RS In our opinion Offsite Audit

Offsite Audit

August 2011

The Russian law provides for a variety of ways in which tax authorities can monitor and audit businesses. There is no doubt that the most unpleasant of those is onsite audit when inspectors come to the office of a company and look at all the relevant documents on the spot. However, these days many companies operate for years on end without being subjected to a single onsite tax audit; tax authorities use onsite audits only in cases where there is already information that serious violations might have been committed. Such information is gathered during a desk audit that some organisations have to face almost on a monthly basis. Thus, it’s good to know the rules that desk audits must abide by and how to prevent any surprises during such an audit.

You Submit Your Declaration – You Get Audited

A desk audit is essentially an inspection by a tax authority of the tax declarations and reports submitted by the tax payer. And as we all know tax payers are obligated by law to submit declarations and tax reports to tax authorities on a periodic basis.

In other words, the submission of a declaration or a tax report may serve as the basis for a desk audit, no matter if it’s an original or an adjusted declaration and whether it was filed for any tax period or any reporting period. Any one of those declarations may be subject to a desk audit. It’s important to note that no special written decision is needed for a desk audit. This is perhaps the most important difference between the desk audit and the two other types of tax audits – onsite audits and the so called cross-audits - for which official written decisions must be issued and the tax payer must be notified.

Thus, the submission of a tax declaration can encourage a desk audit. The audit can be conducted without issuing any special warrant and the tax payer does not have to be notified.

How it’s done

In this respect a tax payer may reasonably ask ‘What is it exactly that is going to be audited?’ Unfortunately the Tax Code of the Russian Federation does not give a clear answer to that. However, it follows from the contents of Article 88 of the Tax Code that the objective of a desk audit is to simply do an arithmetic check of the figures contained in the submitted data and compare them with the previously filed reports and other information about the tax payer that the tax authorities have obtained from other sources. In other words, a desk audit simply verifies the submitted reports for consistency of the information contained therein, and in most cases tax authorities do not have the right to demand that the tax payer submits any other documents*, and they must also notify the tax payer of any errors and inconsistencies discovered during the audit.

Please note, that under the current law a desk audit may be conducted within 3 (!) months of the date on which the declaration was submitted rather than within 3 months of the submission deadline. It’s also important to remember that this period cannot be extended; neither tax authorities nor the Ministry of Finance nor even courts have the right to extend the period within which a desk audit may take place. If a tax authority conducts a desk audit later than within three months of the declaration submission date, this fact will be sufficient grounds for a court to cancel any resolution of the tax authority to be issued based on the findings of the audit.

Possible consequences

As it has already been mentioned, tax authorities must notify the tax payer about any errors, inaccuracies, inconsistencies, etc. found in its declaration/report during a desk audit. Tax authorities may demand that the tax payer’s accounts department should provide explanations or make changes to the declaration. Here again it should be noted that there is a gap in the Tax Code regarding this issue as it provides no regulation on the form in which tax authorities must notify the tax payer about the inaccuracies and errors they found in the declaration. To fill this gap the Federal Taxation Service issued letter № SHT-8-2/320@ dated August 1, 2008 in which tax inspectors in effect assumed an additional obligation to draft written notices and deliver them to the tax payer either personally or by mail if delivery in person is impossible. What this means is that if a tax payer never got a written notice about errors or inaccuracies in its declaration, the tax payer cannot be fined for any failure to answer the tax authority claim **.

It should be emphasised once again that tax inspectors can only demand that explanations for inaccuracies/errors/inconsistencies be provided or that the declaration be amended. They have no right to use this mechanism to obtain any additional documents. The Tax Code does allow accountants to take initiative and submit additional documents to tax authorities to substantiate their explanations. But this is a right, not an obligation! Therefore, tax payers may decide on their own which documents to send to the tax inspectorate or whether to send any documents at all.

If an audit discovers any violations and the accounts department fails to provide adequate explanations, the tax authority will issue a certificate documenting the final findings of the audit. The law requires that the certificate be issued within 10 business days; then it should be handed to the tax payer within 5 business days.

If the tax payer disagrees with the conclusions drawn in the certificate, the certificate can be appealed against and reviewed but this is something we plan to talk about in our next issue, where we will also discuss onsite audits, as well as about when it makes sense to argue with the tax authorities and when arguing with them will only result in a waste of time and money.

Prepared by analysts of
ICLC Consulting Department
Exclusively for Russian Survey RS

* Under the current law tax inspectors may demand submission of extra documents only during a desk audit of the VAT declaration requesting a refund from the budget or a declaration for other taxes claiming exemptions and/or benefits. Tax authorities may also demand additional documents while auditing declarations for taxes related to the use of natural resources (for example the tax on the extraction of mineral resources or oil, natural gas excises etc.). Otherwise no additional documents may be demanded.
** It should be noted that in practice tax payers are notified verbally, and demands to provide explanations are also made verbally. However, such verbal demands of tax authorities shouldn’t be disregarded, because this is a great opportunity for the tax payer to explain its viewpoint and settle any arising conflict before the tax authorities decide to conduct an onsite audit.