While checks of the invoices and and receipts had priority in tax field audits in past times, this is now taken care of by the IT of the tax auditor. The auditors mostly obtain the accounting data in an electronic format in preparation of the audit. Thus, e.g. your cash account is checked for credibility within seconds. The specialists from the tax authorities then evaluate this data by means of a software program (IDEA). The results show any anomalies and provide important information to the tax auditor on what they need to look into.
This can be e.g. an extraordinary value or a journal entry, for which the combination of description and amount look suspicious. IDEA can provide extensive insights even for monitoring the accounts receivables, inventory, cost centers or loans. IDEA can e.g. also check the total of numerical fields for credibility or whether an invoice was issued for a specific transaction and whether the invoice amount was recorded in the accounting. Analyses for double gearing of items can identify double payments to suppliers, repeated entry of the same item number for the inventory or for determination of duplicate names or addresses in case of insurance claims. In addition to this, a tax auditor will not only resort to the data of your company, but also to control reports of other tax authorities.
The tax auditors today predominantly deal with contract reviews and – where applicable – international supplies and service provisions within a group of companies. It is checked within the context of contract reviews, for example, whether contracts were signed in advance and whether the contract conditions were according to the arm’s length principle for specific internal transactions, transactions with employees, or transactions with shareholders. The adequacy of the selected transfer price must be proved for cross-border supplies and services within the group. If certain amounts are exceeded, a transfer pricing documentation has to be submitted, which complies with strict formal and substantive requirements of the legislator. Not meeting these requirements, can result in dire consequences. This ranges from hidden profit distributions, surcharges and interests and fictitious profit estimations of the tax authorities. Furthermore, cross-border supplies and services are subsequently investigated to check whether the complex VAT related provisions are complied with. The auditors always find mistakes especially with the latter, which could have been avoided with careful analysis of the issue.
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