It is likely that every business will be subjected to a tax inspection at some point during its operations. Below, I will outline the process of a tax inspection, the rights of the tax authorities, the obligations of the taxpayer, and how one should act in connection with a tax inspection. Preparing for a tax inspection includes ensuring that accounting records are correct and up-to-date, as well as the declarations submitted to the tax authorities. It is also important that the explanations and statements given during the tax audit are carefully prepared so that the tax inspector understands and accepts them.
A tax audit is not a welcome event for any company. However, it is probable that every company will face one at some point in its operations. Preparing for a tax audit involves ensuring that the accounting records are correct and up-to-date, as are the declarations submitted to the tax authorities. Despite this, the tax authorities and the taxpayer may have different views on issues such as which expenses are related to the business, accounting entry practices, VAT practices, or acceptable travel expenses, etc.
It is important that the explanations and statements provided during a tax audit are carefully prepared so that the auditor understands and accepts them. If errors are found during the tax audit, they can be corrected in a tax adjustment process in an administrative court or a possible criminal process, if the tax authorities suspect tax fraud or other offences. Such retroactive correction is expensive and can take years. Taxes assessed in a tax audit must also generally be paid within a short payment period, even if the tax assessment is appealed.
What is a tax audit about?
A tax audit investigates whether the correct and sufficient information has been provided to the Tax Administration to ensure that taxation has been carried out correctly in accordance with Finnish tax legislation. Findings made during the audit may lead to the imposition of taxes. The tax audit focuses on the company's accounting and other documentation, such as agreements and deeds of sale. The audit generally clarifies whether the business operations and the accounting correspond to each other, whether the declarations provided to the Tax Administration are in accordance with the accounting, and whether tax legislation has been followed.
The scope of a tax audit varies depending on the situation and requirement. The audit may focus on a specific subject area, such as value-added tax, or it may cover one or more types of tax more broadly and simultaneously. The tax authority has certain focus areas each year, which determine the subjects of tax audits. Audits can be directed, for example, at specific industries or phenomena identified as risky. In addition, some tax audits are targeted randomly.
A tax audit can also be conducted as a comparative tax audit, where the Finnish Tax Administration solely collects comparative data from the business partners or other operators of the taxpayer being audited. It is also important to note that if, for example, a company's customer or supplier is suspected of VAT fraud, the audit can be extended to that company's customers and suppliers concerning their cooperation with the suspected company.
The tax authority's rights and the taxpayer's obligations
Tax inspectors have extensive rights to access information during a tax audit. Upon request from the Tax Administration, a company must present its accounting records and notes to be audited in Finland, as well as all contracts and documents related to its business activities or other income-generating activities, and any other material and property that may be necessary for taxation. The taxpayer must also present for inspection all other material and property that may be necessary for taxation.
In the course of a tax audit, the tax authority can often co-operate with other European tax offices, especially when a company has subsidiary companies or significant operations abroad. I am aware of cases where tax audits have been conducted in very close co-operation with the tax authorities of the Baltic states.
How is a tax audit conducted?
The Tax Administration will contact the company in advance to arrange a suitable time for the tax audit and to inform them of the period the audit will cover. The company will also be informed of the accounting records and other materials required for the audit.
It is recommended that a company contact its auditor and/or lawyer immediately upon receiving notification of a tax audit.
A tax audit begins with an initial discussion, during which company representatives present the business and significant changes. The discussion also covers arrangements for accounting, financial management, and payroll, the locations and number of business premises, ownership relationships, and the number of employees. The tax authority explains the objectives and stages of the audit during the initial discussion. Two tax inspectors always participate in the audit. A written memorandum may be drawn up from the initial discussion, which is signed by both parties, and the discussion can also be held by telephone.
The next stage of a tax audit is the inspection of documentation, which can now also be carried out electronically. A company can grant the Tax Administration access to its electronic accounting system, where the inspection can be performed. If an electronic inspection is not possible, it can be carried out at the premises of the Tax Administration or the company, for example. Any unclear matters will be clarified during the audit through discussion or later via a written request for clarification.
The key is that the matters to be discussed and the explanations provided have been considered in advance. It is difficult to correct a tax inspector's wrong impression afterwards. Nor does it improve the company's credibility if explanations given in haste are corrected with subsequent clarifications or statements.
The company's accounts are audited to the accuracy deemed necessary by the tax authorities. The audit is not limited to just receipts and accounting, but generally also covers contracts, deeds of sale, loan agreements and employment contracts. One of the key aspects is determining the reliability of the accounting, i.e., checking whether the declarations correspond to the accounting and whether the accounting reflects the actual circumstances.
The tax audit concludes with a final discussion, often held after reviewing the documentation or later by telephone. In this discussion, the tax inspectors present their findings and any matters that the company still needs to clarify. They also explain the basis for any estimated taxation and give an estimate of when the tax audit report will be completed.
After this, the Tax Administration will draw up a tax audit report, which is an account of the course of the audit, any tax-related matters identified, and the subsequent actions arising from them. The company has the opportunity to provide a written response to the tax audit report, and the Tax Administration generally allows two weeks for this. This deadline can often be extended upon request.
If a tax audit results in the assessment of additional taxes, it is advisable for the company to submit a response to the tax audit. At this stage, it is still possible to get the tax authorities to change their opinion. It is advisable to seek the assistance of an expert, such as a lawyer or auditor specialised in tax matters, when preparing at least the response.
Miten verotarkastukseen tulisi valmistautua?
A company's preparation for a tax audit includes, at a minimum, compiling and providing the relevant material to the tax inspectors. This material covers accounting records as well as, for example, supply, financing, and subcontracting agreements, employment contracts, and timesheets. Companies should review this material to ensure it contains everything necessary. Preparation therefore means going through the material and confirming its appropriateness. If an error is found during the review, it is advisable to bring it to the attention of the tax inspectors, which enhances the company's credibility.
A company can also prepare for a tax audit proactively as part of its normal operations by regularly considering tax risks and always keeping its accounting records in a deliverable and checkable condition.
A tax audit with its various stages can be a complex process from a company's perspective, so utilising a reliable expert is recommended and can even be essential. The earlier an expert is involved in the process, the greater the likelihood that the outcome of the tax audit can be predicted, and misunderstandings and the taxes levied based on them can be avoided.
What can a company do if additional taxes are imposed or the taxation is adjusted to the company's detriment as a result of a tax audit?
A company can appeal a tax decision. The first level of appeal is the Tax Adjustment Board. If the company is not satisfied with the Tax Adjustment Board's decision, it can take the case to administrative court and, if necessary, appeal further to the Supreme Administrative Court. This process can take years.
Jari Sotka
Lawyer, MBA
Tel. 040 544 0610
[email protected]
Amos Attorneys at Law Oy
www.amoslaki.fi
The author has worked as a lawyer and advocate for more than 25 years, focusing throughout his career on preventing and solving legal problems for small and medium-sized enterprises.