Tax audits could be very time-consuming and significantly impact resources or external advisors.
Be therefore prepared and minimize the risk that extensive resources have to be allocated when an audit is held by getting already a clear understanding of the material tax risks (risk-based approach), visibility of the related processes and controls, its weaknesses and strengths (for example zero measurements as a simulation of a tax audit), identify the evidence supporting tax positions taken and document in such a way that will be easily accessible again when needed (audit trail/workflow management).
A transparent relationship with tax authorities might resolve any disputes faster.
Define and outline a tax audit strategy and set a protocol for:
- company's code of conduct, respectively, rules of engagement during an audit (the dos and don'ts)
- project plan and resources needed (roles & responsibilities)
- preliminary audit findings (amount of assessment and fines)
- voluntary disclosure, for example, to avoid prosecution for tax fraud or joint liability
- exchange of information, such as answering queries and providing information respectively, data
- holding the final meeting
- litigate and how and when to settle
- managing essential deadlines (e.g., objection procedures, appeals to District Courts, Courts of Appeal and Supreme Court, etc.)
- implementing audit findings in new processes and controls
- document audit findings from preliminary to final audit findings (gap and explain the gap)
Avoid disputes and manage risk
Tax controversy considerations and requirements should be built into the preparation of the indirect tax return, and those responsible for indirect tax controversy review indirect tax returns to verify that indirect tax positions are adequately disclosed, presented, and documented. It is also about 'being tax audit ready,' such as simulation tax audit analysis to anticipate any actual tax audits. It is something you could - proactively - prepare for.
Prepare IT systems for e-audits
Not only finance and tax authorities but also tax authorities might request access to systems and data analysis tools that show how transactions are processed and how IT systems are set up. Data integrity is, therefore, becoming a more significant risk factor when transactions are booked in any given country and are not adequately evaluated for tax purposes.
It could be that the financial data in the system does not reflect the business model design or that any business change is not properly managed.
A new trend: tax authorities and standard audit files for tax purposes
Due to technological innovations, tax authorities have become increasingly better at executing their tax audit. The probability that the Tax Authorities will issue additional assessments and penalties shortly because errors in indirect tax are detected increases by the day.’
The OECD issued a guidance note on the development of Standard Audit File –Tax (SAF-T) in May 2005 and recommends using it to export accurate tax accounting data to tax authorities so that it can be easily analyzed.
Portugal implemented this guidance on January 1, 2013. Companies are obliged to submit the SAF-T (PT) reports for sales invoices to the tax authorities monthly.
From a risk management perspective, mandatory data filing should give food for thought. The submission of the SAF-T file means that a taxpayer has to provide specific data to the tax authorities every month.
It is best practice that a company perform a risk assessment and determine the worst-case scenario before providing information to the authorities to avoid unforeseen tax risks. The company should also make copies of any information provided.
What if there are glitches in your data, input errors, empty fields, awkward descriptions in fields or apparent inconsistencies?
A non-exhaustive checklist regarding submitting data to the tax authorities
- Has data been analyzed and a tax risk assessment performed?
- What are the tax authorities doing with this data: perform data analysis?
- Does not meet the requirement result in a higher risk of a tax audit?
- If not impacting the present, does the company show an audit trail that can be retroactively be investigated and backfire to tax position taken (ammunition for contra arguments, increase in penalties)?
- If the data provided does not meet the required data format, could this result in a higher risk of a tax audit
