So, the tax audit is over – now what? If no violations were found in the audit, then depending on which kind of audit was performed – a desk audit or a field audit – the company will either get a notice that it passed the audit or it will get nothing. Accordingly, if the desk audit went positively for the company (there were no additional taxes or denial of deductions), then the company doesn’t get a notice and no documents are issued.
If a field audit is done and no violations are found (which is rare), the company is given only a notice that it underwent a field audit.
Of course, in most cases, tax audits end in additional taxes. This is especially true for field audits. It is not important which types of violations are found and additional taxes accrued, the taxpayer receives an official report - the tax claim. As soon as the claim is in the taxpayer’s hands, the company begins a long fight to defend its interests.
Procedure for preparing responses to tax claims
The procedures for preparing responses to claims from desk and field audits are the same. The deadline for submitting responses is 15 business days from the day the claim was received, regardless of whether it was received in person by a company rep or by mail. It is better of course if the claim is received in person so that the company has more time to prepare its responses.
The approach to the response can take two different directions:
Finding procedural violations by the tax authorities committed when making the claim or when performing the audit.
Objecting to the basis for demands for additional taxes to be accrued.
When protesting the claim on the basis of procedural violations, you need to carefully assess all actions by the tax authorities during the audit and how they composed the claim. In particular, this could be:
Violation of the timeline for performing an audit;
Tax authorities’ failure to observe the limitations for the tax periods that can be audited;
Tax authorities’ failure to observe the obligations of requesting from the company explanations of mistakes that arose during the desk audit;
Failure to present an official request for documents to be audited;
Failure to observe rules on performing a repeat audit;
Tax authorities’ failure to submit an official letter of completion;
Refusal to accept amended declarations during the course of the audit;
Failure to observe regulations on tax control measures (requests for documents, witness interviews, experts, etc.);
Violation of the taxpayer’s right to receive a written claim upon the completion of the audit.
If the company challenges the tax authorities’ claims on the basis of procedural violations, the head of the tax authority may decide to take additional control measures which would allow the tax authority to eliminate procedural lapses.
Therefore, it is advisable to write your tax claim response focusing not only on procedural errors but also on those omissions that the tax authorities made in the substance of the audit.
Our experience shows that many points of the tax authorities’ claims are successfully disputed at this stage. For this reason, although the company is not obligated to prepare an official response to the claim, doing so is very beneficial since it makes it possible to resolve problems more quickly.
First and foremost, you need to understand which violations recorded in the claim really occurred and what the tax inspectors’ positions are.
Then you need to assess whether the company can (and whether it will) dispute the claims made. This can be done by eliminating the violations discovered by the tax authorities. If the claims concern the accuracy of the taxes calculated (i.e. the tax authorities levied additional tax), then you should think about using your “tax airbags” – deductions that were not used before. You should submit adjusted tax declarations in this case. This will help offset the amount of fines and penalty fees set out by the tax authority in the claim.
In addition, if the company is able to recover missing documents or fix errors in the documents it has, then this should also be done and the corrected or recovered documents should be presented along with the responses. In this part, the tax authority should also be able to lower the amount of the additional tax by taking into account the adjustments submitted.
Regarding the violations that the tax authority included in the claim but which, in the company’s opinion, were not present or not the results of the actions by the company (for example, failure to pay taxes by an unscrupulous business partner), then you need to pay particular attention here to how you are going to challenge such claims.
The company should summarize in detail their view of the situation and indicate why it acted the way it did and not otherwise. The company should reinforce its position with corresponding documentation. The documents should be attached to the claims as certified copies.
Also, if the tax authority did not challenge the existence of the business transaction (e.g. they can claim a transaction did not happen in reality but was a mere sham), then there is no need to write this in the response. It’s better to leave this argument for the court since the tax authority may perform an examination or other such action and thus will have the opportunity to conduct additional audit procedures.
You should also cite legislative norms that support the company’s position. In addition to the responses, you can bring letters from the Ministry of Finance and the tax authorities where similar issues were decided in favor of the taxpayer.
You should focus special attention on selecting judicial practice to cite on the given issue. The tax authorities should be focusing on current judicial practice and will not allow citations of any claims where judicial practice was not in favor of the tax authorities. Therefore it should be indicated that there is a good possibility that the tax authority will lose in court on the issue being examined.
In the end, it is best to write that the company requests to be invited to review the response and also indicate how to get in touch with you to be notified of the date and time of the response review. Although the Tax Code obligates inspectors to do this, it is best to still request in your response so that you don’t give them any opportunity to review the response without you.
The same documents and explanations that you enclosed with the responses to the claim may be presented when reviewing the responses and the tax authority must review them and make a decision taking these supplements into account.
Alinga Consulting provides the following tax audit services:
Preparing companies for tax audits;
Supporting tax audits;
Preparing documents required by the tax authorities during the auditing process;
Preparing written responses to tax claims;
Being present at the tax authority during the review of responses to claims;
Preparing complaints to the higher tax authority;
Appealing decisions on prosecutions for committing tax violations;
Supporting and defending companies’ interests in court.
Our specialists can help you with these issues:
Tel. +7 (494) 988-21-916 ext. 171
Mobile: +7 926-230-91-31