Tax audit: how it works and what rights you have

A tax audit is the procedure by which the tax authority verifies whether you have met your tax duties correctly. It is not an accusation or a penalty — it is verification. It usually begins on the day stated in the notice of audit, proceeds through the submission and review of documents, and ends with an audit report. The whole process has statutory rules, and you, as the audited business, have clearly defined rights throughout it. Below we explain how an audit works step by step and what you can expect during it.

What a tax audit is — and what it is not

A tax audit is the verification of the facts decisive for correctly determining the tax. The tax authority (the tax administrator) ascertains whether the data you stated in your tax return correspond to reality and to the documents. It is not an automatic presumption of wrongdoing — an audit may well end by finding that everything was in order. It always concerns a specific tax and a specific period, which are defined at the outset. Nor need it be a sign that you did something wrong — it may be selected routinely or on the basis of specific signals in a filing. What matters is knowing what the authority may and may not ask of you during it.

How does a tax audit begin?

An audit usually begins on the day stated in the notice of tax audit. In it the tax administrator specifies which tax and which period the audit concerns, where it will be carried out and by when you are to submit the documents. If the set day does not suit you for a serious reason, you must notify the tax administrator within eight days of the notice being delivered and arrange a new date; the audit, however, must begin within 40 days of the notice being delivered at the latest. Exceptionally — for example where there is a suspicion that documents will be destroyed, or at the request of the bodies active in criminal proceedings — the tax administrator may begin the audit even without a notice, by drawing up a record. Statutory time limits run from the day it begins. The notice should therefore not be taken lightly — it is sensible to prepare the relevant accounting and tax documents straight away.

How long can an audit last?

The time limit for carrying out a tax audit is at most one year from the day it begins (Section 46(10) of the Tax Code). The audit may, however, be suspended — for example where the tax administrator needs to request information from abroad. The time limit does not run during a suspension, so in calendar terms the whole process may take even longer than a year. A special regime applies to transfer-pricing audits of related parties, where the second-instance body may extend the limit by up to a further 12 months. The one-year limit is an important safeguard: if an audit exceeds the statutory framework, this may affect the usability of its results.

What rights do you have during an audit?

An audited taxpayer is not in a passive position. In particular, you have the right to:

• require the inspector to produce a written authorisation to carry out the audit and a service ID card,
• inspect the file relating to the audit,
• submit evidence and propose that it be taken,
• put questions to witnesses and experts at an oral hearing,
• be represented — for example by a tax adviser or a lawyer,
• comment on the findings the audit has produced before it is closed.

What duties do you have?

The other side is cooperation. You are obliged to allow the audit to be carried out, to submit the requested documents and records (electronic data, including to the financial administration's data storage), to allow access to the accounting software, and to provide the necessary explanations and information relating to the audit. Cooperation is in your interest — smooth, matter-of-fact communication with the tax administrator generally shortens the whole process and reduces the risk of misunderstanding. At the same time it is tied to the audited tax and period: the authority may not request anything beyond what is the subject of the audit.

How does an audit end?

An audit is closed by an audit report. The report contains a list of the audited documents, the established findings, the evaluation of the evidence and the statements you made during the audit. Delivery of the report ends the audit. If a difference in tax was found, the report includes a notice to comment on the findings and identify evidence — the period may not be shorter than 30 working days from delivery of the report and its being missed cannot be excused. On the day following delivery of such a report the tax assessment proceedings begin, in which the tax administrator decides on the tax (Section 46(8) and (9) and Section 68 of the Tax Code).

What if you disagree with the outcome?

Disagreement has its place and its procedure. You raise your objections first in your comments on the report (within the period set in the notice, at least 30 working days), then in the assessment proceedings, and against the resulting decision an appeal is possible within 30 days of its delivery. A special situation arises where an audit also touches the criminal-law sphere — what the police may use from what you told the inspectors is addressed in the expert article Tax audit and criminal proceedings. In contested audits it pays to have an expert at your side — see our tax service.

Summary and recommendation

A tax audit is a standard procedure with clear rules. The key to a calm course is order in the documents, meeting the deadlines and knowing your own rights. If a discrepancy appears or the audit becomes complicated, do not wait — the sooner you go through the situation with an expert, the more response options you retain.