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In recent years, there has been a very noticeable increase in the tax authorities’ auditing of companies.
Not only has the volume of activity increased, but the authorities are also equipping themselves with increasingly effective and sophisticated means to carry out these audits much more efficiently: regulatory changes granting greater audit powers to the relevant bodies; increasingly seamless and systematic cooperation with other jurisdictions; access to digital platforms; and the acquisition of powerful AI tools that enable them to access far more information and process it more reliably…
In such circumstances, an increasing number of companies are facing some form of tax inspection or demand from the tax authorities.
Furthermore, the tax inspectors’ approach is becoming increasingly aggressive, as they frequently apply criteria focused primarily on revenue collection, thereby stretching the interpretation of the law to limits that are sometimes of dubious legality.
What is a tax inspection?
It is common for a client to state that they are undergoing a tax inspection because they have received a notice from the Tax Agency requesting that they provide certain information and documentation.
However, in most cases, this is not strictly speaking an audit procedure, but rather an administrative procedure, whether it be a ‘data verification’ procedure (for example, where they request information on dividends received from a foreign company to check whether the international double taxation relief applied has been correctly calculated), or a ‘limited verification’ (for example, a request for documentation proving the validity of a deduction claimed by the taxpayer).
These are ‘minor’ procedures that are not carried out by the Tax Inspectorate, but by the administrative departments, which have a much narrower scope, although they can sometimes have very significant effects. Furthermore, as we have mentioned, the powers of the administrative bodies have been extended by a number of recent legal reforms (specifically, Law 13/2023 expanded the powers relating to limited audits, allowing, amongst other things, the examination of commercial accounts to cross-check them against the information available to the Administration).
For its part, an audit, strictly speaking, is a procedure carried out by the Tax Inspectorate, which is a body within the various tax authorities (local, regional and central), and which has much broader powers of investigation than the administrative departments.
Is it possible to find out whether my business is going to be inspected?
It is not easy to know, as there may be various reasons why a tax audit might be initiated. Thus, without claiming to be exhaustive:
- Having submitted a tax return containing any unusual figures; for example, where the turnover or expenditure for a particular financial year is significantly higher than that of neighbouring financial years, whilst the remaining financial years are more or less consistent with one another.
- Making a significant off-balance-sheet adjustment to the corporation tax (CT) assessment base.
- Declaring a large sum as exempt income for personal income tax (PIT) purposes.
- Having carried out transactions with a company that is under investigation for issuing false invoices.
However, they may also be triggered by the fact that a business belongs to a sector that has been included in an ‘inspection programme’, as the Inspectorate plans its operations and organises itself to carry out large-scale checks on specific sectors (for example, law firms, opticians’ practices, second-hand car dealers, etc.).
Finally, there are certain structures, schemes and businesses that are more likely than others to be subject to scrutiny. Thus:
- International structures established in, or having links with, jurisdictions classified as low-tax, non-cooperative or tax havens.
- Assignment of image rights.
- Invoicing by professional services companies.
It is therefore not possible to know with certainty whether a particular taxpayer will be subject to a tax audit or, if so, when.
Which concepts and exercises will an inspection affect?
The notice initiating the inspection proceedings must expressly state:
- Whether the audit is comprehensive or limited in scope.
- Which tax categories it covers (VAT, corporation tax, etc.).
- Which tax periods it relates to.
If the scope of the audit is partial (that is, only some elements of the tax are examined and, therefore, once the audit is complete, the financial year under review – for example, 2024 – is not ‘closed’ to further scrutiny but may be subject to another audit), the taxpayer may request that the scope of the audit be comprehensive so that, upon completion of the audit, the financial year is definitively closed.
It is important to bear in mind that such a request may only be made within 15 days of being notified of the commencement of the audit proceedings.
Furthermore, if, during the audit procedure, the auditor considers that other financial years or items should be audited, they may broaden the scope of the audit and extend it to those financial years and items, provided that they are not time-barred.
How should one deal with the tax authorities?
Upon receiving notification of the commencement of an audit, it is advisable first to check whether the taxpayer has previously been subject to an audit in respect of the same tax category (VAT, personal income tax, corporation tax, etc.) in order to ascertain, on the one hand, which aspects the audit focused on, and, secondly, what the outcome was (agreements or disagreements, with or without the initiation of penalty proceedings, etc.).
This can give us an idea of what we might expect to encounter and how to prepare for it, by reviewing in particular which points were the subject of rectification in order to assess whether there is a risk that the Inspectorate will raise them again and, in light of this, decide whether to amend our approach or prepare to defend it against a likely challenge.
Such an analysis must be carried out by an expert in the field; therefore, if the company does not have one on its staff, it would be highly advisable to seek one externally, as there can be a significant difference between facing a tax inspection procedure with the assistance of a reputable professional and doing so without such help.
