Will General Tax Audits Become More Predictable?

The Tax Inspection Board’s Audit Preparation File system requires information and documents requested during tax audits to be prepared electronically in a standardized format. The system was initially launched with the Fake Document Use Module, and separate modules are expected to be introduced later for full-scope tax audits and VAT refund audits.

From the perspective of audits concerning the use of fake documents, this approach is not entirely new. Due to KURGAN, invitation-to-explain procedures and similar processes carried out by tax offices, taxpayers have long been asked to provide information and explanations before an audit begins, to make corrections where necessary, and, if the tax risk is eliminated, in some cases to avoid the commencement of an audit altogether.

In my view, the more striking aspect is that this approach is also expected to be extended to full-scope tax audits.

For taxpayers, a general tax audit can often feel like navigating a minefield. Not knowing in advance which area the audit will focus on is a major part of the uncertainty created by the process.

If the information and documents requested under the Audit Preparation File point to a specific risk area, the taxpayer may be able to understand, to a significant extent, which issue the Tax Administration is focusing on even before the audit formally begins.

In that case, the company can prepare more accurately and, if there is indeed an error, make more meaningful use of the opportunity to correct it.

However, if the requested information and documents are defined too broadly, the situation may not change very much from the company’s perspective. The taxpayer may simply complete standardized Excel files while still being unable to answer the question: “What exactly will be examined during the audit?”

How the system will operate in audits initiated as a result of notifications or reports is also particularly important. In some audits, it may not be possible or appropriate to disclose the subject of the examination from the outset.

For this reason, the real value of the Audit Preparation File for companies will not be determined solely by the standardized collection of information and documents. It will depend on the extent to which taxpayers are able to understand the tax risk identified in relation to them.