Five Reasons To Conduct A Tax Audit.
There are more reasons than these, but these are the most important.
Reason 1. Know your risks
Every year, dozens of amendments to Russian tax legislation are signed into law: new taxes, altered rates, new reporting forms, etc. In 2017, among other things, the proportion of the distribution of profit tax between the federal and local budgets changed, and the Federal Tax Service started administering insurance premiums instead of the Russian Pension Fund. Now only 50% of previous year’s losses may be claimed as deductions to the taxable base of the current tax period (2017). Two out of ten of our clients did not hear anything about this before meeting with me.
A regular accountant does not always manage to track such changes in tax laws. An auditor will know how to do things “the right way today” and help clients avoid tax and reputational risk.
An audit of financial statements can only be carried out in Russia by certified specialists. Tax audits come with no such requirement, but our services are always headed by certified specialists who are guaranteed to have a thorough knowledge of tax legislation. If needed, a certified tax advisor can also be added to your service team.
Reason 2. Pay taxes properly
Tax law violations are costly and troublesome for businesses. Non-payment of tax is punishable by a one-time fine in the amount of 20% to 40% of the unpaid amount. In addition, interest is added. At the time of publication of this article (April 2017), this is equal to 1/300th of the Bank of Russia’s key rate. For arrears occurring after 1 October 2017, starting from the 31st calendar day, late payments will be calculated at 1/150th of the Bank of Russia refinancing rate (key rate). From the second month that payment is late, the penalty rate will be approximately 24% – as if you took a loan and must now pay it back.
Conducting a systemic tax audit allows you to pay only the taxes you owe. You need not “throw away” money on fines.
Even if you have already submitted your taxes, you still have time to find any mistakes and you have the right to file updated declarations and pay any tax needed. In this case, fines do not apply, only penalties.
The main thing is to be sure that you are filing the updated tax return correctly.
A business owner I know recently told me that his company was fined 600,000 rubles for violating the procedure for filing an updated tax return. Instead of first paying the missing amount, and then filing an updated declaration, the opposite was done. The company was fined for this.
Statistically, the cost of an audit is a fraction of the fines that can be imposed. According to my calculations, the frustrated businessman should have paid about 200,000 rubles for a tax audit.
Reason 3. Maintain smart financial policies
The law can be harsh, but it also gives us a lot of indulgence. I will give an example. To stockpile funds without resorting to external borrowing, an organization with a large payroll budget can create a reserve of unused vacation time that is recognized in the tax accounting. A company also has the right to reduce its income tax owed if it acquired depreciable property and immediately charges the amortization premium. This allows you to immediately recognize 10% to 30% of the purchase price for tax purposes.
There are plenty of options and possibilities to find. Corporate accountants are not always motivated to seek out all of them. It is the daily work of auditors and tax advisers, however, to know all these maneuvers and where they can be used.
Reason 4. Prepare for the tax inspection
Auditors essentially arrange a dress rehearsal of a tax inspection – doing what government inspectors would essentially do from start to finish. We verify the tax reporting, check it against consolidated registers as well as make sure that the needed primary documents are in order. We especially analyze the most common sources of risk: types of transactions where mistakes most often occur, such as in leasing and payroll calculation. Mandatory or voluntary audits take place virtually under the same scheme.
Of course, auditors can’t check every document, but we do know tricks for checking what tends to stand out the most. For example, we pay special attention to the days when the chief accountant and / or the general director were absent from the office and check that anyone who signed documents in their place had the required power of attorney. It is also important that the primary documentation, signed by proxy by the heads of departments, indicates its company details. Otherwise, the matter could be sent to handwriting experts for verification. A competent lawyer can help you, but the trial will take 2-3 months.
Errors that entail serious fines can be obvious, accidental, silly, and even vexing. Here’s an example for you: in the course of one of our audits, we found a mistake in personnel documentation. It turned out that employees of this company’s subsidiaries located in the Russian Far North did not have the “northern allowance” stipulated in their employment contracts: an additional 30% of the stated salary. Although employees received a competitive, reasonable salary as a whole, the fact that this “allowance” was not included within the wage calculations could have resulted in a huge fine and / or a court decision against the employer. Penalties for labor law violations are comparable with those for tax law violations. Thus, tax audits are often conducted together with HR audits.
In my experience, attention to detail provides well-being and risk-free company performance.
Therefore, when preparing a client for a tax inspection visit, or when conducting a voluntary or mandatory audit, we always carefully check the client’s counterparties. This is particularly important. I’ll explain why.
Reason 5. Protect yourself from scammers
Getting into “bad company” is the easiest, fastest, and most effective way to bury your business. In the corporate world, a “bad company” is a counterparty that is questionable from the point of view of the tax inspection.
Absolutely law-abiding businesses can be punished with fines and legal decisions against it, if it has partnered with “fly-by-night firms,” “one-day companies,” or similar organizations. Transactions with such entities are considered attempts to obtain unreasonable tax benefits (this concept was introduced to Russian legal thought the Supreme Court of Arbitration). Participants in such dealings are faced with a series of troubles.
Expenses involved with such dealings are not able to be used in the reduction of the tax base. Additionally, profit tax of 20% is charged on the transaction value, withholds VAT and fines, calculated at 20-40% of the unpaid tax, are charged.
Suppose an organization had the recklessness to buy goods for 100 million rubles from such an unreliable supplier. After this has been brought to light, the company is assessed 20 million rubles in tax, has VAT withheld in the amount of 18 million rubles, and fines immediately imposed in the amount of 7-14 million rubles. Penalties are also charged for late payment of taxes. If the company does not pay off its debt, the case may reach the point where its account is blocked and operations are paralyzed.
Therefore, when conducting a tax audit, we check the clients’ counterparties exactly as they are checked by tax inspectors – for a number of known parameters, and using the industry-standard Spark-Interfax databases.
Here are the main features of firms considered to be “unreliable:”
- frequent migration from region to the region (change of tax inspections),
- low tax burden (no more than 1% of the turnover of funds on accounts),
- Lack of staff required to provide services / low payroll taxes, funneling money through the settlement account
- Absence of reporting,
- Unpaid taxes,
- Address used for “mass registration” (although, this is ambiguous, after all any business center is an “address of mass registration”).
Tax authorities recommend that companies perform due diligence for any potential counterparty, forming a dossier for each with copies of the charter, accounting and tax reporting, with an extract from the Unified State Register of Legal Entities and a Certificate of the Absence of Tax Debts.
Meanwhile, companies continue to pay for such “bad company.” Several large retailers have recently been fined 14 to 17 million rubles based on the results of a field audit . A good tax audit would cost them 800 thousand to 1 million rubles.
We can see here that advantages of using audit services can more than pay for themselves. It’s all in the numbers, my friends.
We are also ready to provide you with the following services:
- Conducting an audit in several stages.
- Review of the financial statements.
- Carrying out agreed upon procedures.
- Tax audit.
More about services on site: AUDIT SERVICES.
We will be glad to start working with your company.
Head of Audit and Taxation Department
Office : +7 495 988-21-91
Office : +7 495 988-21-91