On-site tax inspection: how to prepare and come through without losses

On-site inspection under Article 139 of the Tax Code

• subject — fulfilment of specific obligations to calculate and pay taxes, analysis of documents and movements of inventory and cash;
• grounds — an order of the head of the tax authority stating the person inspected, the inspectors, the timing and the purpose;
• duration — no more than 10 days; it ends on the day the report is handed over or sent to the taxpayer's personal account;
• during the inspection, timekeeping surveys and checks of cash registers and payment terminals are possible.

How it differs from a desk review and a tax audit

• desk review — without visiting the taxpayer and without requesting documents (Article 138);
• tax audit — a review of whether taxes for a period were calculated and paid correctly, with 30 days' notice (Article 140);
• on-site inspection — a targeted check of specific obligations within 10 days (Article 139).

How an on-site tax inspection differs from a desk review

A desk review takes place at the tax office on the basis of the returns filed: the returns and data the tax authority already has are analysed. The company usually takes part only by providing explanations and supporting documents.

An on-site inspection works differently. Inspectors come to the company, gain access to original documents, may inspect premises, question employees and check whether transactions actually correspond to how they are recorded in the books. The depth of analysis is incomparable.

• work with original primary documents
• inspection of premises and storage areas
• obtaining explanations from employees
• checking several taxes at once
• analysing whether transactions are real, not just how they are documented

What usually triggers an inspection

The tax authorities take a risk-based approach: companies are selected not at random but on a combination of indicators visible from their reporting and external data sources. The specific criteria and their weightings are revised from time to time.

In practice, attention is drawn by sharp changes in indicators, persistent losses with growing turnover, large amounts of credits, dealings with counterparties showing signs of being problematic, and discrepancies between the company's data and that of its partners.

How the procedure works

The inspection begins with presentation of the decision to conduct it and the inspectors' credentials. From that moment, the company must provide access to documents for the period under review and allocate a place for the inspectors to work.

Then comes the main stage: document requests, explanations and, where necessary, an inventory count and inspection of premises. It all ends with the results being documented, the company being informed of the findings and having the opportunity to submit objections before a decision is issued.

• presentation of the decision to conduct the inspection
• handing over documents at the inspectors' request
• explanations on disputed transactions
• documenting the inspection results
• preparing and submitting objections
• appealing the decision in case of disagreement

What is checked first

The focus depends on the industry and the structure of the business, but the set of typical areas is stable. Inspectors check whether expenses are justified, the right to credits, the completeness of revenue and the correctness of transactions with interrelated persons.

A separate line of enquiry is whether business transactions are real. Inspectors are interested not only in a signed contract and invoice, but in confirmation that the service was actually rendered and the goods were delivered and used in the company's business.

• completeness of revenue recognition
• documentary support for expenses
• legitimacy of credits claimed
• transactions with interrelated persons
• documentation of payroll settlements
• foreign trade transactions, if any

How to prepare in advance

Reliable preparation means regular self-review. It is far cheaper to find gaps in documents a year before the inspection, while the counterparty can still be reached and signatures can be restored, than to explain their absence to an inspector.

We recommend that companies carry out a tax diagnostic review of key risk areas and put their contract base in order. It is also worth setting an internal procedure for dealing with inspectors: who communicates, who hands over documents, who approves explanations.

• reconciliation of primary documents for major transactions
• checking contracts and appendices for completeness
• analysis of counterparties and files on them
• reconciliation of settlements with the budget
• an internal procedure for conduct during the inspection
• a single point of contact with the tax office

How to act during the inspection

The key principle is to hand over documents in response to written requests and record what was handed over. This protects the company from disputes over whether a document was supposedly not provided, and gives an understanding of the inspection's logic.

Explanations are best prepared in writing and agreed internally. Oral answers from employees who are not familiar with the details often become a source of problems: an imprecise wording ends up in the record and is later used as an argument.

It is also useful to decide in advance how copies of documents handed over will be kept. Experience shows that the set given to inspectors often differs from what the company believes it handed over, and without copies and an inventory list the truth cannot be established. We recommend copying every document handed over and keeping a dated register. This adds some effort at the time, but removes a whole class of disputes and also makes it possible to see which transactions are in the inspection's focus.

Inspection support from Leader Audit specialists

We get involved at any stage: before the inspection — with a risk diagnostic, during it — supporting communication with the inspectors, after it — preparing objections and appeals. With 13 years of practice and more than 220 audits, we understand the logic of tax control from the inside.

Our aim is not to argue for the sake of arguing, but to bring the company's position to a state that is supported by documents. This reduces both the amount of additional assessments and the likelihood of renewed interest.

• pre-inspection tax risk diagnostics
• putting documents in order before the inspection
• support in dealings with the tax office
• preparing explanations and objections
• assessing the prospects of an appeal