Compliance audit or tax audit?

Tax authority review – how is the target selected?

In addition to the negligible number of mandatory audits, the tax authority selects taxpayers for inspection through targeted selection systems and based on individual risk analysis procedures.

Based on the results of the targeted selection system and the individual risk analysis, the tax authority will ultimately launch a compliance audit or a tax audit against the taxpayer. 

Only 5.8 % of the audits carried out in 2023 were tax audits, while 94.2 % were compliance audits for data collection and checking the fulfilment of certain tax obligations, which illustrates that reviews are predominantly carried out as part of a compliance audit. 

Let's take a look at the specialities of these two types of investigation and what taxpayers should know about them.

What is a compliance audit?

In the framework of a compliance investigation, the tax authority checks whether the taxpayer has fulfilled its statutory tax obligations, whether it has done so in due time and whether it fulfils them in a way that is suitable for the assessment, declaration and payment of the tax. 

In addition, the tax authority may collect data to establish the veracity and authenticity of the information, facts and circumstances contained in the tax authority's records, the taxpayer's records and filings, and it may also examine the veracity of economic events. 

As a general rule, a compliance audit must be completed within 30 days, or within 60 days if the deadline is extended.  It does not create a closed audited period, i.e. self-revision is possible during the audit. The tax authority may carry out several compliance audits for the same period or tax type. 

The compliance audit also plays an important role in the further development of the selection system, as the tax authority can collect data during the compliance audit to facilitate its auditing practice.

A compliance audit can be carried out at practically any time to achieve the above objectives, even before the close of the relevant filing period or while a tax audit is ongoing.

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Compliance audit – when is it commenced?

• When the tax authority wishes to check whether a company has met certain tax obligations. For example, whether the tax returns have been filed on time, reporting and bank account opening obligations have been fulfilled, whether data have been properly reported, and source documents have been issued and kept in accordance with the relevant legal requirements, etc. 
• If there is a discrepancy between the data in the taxpayer’s filings, declarations and tax authority records, e.g. VIES from a business partner, domestic recapitulative statement, in order to identify and clarify the reasons for the discrepancy.
• In connection with the audit of another taxpayer doing business with the company.
• For the purpose of investigating a particular transaction, the tax authority will check whether the transaction has indeed taken place and whether it has taken place as documented by the parties. 
• In order to map business relationships, it may examine transactions for a given period, collect data for tax audits involving other taxpayers (e.g. examination of the distribution chain, volume of sales).
• To collect data, for example, on retail sales, in order to set up an estimation database in areas considered high risk on the basis of previous experience (e.g. catering, markets, fairs).
• To conduct open or covert test purchases.
• To investigate the reasons for a sudden increase in the number of employees.
• To verify that the EKAER obligations are properly fulfilled  
• If the company has declared in the CIT return that it does not opt for the minimum income and gains threshold, the supplementary form attached to the return will be examined under the risk analysis procedure. If, as a result of this, an income concealment or irregular cost accounting is suspected, the tax authority will order a compliance audit.

What is a tax audit?

During the tax audit, the tax authority subsequently reviews the tax assessment and filing obligation.

This may be conducted by tax type, subsidy and period, or for several tax types and subsidies for a specific period.

Also, as part of the tax audit, the tax authority may review the budgetary subsidy and tax refund claims before disbursement. If the tax authority determines that part of the disbursement is justified, it will arrange the payment for that part and continue the tax audit for the remaining part.  

As a general rule, tax audits must be completed within 90-120 days, but it is possible to extend the deadline several times.  It creates a closed audited period with no possibility for self-revision once the audit has started. As a general rule, the tax authority cannot carry out a new tax audit for the same period or tax type. 

Tax audit – when is it commenced?

If a tax audit has not been preceded by a compliance audit, where an irregularity has been discovered that triggered the tax audit, it may be concluded that the tax authority already has information from other sources that suggests a more significant risk regarding the company's operations.  Such a risk could be, for example: 

• irregularities detected in the audit of a partner in the supply chain (e.g. abuse in workforce hiring);
• where the activity is considered by the tax authority to be of high risk, for example where the company is one of the operators in the supply of Community goods following domestic purchases in chain transactions, or where the company is involved in trading activities involving risky products; 
• where there is a likelihood of a company's non-compliance based on control data, such as international information exchange or a request from a foreign tax authority.

Key differences between the tax audit and the compliance audit

1. Based on the above, the most important difference between the tax audit and the compliance investigation is that only the tax audit creates a closed audited period. As a general rule, no repeated audit can be carried out for a period that has been closed by a tax audit. It is possible to submit a self-revision during or after the compliance audit, and the tax authority may carry out another compliance audit or even a tax audit for the same period and same tax type. 
2. Another important difference is that if the tax authority identifies any deficiencies regarding certain obligations during the compliance investigation, it will record the fact in the report/minutes, but it cannot make any tax assessment or establish any tax difference. In response to the deficiencies identified, a default penalty may be imposed as a maximum in the authority procedure. For more serious non-compliance, a subsequent tax audit may be ordered and this fact recorded in the compliance audit report.
3. The difference between the tax and budgetary subsidy declared/filed and not declared/filed (tax difference) can only be established subsequently by a tax audit – this is not possible in a compliance audit. 

It is therefore important to pay more attention at the beginning of the investigation to the type of audit ordered, which can be found in the notification sent by the tax authority or in the engagement letter received.

You should understand what kind of audit is ongoing against your company, for what period, as the focus, purpose and framework of a compliance audit and a tax audit are different, which determines the rights and obligations of the taxpayer and the tax authority during the procedure.

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The obligatory content of the engagement letter ordering the audit includes the name of the tax authority carrying out the audit, the name of the taxpayer subject to the audit, the type of audit and, in the case of a tax audit, the period and tax type audited. The acting tax authority may not extend beyond the scope of the mandate, so it is particularly important that the taxpayer monitors the procedural actions during the audit, and makes comments and objections regarding possible irregularities during the audit and not only in the appeal.