Preparing For a Tax Audit

The article has also been published in Almatalent Juridiikan ajankohtaiset (in Finnish).

A company or an individual can achieve significant financial and time savings by preparing for and responding to an impending tax audit correctly and proactively. Careful preparation, started in good time, reduces the workload both during and, above all, after the audit. During the tax audit, it is also advisable to follow a pre-agreed procedure. This facilitates the authorities’ investigative work and, above all, reduces misunderstandings and misinterpretations. This article outlines how to prepare for a tax audit and how best to conduct yourself during the audit. Ideally, a tax audit is a welcome official procedure which, if utilised correctly, can even lead to savings on future tax costs.

The Purpose of a Tax Audit

Hundreds of tax audits are carried out in Finland every year. The audits mainly target companies, but private individuals may also be subject to a personal tax audit. These often relate to transactions made using cryptocurrencies, income earned from social media activities, or travel expense deductions claimed on tax returns.

A tax audit is carried out to clarify the taxpayer’s own tax affairs. The audit determines whether the Tax Administration has been provided with accurate and sufficient information to ensure lawful taxation and the fulfilment of tax obligations.

Commencement of a Tax Audit

Prior to a tax audit, the tax inspector reviews the information that the Tax Administration already has on file regarding the taxpayer or which is otherwise available to the tax auditors. The taxpayer is then notified of the start of the tax audit, usually either by telephone or email, unless there is a specific reason not to do so. At this stage, the tax inspector will usually wish to agree on the start date of the audit, the location of the audit, how the material to be audited is to be provided, and so on.

During the initial contact, it is advisable to acknowledge receipt of the notification that the audit is to commence and to agree on the matters mentioned above. However, during this initial contact, it is not advisable to agree on any further details other than that the taxpayer will get back to the matter once they have clarified their own schedule. This is important because it is advisable to consult a tax expert at this very early stage. This advice applies to both companies and individuals. Many tax audits have gone off the rails right from the start simply because the person or company under tax audit, and their representatives, are unfamiliar with the tax audit process, and, for example, act in accordance with written guidelines they have found and the instructions given by the tax inspectors. At worst, this can lead to a situation where correcting misunderstandings and misinterpretations that have arisen during the audit is, in retrospect, considerably more labour-intensive and costly than starting the audit in collaboration with an experienced expert. This also applies to situations where, for example, the tax audit is a familiar process from previous years. Every tax audit is unique, and its progress also depends to a large extent on the tax authorities conducting the audit.

Involvement of a Tax Expert

A tax expert can work with the taxpayer to identify any potential grounds for the audit before the actual audit begins. This is important so that the taxpayer can remain in control during the audit and does not get swept along by the tax authorities. As such, you cannot refuse a tax audit, nor is there any reason to fear it. Finnish tax inspectors are taxation professionals and, at the same time, reasonable people. Cooperating with them during a tax audit yields the best outcome. However, this requires that the taxpayer knows their rights and is able, if necessary, to politely ask for them to be taken into account.

Procedures During a tax Audit

Once a tax audit has begun, it is advisable to appoint a person to act as the liaison between the company under audit and the tax inspectors. This is often the company’s tax manager, finance director or managing director. In some cases, it may be an external tax expert. The designated person attends all meetings relating to the audit, receives requests for documentation and coordinates the provision of responses.

The person in charge also arranges the initial meeting. This is one of the most important stages of the audit, alongside making contact with the expert. During the initial meeting, the objectives and procedure of the tax audit are clarified, and a description is provided of the taxpayer’s business operations and any specific features. The taxpayer should put effort into the initial meeting, for example by preparing a PowerPoint presentation on their operations, ownership structure, etc. The importance of the initial meeting cannot be overstated. During this discussion, the tax inspectors form a solid understanding of the taxpayer’s operations. If any material information is omitted or a false impression is formed regarding a particular matter, it is difficult to rectify this later.

The initial meeting also covers the practical arrangements for the audit, such as the timetable and the use of any workspace. Tax audits are often conducted electronically without visiting the company’s premises, but visits to, for example, production facilities are particularly useful for gaining an accurate picture of the taxpayer’s operations.

Review of Documentation, Final Discussion and Tax Audit Report

Following the initial discussion, the tax inspectors will examine the taxpayer’s operations to the extent outlined during that discussion. The aim is to clarify matters affecting taxation in as much detail as possible. As the auditors cannot investigate every single matter, it is important for the taxpayer to ensure that the auditors receive accurate and sufficient information on the matters they have requested. It is not in the taxpayer’s interest for the tax auditors to be left with room for interpretation. Correcting misunderstandings that arise at this stage is more difficult later on than ensuring matters are properly understood during the audit.

Following the audit, a final discussion is held on the audit findings. In addition, the taxpayer is provided with the tax audit report for comment. Ideally, it will not contain any errors arising from misunderstandings, but should any errors come to light, the taxpayer still has the opportunity to comment on the findings. At this stage, comments relating to misunderstandings rarely lead to changes being made to the report.

The tax audit report forms the basis for any subsequent adjustment to the tax assessment, which may also be appealed against later. For private individuals, a retrospective adjustment to the tax assessment may lead to criminal proceedings following the tax audit process, should the taxpayer be suspected of tax fraud or aggravated tax fraud. This, too, should be borne in mind from the very start of the audit.

In Conclusion

Ideally, a tax audit is a welcome measure that enables the taxpayer to ensure their operations comply with legal requirements. During the audit, it is also possible to request and receive guidance from the tax authorities on tax-related matters.

The key factors for successfully navigating the tax audit process are contacting an expert right from the outset and investing time in the initial discussion. Investing in these aspects will pay for itself many times over.

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