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Tax audit and tax risks computation

7 min read

Despite the fact that in these latter days financial accounting (bookkeeping) and tax accounting are becoming more and more close, and also in spite of their seeming similarity there are still lots of factors evidencing in favor of the approach that they are two separate kinds and systems of accounting.

Every year fines for non-compliance with tax legislation become more and more strict, while tax legislation itself changes regularly and sometimes it is rather difficult to keep track of changes. In connection with this value and relevance of tax audit is not only not decreasing, but is constantly increasing.

By its very essence tax audit is the same as financial audit except the fact that the tax statements are object of tax audit. In such case the task of consultant-auditor is verification and confirmation of correctness of drawn tax statements and in case of finding violations – providing clear and comprehensible recommendation how to adjust identified deviations in the shortest possible terms and what is needed to be done in order to avoid them in the future. Tax statements of all or certain kinds, identified by the client, taxes can be subject to tax audit.

Audit is conducted for the reporting period set out by the client. It is usually period of company’s activity covering the last three years (in accordance with the general rule the tax authority has no right to check correctness of tax obligations identified by the tax payer after this period). But in some cases tax authorities still can analyze documents and tax statements for more early periods: up to seven years from the date of primary documents or respective tax statements drawing. In this regard, more often period of audit covers from one month to three –five years.

It is absolutely obvious that the tax statements with the higher extent of probability will in future be in detail (and unfortunately, often – prejudicedly) studied by the regulatory authorities. In this regard, the auditor should not only have strong knowledge of and navigation in specific tax legislation, but also understand what point of view for this or that controversial (ambiguous) issue tax authority is likely to follow. In some cases tax statements should be drawn taking into account explanations of respective tax authorities rather than rules and regulations established by the laws. Otherwise, even if the company is sure it is right there is high probability that the point of view different from those of tax authorities should be defended in court. That’s why during tax audit conduction we believe it is very important to show the client all the alternative ways of drawing this or that tax statement and also to provide information on possible tax consequences of every variant.

In the process of audit we carry out the full calculation of possible tax risks of the company: potential financial losses which may happen in the result of breaching tax legislation. Companies of large and medium size business are recommended to go through tax audit at least once a year and preferably once every six months or once a quarter with the aim to minimize risks of underpayment (in some cases – overpayment) of taxes. In the practice it is always better and easier to perform necessary “preventive measures”, than to adjust the actual violations (especially if they are not once-only but lasting through certain period of time).

There are two completely different types of tax audit conduction:

— beforehand the submission of respective tax statements;

— after the submission of tax statements.

Conducting tax audit before the submission of statements to the respective regulatory authorities is for sure more effective way, as in such case the company is able to take into account all the identified deviations directly in such statements for the relevant tax period (i.e. without subsequent submission of adjusted calculation often resulting in accruals of additional fines and penalties).

An additional benefit to the tax audit service from our company is providing recommendations on mistakes’ adjustment and support in defending company’s point of view on controversial issues during and after verification of statements by tax authorities. And the most important – in our company there is accepted practice of financial accountability for conducting tax audit: in case the tax authority will find deviations not identified by us, we are ready to compensate company’s losses in the form of fines and penalties.


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