HOW TO COOPERATE DURING AN SRS AUDIT

To begin with, it is advisable for the entrepreneur to participate in the SRS audit process. Do you know exactly what to do and  what not to do?

Prepare Thoroughly for the Initial Interview

The initial audit interview is an integral part of the audit, during which broader information is obtained regarding the taxpayer’s economic activity, accounting records, business partners, and similar matters. Providing poorly considered information during this interview can negatively impact the audit results.

In our practice, there are often cases where the SRS, analyzing the information provided during the initial interview in conjunction with information obtained later in the audit, concludes that the taxpayer has already provided contradictory explanations during the initial interview regarding the transactions contested in the audit.

Host a Lunch for Business Partners Before the Audit

It is crucial to carefully consider the information provided during an SRS audit. When requesting information, the SRS specifies a deadline by which the information must be submitted; therefore, it is particularly important to provide explanations that are as detailed as possible, having carefully thought through the information beforehand, as the SRS will work with it rigorously.

Pursuant to the laws and regulations of the Republic of Latvia, the SRS has the right to obtain additional information during an audit not only from the taxpayer being audited but also from its business partners, current and former employees, and to conduct observations of your economic activity. Therefore, it is essential that the  information provided by your business partners and other persons is not vague or contradictory. Conversely, stating in an explanation that the provider does not remember the details of the disputed transactions because they occurred, for example, several years ago, will be perceived negatively by the SRS.

Cooperation Is Cheaper Than Ignorance

It must inevitably be taken into account that if a taxpayer avoids an audit, fails to provide the information necessary for the audit, or obstructs auditors in performing the audit, the SRS is entitled to impose various sanctions. For example, they may draw up an administrative violation report for a board member or initiate a ban on holding a board member position for up to three years. Such circumstances can also negatively affect the audit outcome.

Furthermore, if during the audit the taxpayer—represented by its representative or board member—has not cooperated with the SRS or if the amount of taxes payable to the budget cannot be determined in the audit, the SRS is entitled to determine tax payments on the basis of an assessment.

What does this mean? In such cases, the SRS determines the amount of taxes payable to the budget based on an assessment, using the information at its disposal. It should be noted that results obtained by the SRS through indirect assessment will never be as accurate as if the taxpayer had carefully presented their accounting data to the SRS and fulfilled their duty of cooperation.

Audit Deadlines

According to Section 23 of the Law “On Taxes and Duties,” an audit must be conducted within 90 days from the date it was initiated. At the same time, regulations allow the SRS the right to  extend the audit period by a further 30 days if additional information is required to conduct the audit, and by another 60 days if information is required from foreign tax administrations or other competent foreign authorities, or from a taxpayer undergoing a transfer pricing audit.

A distinction must be made here between an extension of the audit period and the exclusion of a specific period from the audit timeframe. The following are not included in the audit period:

_the period from the day information regarding the taxpayer’s economic activities abroad is requested from a foreign tax administration or other competent foreign authorities until the day the response is received,
the period by which the taxpayer has missed the deadline for submitting information requested by the tax administration,
the period during which the audit could not be performed due to the absence of the taxpayer or their authorized persons, including due to illness,
the period from when information is requested from the taxpayer within a transfer pricing audit until the day the response is received._

Read the Final Minutes Carefully

The conclusion of the SRS audit process is the official’s decision on the audit results. Before the audit decision is made, the SRS prepares and sends the minutes of the final audit meeting, which should be reviewed carefully and in detail before the meeting. These minutes reflect the audit findings and provide an opportunity to  present arguments to justify your position.

Although arguments presented during the final audit meeting are most often rejected by the SRS for formal reasons, there are cases where, after the taxpayer carefully reviews the final meeting minutes, provides detailed explanations, and submits supporting documents, the SRS reduces the projected tax amount payable or increases the amount to be refunded from the budget.

The principle of taxpayer cooperation in SRS audits stems from both the laws and regulations of the Republic of Latvia and established case law regarding the contesting of SRS audit results. Specifically, the taxpayer—the board member or their authorized person—should actively participate in the tax audit process right  from the very beginning, communicate with the SRS in a methodologically correct manner, actively submit evidentiary documents, and, most importantly, accurately explain the actual circumstances of the disputed transactions identified by the SRS. Only with such an approach is it possible to achieve a positive result in an SRS audit!

P.S. Next time, you will learn about the rights of an entrepreneur in an SRS audit. There will be 6 recommendations.