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The Warsaw Voice » Law » March 12, 2008
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Electronic Tax Audits
March 12, 2008   
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Tax compliance reviews and audit visits are part and parcel of the Polish tax system. Although a compliance review/audit visit will now tend to run a more or less established and predictable course, new issues crop up every now and then. One such widely discussed recent issue is that of "electronic tax audits."

As the aim of a tax audit is to check if the taxpayer fully complies with the tax laws, the main part of the audit consists of gathering and analyzing evidence. The standard way of doing that was to examine the various kinds of tax-related documents such as account books, invoices, agreements, transfer pricing documents, as well as the explanations of taxpayers or, where applicable, of their employees. Thus tax inspectors would physically descend upon the premises of their unsuspecting quarry. Nowadays, however, the electronic tax audit method is rapidly gaining popularity. The Polish tax authorities are thereby taking the trail blazed by their European counterparts.

The Tax Code authorizes tax investigators to request of taxpayers all relevant data in electronic form. This legal provision was inconspicuously squeezed into the list of the tax authorities' powers in relation to tax audits.

From the legal perspective, such an audit is still to be regarded as a regular tax audit as defined in the Tax Code, but tax authorities now use specific software to analyze data extracted in its electronic version from the taxpayer's financial system. For this, Polish tax authorities use ACL or IDEA software. Both tools are highly rated on the software market for their capacity for complex data analyses and for examining large volumes of records.

The use of these tools influences the way in which a tax audit is conducted. To carry out an electronic tax audit the inspector must ask the taxpayer in writing to extract the data from their financial/accounting system and provide it in electronic form (on disc or pen drive). Then they transfer the data for analysis on their own computers. The software used by the tax inspectors generally allows them to read the various kinds of formats in which the particular financial/accounting systems store the data, although sometimes there are difficulties with electronic tax audits caused by differences in software systems. From time to time voices are raised in favor of regulating by law the types of electronic data formats used in financial/accounting systems, but at the moment such requirements are still subject to discussion. The data required by the tax inspector should be specified by them. Taxpayers have the right to know the kind of data they are expected to extract from their records systems. But the general rules on tax audits still apply: the requested data must relate to the scope of the tax audit in question.

It may be useful for taxpayers to keep their own copies of the data provided to the tax authorities in order to establish common ground for any potential discussions connected with that particular audit.

Analyses of data received in electronic form may be approached from a variety of angles. It depends on the kind of test applied by the tax inspectors. Generally, the software makes it possible to compare and match the data introduced into the financial system-from routine operations based on matching the dates at which invoices were issued/received and subsequently settled and their consequent VAT deductions, to complex analyses of various kinds of records.

An electronic tax audit does not mean that tax inspectors will not want to look at the paper documents. Inspectors still request sight of source documents such as agreements, invoices and confirmation of payments to have a full picture of the facts. The use of software, however, points more precisely at the documentary evidence the tax inspector should be looking for, and the value of this facility cannot be overestimated with regard to tax audits taking place in really big companies.

The use of software allows tax authorities to examine a wide range of accounting records in a short space of time, which reduces the time required for the tax inspectors to be physically present at the premises of the company being audited. On the other hand, its use increases the probability of discovering typical bookkeeping errors like double-booking the same invoice, VAT deductions in the wrong month, discrepancies in VAT rates applied to the same goods, and other inconsistencies that will come to light after appropriate criteria are keyed into the inspector's software.

Thus, a "virtual" tax audit could result in far from virtual consequences for the taxpayer.

Mirosława Przewoźnik-Kurzyca, senior associate and head of SALANS Warsaw Tax Litigation Practice
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