What should we do when the tax authority audits us and imposes fines and penalties?

In this blog, you will learn about managing tax risks.

Let's start with a question

How often have you thought about what to do when the tax authority audits you and assesses additional taxes based on the audit report?

The standard answer to this question is probably that there's nothing that can be done about the assessed taxes, so they must be paid. 

There is no other way.

You might be surprised, but you are wrong. In our blog, we will try to prove just that.

Let's start from the beginning.

As you know, the main assessed tax automatically accrues penalties, which often doubles the amount.

How can we withstand this unexpected burden without "breaking our backs," or going bankrupt? 

The answer is simple: fight back, fight back with qualified, every possible legal method.

This fight must be carried out in several stages.

Stage One: Studying the Legal Basis for the Assessment

First, we must study the legal basis for the assessment. For this, you will need a good tax specialist, which is a luxury only large businesses can afford.

For small and medium-sized businesses, an affordable alternative is to hire a tax expert.

A simple truth💡 It's a fair statement in the tax world that private service is better than public (private school vs. public school, private lawyer vs. public defender, private insurance vs. public insurance).

This means a private tax expert has a good chance of finding flaws in the assessments made by tax officials.

After all, tax law is complex, and in addition to local tax legislation, it requires knowledge of law, accounting, business, international taxation, and most importantly—extensive tax practice.

Even having an advantage in just one of these areas gives a tax expert a good chance to find flaws in the tax audit report.

So, what happens in the next stage?

Stage Two: Effectively Managing the Tax Dispute Process

Next, we must start the tax dispute process, which has two stages and includes the Ministry of Finance and court stages.

The dispute process is a separate "art" 🎨. In addition to drafting a qualified complaint, it requires:

• Qualified presentation before the dispute-resolution body

• Arguing, debating, asking smart questions, and fending off questions asked of you. 💪

The dispute process can last quite a long time, sometimes even for years.

In the meantime, parallel to the dispute, we can start the tax settlement process.

This is precisely the third stage of our action—achieving a tax settlement! 🕊️

The process is simple: we upload an offer to pay a portion of the total assessed taxes on the Revenue Service website.

The golden rule here is that the offered amount should be proportionate to the original assessed tax (excluding penalties). However, there are frequent cases where a settlement is reached for a significantly smaller amount than the principal tax.

The tax settlement process typically involves 2-3 iterations.

We offer a settlement amount.

We receive a refusal without any comment, and then improve our offer.

After about 2-3 attempts, a positive result is highly likely.

You might be wondering what factors influence this positive outcome?

I will tell you now.

📝 The first factor

We conduct the initial tax dispute with expertise.

The tax authority realizes that the more expertly and lengthily we argue, the lower the chance is that they will be able to collect the assessed taxes in full.

Furthermore, for everyone, including the state budget, "a bird in the hand is worth two in the bush."

📝 The second factor

A tax settlement is based only on our brief, standard-form offer, where we can only state:

• How much was assessed

• How much we are prepared to pay.This is done without any explanations or the ability to make logical arguments.

  
  

Nevertheless, the explanations we submit as an additional document—explaining why we believe paying the offered (settlement) amount is reasonable—have a significant impact on whether the settlement is concluded.

For example, we create a cash flow forecast for our company, which shows what the company is capable of paying.

We submit an estimated market valuation of our assets, which makes it clear what the budget will receive if it bankrupts the taxpayer (it will have at least one less taxpayer).

A dispute requires resources (time, money, lost opportunities), so the taxpayer prefers to pay money today to resolve the tax dispute.

In general, a settlement has a significant positive connotation (both sides win), and in this regard, it is better than one side winning and the other losing in a dispute🤝

In a nutshell

Managing tax risks requires knowledge, experience, and, most importantly, the right strategy.

As we discussed in this blog, it's possible to deal with tax assessments not only through a dispute but also through a settlement. The main thing is to confront the problem with expertise and competence, for which it is best to entrust the matter to professionals.

The involvement of a tax expert significantly increases the chances of success because they take into account not only tax legislation but also legal and business aspects.

Ultimately, this approach allows us to lighten a heavy tax burden, avoid bankruptcy, and maintain business stability.

For now, that's all on the final stage of risk management. We will write about the other stages in another post.

We will conclude today by sharing that, with the participation of our consultants, a large company recently shed a heavy tax burden, halving its total taxes through a tax settlement agreement.

Would you like to achieve a similar result with our help?

Then partner with us.

Accurai specialises in managing tax disputes and reducing your business risks.