Let’s start with the fact that it is desirable for a businessman to participate in the SRS audit process. Do you know exactly what to do and what not to do?
Prepare carefully for the opening conversation
The audit initial conversation is an integral part of the audit, which provides more information about the taxpayer’s business, accounting, business partners and the like. Providing ill-considered information during it may adversely affect the outcome of the audit.
In our practice, there are often cases when the SRS, analysing the information provided during the initial conversation, in conjunction with the information obtained later in the audit, concluded that the taxpayer had already provided contradictory explanations regarding the transactions contested in the audit.
Have a lunch with your cooperation partners before the audit
It is very important to carefully consider the information provided during the SRS audit. When requesting information, the SRS indicates the deadline by which the information must be provided, therefore it is especially important to provide explanations as detailed as possible, before carefully considering the information indicated in the explanations, as the SRS will work with it carefully.
Pursuant to the laws and regulations of the Republic of Latvia, during the audit the SRS has the right to obtain additional information not only from the audited taxpayer, but also from its cooperation partners, current and former employees, to monitor your business activities. Therefore, it is important that the information provided by your partners and others is not general or contradictory. In turn, the fact that the explanation indicates that the provider of the explanation does not remember the course of disputed transactions, because it happened, for example, several years ago, will be perceived negatively by the SRS.
It is cheaper to cooperate than to ignore
Inevitably it must be taken into account that in case the taxpayer avoids the audit or does not provide the information necessary for the audit or hinders the auditors, the SRS is entitled to impose various sanctions, such as drawing up an administrative violation report or deprive of the right to hold the position of a board member for a term of up to three years. This circumstance may also adversely affect the audit result.
In addition, if during the audit the taxpayer – represented by its representative or board member – has not cooperated with the SRS or the amount of taxes to be paid to the budget cannot be determined in the audit, the SRS is entitled to determine tax payments on the basis of calculations.
What does it mean? Then the amount of taxes payable to the SRS budget is determined on the basis of calculations, taking into account the information at its disposal. In this case, it must be taken into account that the results obtained by indirect calculations of the SRS will never be as accurate as if the taxpayer itself carefully presented its accounting data to the SRS and fulfilled the obligation to cooperate with the SRS.
Audit deadlines
In accordance with Section 23 of the Law On Taxes and Duties, the audit shall be performed within 90 days from the day when the audit has been initiated. At the same time, regulatory enactments allow the SRS the right to extend the term of the audit for another 30 days if additional information is required for the audit and for another 60 days if information is required from a foreign tax administration or other competent foreign authorities, or from a taxpayer transfer price check performed.
Here, a distinction must be made between the extension of the audit deadline and the non-inclusion of a specific period in the audit deadline. The term of the audit does not include:
– The period of time from the day when a foreign tax administration or other competent foreign authorities have been requested to provide information regarding the taxpayer’s economic activities abroad until the day of receipt of the reply,
– The term for which the taxpayer has missed the term for submission of the information requested by the tax administration,
– The period during which the audit was not possible due to the absence of the taxpayer or its authorised persons, also due to illness,
– The term when the taxpayer has been requested to provide information within the framework of the transfer price verification until the day of receipt of the reply
Read the final audit report carefully
The conclusion of the SRS audit process is the decision of its official on the audit results. Before making an audit decision, the SRS prepares and sends the final audit report, which it is desirable to get acquainted with carefully and in detail before the final discussion. It reflects the findings of the audit and provides an opportunity to make arguments to justify your position.
Although the arguments expressed to the SRS during the final audit conversation are most often rejected due to formal reasons, there are cases when after the taxpayer has thoroughly got acquainted with the final audit report and provided detailed explanations and submitted documents confirming the transaction, the amount of estimated taxes to be paid to the budget must be reduced or the amount to be off-set from the budget must be increased accordingly.
The principle of taxpayer’s participation in SRS audits follows from the laws and regulations of the Republic of Latvia, as well as from the valid court practice in contesting the results of SRS audits. Namely, the taxpayer – a board member or its authorised person – should actively participate in the tax audit process from the very beginning, methodically communicate with the SRS and actively submit evidence documents and assets to the SRS and, most importantly, accurately explain the SRS conditions. Only with such an approach is it possible to achieve a positive result for the SRS audit!
