start an audit.

Thus, the Tax Code of Ukraine stipulates that officials of the controlling authority have the right to start a tax audit if there are grounds for such an audit and the following conditions are met: 

• a referral for an audit is sent or presented to a taxpayer;
• a copy of the order to conduct the audit is sent or submitted before the audit begins;
• the official IDs of the persons specified in the referral for the inspection are provided.

It is worth noting that both the referral for an audit and the order are valid if they are signed by the head (his/her deputy/authorised person) and stamped by the supervisory authority.

As for the documentary scheduled audit, the right to conduct it is granted only if the taxpayer has been sent (handed) a copy and a written notice indicating the date of commencement of such an audit, not later than 10 calendar days before the date of its conduct.

Failure to submit or send the above documents to the taxpayer or submission of such documents in violation of the requirements for their execution is a ground for preventing officials of the controlling authority from conducting an audit.

It should be borne in mind that if a taxpayer decides not to allow the audit, regardless of the reasons, the tax authority has the right to initiate an administrative seizure of the taxpayer's property and funds. 

Therefore, before deciding to prevent the tax authority from conducting an audit, it is necessary to weigh up all the risks for the taxpayer.

Peculiarities of providing documents during an audit

If representatives of the tax authority have provided the taxpayer with all the above documents with all the necessary details and have started the audit, the question arises as to the specifics of providing the taxpayer's documents for the audit.

Thus, when conducting audits, officials of the controlling authority have the right to obtain from taxpayers duly certified copies of primary financial, economic, accounting and other documents related to the subject of the audit. 

At this stage, it is recommended to consider the following:

• It is necessary to clearly understand the subject of the audit and the timeframe for its conduct, which are specified in the audit order. This will determine the list of documents to be provided to the supervisory authority.

Thus, a taxpayer is obliged to submit for an audit only those documents that relate to the subject of such an audit. The taxpayer has the right not to provide documents confirming transactions that go beyond the scope of the audit. 

• Documents shall be submitted in copies. The tax authority is prohibited from seizing the originals of primary, financial, economic, accounting and other documents, except in cases provided for by the criminal procedural legislation.

Copies of documents submitted to the tax authority must be duly certified (date, name, position and signature of the official, stamp (if any), inscription "as per the original").

At the request of the supervisory authority, a large taxpayer is also obliged to provide, by means of electronic communication, copies of documents created by it in electronic form on accounting for income, expenses and other indicators related to the determination of taxable objects, primary documents, financial statements, etc. no later than two business days following the day of receipt of the request.

• The law stipulates that copies of documents are formalized by a description. 

Such a description is drawn up by officials of the controlling authority and handed over to the taxpayer for signature. However, even if the officials do not draw up such a description, the taxpayer is advised to draw it up independently and obtain the signature of the inspectors. In case of the need to appeal against the decisions of the tax authority based on the results of the audit, such descriptions will serve as evidence of the provision of the necessary documents for the audit and the taxpayer's good faith. In practice, in the audit act, the officials of the controlling authority often do not provide a clear list of documents submitted to them, but only a general description of them.

• The transfer of documents containing trade secrets or confidential information is carried out separately from other documents under an act containing a description of the full list of documents and indicating the official of the tax authority that received them. Such an act must be signed by both the official of the controlling authority and the taxpayer.

Peculiarities of communication with the tax authority during an audit

During the audit, there is also a need to communicate with representatives of the supervisory authority, provide certain explanations or additional documents.

It is recommended to ensure that such communication is in writing. After all, written requests and responses to them may later become necessary evidence when appealing against decisions of the tax authority. 

In this regard, the following steps should be taken during the audit:

1. Depending on the circumstances of the audit, draw the attention of the officials of the tax authority to the importance of issuing requests for explanations or additional documents in writing. 
2. Provide written responses to requests for documents or explanations and record the sending/personal delivery of such responses. 
3. When receiving requests from the supervisory authority, it is necessary to review them to determine whether the requested documents are relevant to the subject matter of the audit and whether the business transactions for which explanations or documents are requested relate to the period under audit.
4. If the taxpayer has received individual tax consultations on issues related to the subject of the audit, it is worth referring to such consultations. After all, if the taxpayer acted in accordance with the individual tax consultation received, it is exempt from fines and penalties.
5. Please note that a request for copies of primary financial, economic, accounting and other documents must be submitted by an official of the supervisory authority no later than five business days before the end of the audit.

If such a request was submitted in violation of the specified time limits and the taxpayer does not have time to prepare a response to it and the necessary documents, such a taxpayer has the right to apply to suspend the documentary on-site scheduled or unscheduled audit for at least five business days.

Review of the audit findings 

The results of the audits are drawn up in the form of an act (if violations are detected during the audit) or a certificate (if no violations are detected), which are signed by the officials of the controlling authority and the taxpayers.

Please note that the tax legislation establishes an obligation for a taxpayer to sign an act (certificate) drawn up as a result of an audit.

Sometimes, representatives of companies that do not agree with the results of the audit set out in the act refuse to receive and sign it. It is worth noting that such actions are not constructive and do not affect the taxpayer's obligation to pay the monetary liabilities determined by the controlling authority based on the results of the audit.

Therefore, after receiving the audit act, it is recommended to take the following actions:

• Carefully read the described violations and conclusions of the audit act and, if received in person, sign it (in case of disagreement with the conclusions of the audit act, sign it with a reservation of disagreement and future objections).

• Provide objections (in case of disagreement with the conclusions of the audit act), which may be submitted together with a signed copy of the act or separately within 10 business days from the day following the day of receipt of the act. 

Nevertheless, it is recommended not to rush to submit objections together with the signing of the act, but to thoroughly prepare such objections with all the necessary additional documents. 

The stage of filing objections is very important, as all the materials attached to the objections, as well as the objections themselves, are an integral part of the audit materials. In other words, if the taxpayer was unable to prepare or submit certain documents during the audit, it must do so within the time limit for filing objections. In addition, the tax legislation stipulates that if a taxpayer fails to provide the supervisory authority with documents confirming the tax reporting figures within the deadline for filing objections, it is considered that such documents were not available to the taxpayer at the time of preparation of such reporting. This may make it difficult to appeal against the decisions of the tax authorities in the future. 

The objections must also provide explanations and attach documents confirming the absence of guilt, the existence of mitigating circumstances or circumstances exempting from financial liability.

Such objections are submitted to the tax authority that conducted the audit.

• Participate in the consideration of objections. 

All additional explanations and documents set out in the objections should be taken into account when considering the objections by the relevant committee for consideration of objections. Participation in the consideration allows the taxpayer/its representative to understand the position of the tax authority/key doubts and provide answers to all existing questions and convey its position. This may help the taxpayer to clarify certain issues that were not taken into account during the audit, which, among other things, may help to reduce potential tax surcharges while issuing tax notice-decisions.

Thus, the company's actions during a tax audit play a significant role in the conclusions that the tax authority will draw as a result of such an audit. Competent organisation of the actions of company officials, a responsible approach to communication with the tax authorities and proper preparation of documents can help avoid erroneous tax charges.

GOLAW has extensive experience in:

• providing legal support in preparation for the audit;
• legal support during the tax audits;
• appealing against the results of tax audits. 

GOLAW specialists will be able to quickly and efficiently analyse the circumstances of the audit, the taxpayer's business transactions for compliance with tax legislation and provide relevant recommendations, provide audit support, formulate a legal position for the purposes of filing objections to the audit act and appealing against the tax notice-decisions, prepare objections and all necessary documents for appealing against the tax notice-decisions both out-of-court and in court, and develop a GR strategy depending on the circumstances of a particular situation.