What are the checks, why do they come and what to do?

In your entrepreneurial activity, you encounter certain obstacles and difficulties daily. The situations may vary, but probably the most unpleasant thing you might face is a tax audit.

As the old Latin saying goes, “Forewarned is forearmed!” Let's arm ourselves with the knowledge of how to behave during an audit, what to pay attention to, and what documents to arrange to minimize risks.

First of all, it is necessary to distinguish between planned audits (you are notified in advance and have the opportunity to prepare) and actual audits (conducted at the actual location of your business activity, with no prior notice). It should be understood that there are certain requirements for conducting an audit: regarding its duration, the documents of the auditors, and the documents to be inspected.

Despite the moratorium on audits for Sole Proprietors (SPs) and legal entities with an annual income not exceeding 20 million UAH, which is in effect until the end of 2018, tax officers may still find a reason to come and start auditing, for example, your licenses, how you pay taxes, whether you comply with cash register requirements, etc.

Documents of the Auditors

Currently, only the central and regional fiscal authorities are authorized to conduct audits. District inspection officers do not have such powers.

Before the audit begins, the inspector must provide the following documents:

1. A directive for the audit, which includes:

• date of the document

• name of the tax inspection

• details of the order for the audit

• details of the object being audited

• purpose of the audit

• type of audit (planned/unplanned, actual)

• grounds for the audit

• dates of the audit (start and end dates)

• auditor's details

• signature and seal of the tax authority.

2. A copy of the order for the audit (the order must contain the same information as the directive, and the specific period of activity to be audited should be clearly stated).

3. The auditor’s identification card(s) (which should be mentioned in the directive).

If any of these documents are not provided to you or are incorrectly filled out, you have the right to deny access to the auditors. They will write a report in two copies, and one will be left for your signature.

Object and Subject of the Audit

So, if you weren't lucky, and the auditors' documents are in order, let's look at what constitutes the object and subject of the audit.

It is perfectly legal if the inspector asks for copies of primary documents related to financial, economic, or accounting activities, which indicate tax evasion, understatement, or non-payment, as well as confirming violations of the law.

According to paragraph 85.2 of the Tax Code of Ukraine (hereinafter – TCU), all documents related to the subject of the audit or directly connected to it must be provided. The auditor can only take copies of the documents. These must be certified by the entrepreneur’s signature and seal (if applicable), and then an inventory of the documents should be made, which will also be signed by the taxpayer. It is prohibited to seize original documents or request additional documents not specified in the TCU.

Documents that form the basis of tax reports and confirm specific indicators must be provided to the auditor by the end of the audit or within five days after receiving the audit report. If such documents are not provided, the tax officers will assume that you do not have them. If you provide documents less than three days before the audit ends, it may be extended by 2-5 days.

There are cases where the auditor refuses to accept any document. Do not despair – use paragraph 44.7 of the TCU and send a certified copy of the document by the end of the audit to the tax authority via registered mail with acknowledgment of receipt. In this case, the inspector will not be able to refuse and will be required to add this document to your case.

However, there are also pitfalls. If the tax authority receives these documents after the audit is completed or within five days of receiving the audit report, they may assign a new unscheduled audit. So be careful!

According to the TCU, audits can be divided into three types: desk, documentary, and on-site. Let's examine each in detail.

Desk Audit

The desk audit takes place at the tax authority’s office based on tax declarations submitted by taxpayers. According to paragraph 75.1.1 of the TCU, it does not require directives, permissions from management, or the presence of the taxpayer being audited. Essentially, you will not know about the desk audit until the tax officers find violations. Then they will create a report in two copies, and one will be sent to you within three days.

Usually, the data provided in the declaration is checked to ensure it matches the current form, is correctly completed, contains no arithmetic errors, and that the tax rate has been correctly applied, etc. The duration of desk audits is not regulated by law.

Documentary Audit

As the name suggests, the documentary audit is based on documents. Tax, statistical, and accounting reports are reviewed, as well as documents related to tax calculations and payments.

The documentary audit can be: on-site (at the taxpayer’s location) or non-on-site (carried out at the tax authority’s office, often without the presence of the taxpayer). The correctness of tax calculations and payments is checked, whether currency legislation is followed, and whether employees are properly registered. After the audit, a report is made in two copies, which is given to the taxpayer, and then it is registered within five days with the fiscal service if it was an on-site audit, or the reverse, if it was non-on-site.

The documentary audit can be planned or unscheduled.