It may also be highly advisable for the inspection process to be led by the same expert who will be leading the defence in any subsequent appeals against both the regularisation and any penalties, where applicable, or by someone working in close collaboration with that expert, since, when an inspection concludes with the signing of a report of disagreement, one should seek to make the most of the inspection phase to begin preparing the defence strategy that will need to be deployed at a later stage.
Indeed, it should be borne in mind that, on some occasions, there will be a good chance that the outcome of the inspection will be favourable, and in such cases it will be advisable to focus efforts on achieving that outcome; but on other occasions it will be clear from the outset that the outcome will be unfavourable, and, on such occasions, the audit phase can and should be used to prepare for the litigation phase, as an audit poorly managed by the taxpayer or by an inexperienced adviser may compromise the subsequent defence in court (because certain statements have been made or omitted, or certain documentation has been produced or withheld, or because actions have been taken at the wrong time). In short, it will normally be advisable for the defence strategy to be followed in the litigation proceedings to be an extension of the strategy followed during the audit proceedings, or at least as consistent as possible with it.
In any event, once the proceedings have commenced, it is advisable to adopt a cooperative attitude towards the tax authorities by providing them with the information and documentation that we are required by law to supply, whilst bearing in mind that, ultimately, they are ‘the other party’ and will frequently seek to defend different approaches to those adopted by the taxpayer, if this could result in a higher tax revenue. Consequently, it is advisable to safeguard those aspects of the taxpayer’s structure or planning that are most likely to be contested.
How long does an inspection take?
The maximum duration of an audit is, in principle, 18 months, to be counted from the date on which the taxpayer is notified of the commencement of the audit proceedings until the date on which the assessment is notified to them (or is deemed to have been tacitly notified, as we shall see).
However, this period shall be 27 months if:
- The taxpayer’s turnover exceeds the threshold required for an audit of the accounts (currently €5,700,000);
- the entity being audited forms part of a group that is currently being audited and which is subject to consolidated corporate tax (IS) or the special regime for groups of entities (VAT); or
- the purpose of the proceedings is to verify or investigate the Supplementary Tax
It should be borne in mind that the Act sets out circumstances in which the calculation of the time limit for the tax inspection procedure is suspended; consequently, in practice, more than 18 or 27 months may elapse between the taxpayer being notified of the commencement of the proceedings and the notification of the assessment notice.
And then what?
Once the verification procedure has been completed, the inspector will propose a settlement in a set of reports, which may be:
- In agreement,
- in accordance with, or
- in disagreement with
The first two will not be subject to challenge by the taxpayer, and once signed, they will be reviewed by the competent body responsible for issuing the assessment (it should be borne in mind that what the inspector includes in the report is not an assessment, but merely a proposed assessment). In the case of reports with an agreement, if the competent authority does not propose, within ten days, any further proceedings or amendments, the final assessment shall be deemed to have been issued and notified at the end of that period. In the case of reports of agreement, the same shall apply if the authority remains silent for one month from the signing of such reports of agreement.
However, if the report is contested, the taxpayer will have 15 days from the date of signature to submit any representations they deem appropriate, and the competent authority responsible for the assessment must rule on those representations before the end of the total period for the audit (18 or 27 months from the date of notification of its commencement).
If the assessment proposed by the inspector is confirmed (which is usually the case), the economic-administrative procedure will commence, to be heard before the relevant Economic-Administrative Court (which, despite its name, is a body belonging to the Ministry of Finance; in other words, at this stage, the Ministry of Finance remains both judge and party). And if the taxpayer’s claims are not upheld at this stage either, the contentious-administrative procedure will commence, in which the dispute will be brought before genuine courts of law for the first time.
Do you have to pay the fee arising from the settlement if you dispute it?
Yes, the fee must be paid within the statutory time limit.
However, it is possible to apply for a deferral of payment by providing security and, in exceptional cases, even without the need for security.
If neither of these options is taken, enforcement proceedings will be initiated and the debt will be recovered through enforcement, with the corresponding surcharges accruing.
What about the sanctions?
As a result of a tax inspection, disciplinary proceedings may be initiated, which will be conducted separately and independently of the tax assessment arising from the tax inspection.
If the assessment notices have been signed in agreement, the penalties may be contested; however, it may also be worth considering signing the assessment notices in agreement in order to benefit from reductions of up to 58 per cent. Conversely, if the assessment notices have been signed with objections, the penalties will, logically, also be subject to challenge.
Unlike the tax liability arising from the assessment notices, if a request is made for the suspension of payment when challenging the penalties, this is granted automatically and does not require the provision of security at either the administrative or the economic-administrative stage.
However, in administrative litigation proceedings, the courts currently not only apply very restrictive criteria when granting a suspension but also require the provision of security; consequently, once this stage of the proceedings has been reached, the taxpayer must choose between paying the penalty in order to continue appealing against it, or requesting a suspension of payment and providing security to prevent enforcement proceedings from being initiated.
Contact our team of lawyers specialising in tax law to plan in advance the most appropriate way to deal with a potential tax audit.
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