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How to prepare for a tax audit

An expert at Suomen Yrittäjät, the Finnish SME association, stresses the significance of contracts between the company and shareholders.

A tax audit can be nerve-racking, particularly if a business owner has no previous experience of one. However, it is quite a common procedure.

“When a business owner is contacted about a tax audit, they should start preparing without delay. It’s a good idea to talk with your accountant about the audit and get the key documentation ready for it. They should answer the questions presented in the tax audit carefully based on certain information. For example, mere ‘rough’ answers based on memory, or investigations that change during the audit, don’t help build credibility,” says Jukka-Pekka Hellman, a tax expert at Suomen Yrittäjät.

Hellman says the best way to prepare for a tax audit is to start doing so as soon as the company starts operating.

“As soon as they start running their company, the business owner should ensure that all operations conform to accounting and taxation legislation.”

How the audit proceeds

The Tax Administration reviews information, such as the details the business owners have provided to it. At the same time, related decisions and advance rulings from the Tax Administration are reviewed.

The Tax Administration generally contacts a company about a tax audit in advance. When it does, it agrees with the business on the audit date and informs the business owner about what period will be audited. It will also instruct the business owner on what materials will be needed during the review. This speeds up the audit.

In the audit itself, the company’s representatives review the business activities and issues such as accounting and payroll arrangements. At some stage, a preliminary discussion may be held over the phone. The actual audit may require written requests for information.

The material audited may include financial statements, vouchers and payroll accounting. Other important documents include administrative minutes of meetings and auditors’ reports.

Remember to document contracts

Hellman says that during an audit, particular attention should be paid to ensuring that in contracts between the company and the business owner, as well as between the company and the business owner’s inner circle, the same procedures are followed as would be with independent third parties. Appropriate documentation of contracts is key.

“If, for example, company property is sold at a discounted price to a shareholder, the shareholder is considered to have received a covert dividend from the price exception. Contracts between the company and shareholders are documents which typically attract attention in a tax audit.

During a tax audit, the business owner will become aware of the kinds of steps the Tax Administration will take to remedy any errors. If necessary, taxation can be amended to benefit the company.

The tax audit report shows what steps have been taken as a result of the audit. The tax auditors will write a tax audit report even if the findings do not lead to action.

The business owner may supply their own account of steps taken on the basis of the tax audit. If this account has an effect on taxation measures, the tax auditors will amend the tax audit report before the Tax Administration sets the final tax or amends taxation. Upon the audited party’s request, the tax audit report may not be published in their MyTax account.

Hellman says that a business can also use an external expert in the tax audit.

“Sometimes, a business owner may not understand the question asked in a tax audit. In that case, they can ask the tax auditors to elaborate. In many cases, it is worth asking an expert who understands taxation well to help as soon as the tax auditors get in touch.”

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Pauli Reinikainen