Planned Audit

Planned audits are carried out according to a schedule, which is approved by December 25 of the current year for the next year, according to paragraph 77.1 of the TCU and published on the Ukrainian Tax Service website. This rule was introduced only in 2017, so the schedule for 2017 audits is not available publicly, and it will only appear in December for the year 2018. The audit plan includes SPs and legal entities that have a risk of tax evasion or have been found to have violated the law.

You can receive a notification about the planned documentary audit 10 days before its start. You will receive an order signed by the head of the tax authority. If this requirement is not met, the audit is considered illegal.

The audit duration should not exceed ten days, and in exceptional cases, it may be extended by the head of the tax authority by five days.

You can view information about planned audits on this resource.

Unscheduled Audit

With unscheduled audits, they arrive unexpectedly and without warning, if there is at least one of the reasons listed below:

• The tax authority received information that the entrepreneur violated the law and did not provide explanations and documentation in response to the tax authority’s request within fifteen days

• Incorrect data was found in tax returns, and no explanations were provided as requested by the tax authority

• By court decision

• Declaration deadlines were violated or taxes were not paid on time

• The entrepreneur decided to submit an amended declaration for a period already audited by the tax authority

• The SP filed a closure request

• If a mistake was made in the declaration and no amended declaration was submitted

• If documents were not provided within ten days in response to a tax authority request for an audit

Before the audit begins, you must receive a copy of the audit order for signature.

The audit terms are prescribed in paragraph 82.2 of the TCU: 5 days for SPs with employees, 3 days for SPs who are not VAT payers without employees who have submitted zero declarations for two years and do not have a bank account.

Actual Audit

According to paragraph 80 of the TCU, the actual audit can be carried out by two or more tax inspectors, at the actual location of the business activity, in the presence of the entrepreneur. Unfortunately, you will not be notified in advance about the audit.

During the audit, they check whether the rules for handling cash, conducting payment transactions (they may make a payment transaction before the audit, i.e., buy something at your store), check the availability of licenses, certificates, and patents, as well as examine your relationships with employees, whether labor contracts exist, and if all employees are properly registered.

In addition to the signed order by the tax authority head for the audit, a basis is also required, for example:

• The tax authority learned that your point of sale has violations regarding payment operations or does not have licenses for conducting business

• A customer filed a complaint against you

• You did not submit an RRO report

• The tax authority learned that you have unregistered employees

Fiscal officers can monitor the work of the business during the audit.

The duration of the actual audit should not exceed ten days. In exceptional cases, it may be extended by the head of the tax authority by five days.

After the audit, a report is made in two copies.

Audit Report (Certificate)

After the audit, a report or certificate is made in two copies. One copy remains with you, and the other with the auditors. If you receive a certificate, it means no violations were found, and you can breathe a sigh of relief and continue working with a smile on your face. If you receive a report, it means there was a mistake somewhere.

After the audit, you can either sign the report or refuse to sign it if you disagree with the conclusions of the fiscal officers. In this case, a refusal report will be made, registered with the tax authority, and sent to the entrepreneur the next day.

However! Refusing to sign the report or disagreeing with the audit conclusions does not exempt you from paying fines or additional tax liabilities. In this situation, you must submit a written objection to the fiscal service or immediately state all your objections and disagreements in the audit report. This must be done within five days of the report’s creation. In your statement, you can indicate that you want to participate in the consideration of objections, and the tax authority will be obligated to notify you about the location and time of consideration within seven days.

What documents must be provided during a tax audit?

You only need to provide the auditors with documents directly related to the subject of the audit, so you do not need to pull out "from the drawers" all the documents from your entire entrepreneurial activity. Also, the list of required documents will depend on the type of audit: desk, planned, or actual.

Tax officers have the right to review reports, accounting books, and documents related to cash discipline, etc. If the accounting is kept electronically, you may be asked to print the documents. If you do not have the necessary document, this can become a reason for a record in the audit report and for the imposition of fines, so try to restore the missing documents before the auditors arrive by requesting copies from suppliers, contractors, and others.

Fiscal officers also have the right to demand an inventory of fixed assets, inventory, and cash, so it is better to conduct an inventory yourself before the auditors arrive and get your affairs in order.

It is quite difficult in this article to list all the documents that entrepreneurs should keep, as the subject of the audit can vary in each case. However, we recommend putting the following key documents in order, which are related to entrepreneurial activity:

• statutory (registration) documents

• licenses and patents

• documents for the rented premises

• personnel documents

• income record book

• primary documents for purchasing inventory

• bank statements, receipts, payment slips, etc.

If it so happens that uninvited guests in the form of auditors come to your office, try to isolate them from other employees so that they don't blurt out anything unnecessary. Unfortunately, with the Labor Inspection, this won’t work, as they have the right to communicate with employees, but in other cases – isolation will help you.