Understanding Their Purpose and Ensuring Compliance
In Bulgaria, the Tax and Social Security Procedural Code recognizes two official forms of tax control and verification: tax inspections and audits.
In this article, we will clarify the meaning of tax audits and inspections, shed light on when you can expect to be subject to a tax audit, provide important information to keep in mind during an audit, explain potential penalties, and offer other helpful insights.
Understanding Tax Inspections and Audits
Let’s start by clarifying the nature of tax inspections and audits themselves.
They serve as preventive, ongoing, or follow-up controls depending on their specific purpose in each case.
According to the Code, a tax audit involves a series of actions carried out by authorized bodies to ensure compliance with the country’s tax and social security legislation.
The main purpose of a tax audit is usually to establish the circumstances and facts relevant to the correct determination of the tax liability.
It is important to note that a tax inspection does not itself result in the creation of a deed. While the conclusions drawn from a tax examination may give rise to potential tax liabilities, those liabilities do not arise through the preparation of a deed.
Instead, they are established in the next step, known as a tax audit.
In essence, tax inspections and audits themselves function as two interrelated instruments in Bulgarian tax and social security legislation.
Tax Audits: Process and Documentation
The findings of a tax audit should be documented in reports and summaries that must be provided to each person who has been subject to an audit.
Unlike acts, these records and reports cannot be appealed. However, the auditors’ actions and findings may be appealed to a higher administrative authority.
To ensure their probative value, the records must accurately reflect the specific factual situation in relation to the legislation in force.
On the other hand, a tax inspection is a form of ex-post control. It is carried out for a previously closed tax period and focuses on the accounting information reported and other relevant details relating to the taxpayer’s activities.
During a tax examination, the rights, obligations, and tax and social security status of the parties involved are determined.
If irregularities are found after a tax audit, an official document known as a report is drawn up.
The purpose of this report is to make debts enforceable and liquid. This means that if the debts are not fulfilled voluntarily, they can be collected by enforcement measures.
Cases Requiring Tax Inspections and Audits
Here are a few reasons that may require a tax audit by the relevant authorities:
- Selection based on predefined criteria.
- Receipt of a letter regarding signals and complaints.
- A request from an obligated person.
- Notifications regarding insolvency proceedings, dissolution, transfer, and conversion of a company.
- Determination of factual error.
- Combating tax fraud.
- Double taxation agreements.
Important Points in Tax Audits
Prior to commencing an audit, it is mandatory to provide the auditee with an audit engagement order setting out the key details. This order should include information about the auditee, the responsible auditors andtheir supervisor. The timeframe and duration of the audit, the types of liabilities to be audited, and any other relevant circumstances.
It is important to note that even without an order being received, the audit procedure may continue. This occurs when National Revenue Agency (NRA) officials have unsuccessfully attempted to make contact at least twice within a week. In such cases, the NRA must maintain written records of their unsuccessful contact attempts.
The standard duration for tax inspections and audits is three months from the time the order is served. If necessary, this period may be extended by a further two months following the issue of another order by the authority that originally ordered the inspection.
In complex cases, the period may be further extended
to a maximum of three years. However, the final decision on the extension rests solely with the Executive Director of the NRA.
Upon receipt of the order, the authorities are entitled to carry out the audit at any time.
When the auditors arrive for the audit, they must identify themselves and ensure that their purpose is consistent with the details specified in the order.
All relevant documentation, including accounting records, payment documents, contracts, invoices, etc., must be presented for inspection during the tax audit.
Within two weeks of the completion of the audit, the auditee must receive an audit report detailing the conclusions reached by the auditors during the audit.
Disclosure of the Source of Funds during Tax Inspections and Audits
As part of the tax audit process, the origin of funds may need to be disclosed upon request by the NRA.
Tax audits can be carried out for both legal and natural persons, although less frequently for the latter. Since legal entities are required to maintain proper accounting records, verification of funds with them is usually clearer and more reasonable.
In the case of individuals who do not keep formal accounts, proving the origin of funds becomes more critical. This is due to the risk of income concealment.
Where the tax authorities suspect a person of concealing income, they may ask for evidence of the origin of the funds in question.
Several types of evidence can be presented to prove suspicious income.
Income that has already been declared in tax returns, accompanied by the payment of applicable taxes, is generally considered to be easily provable and unlikely to be subject to a thorough tax examination. However, for untaxed income, the following evidence must be provided:
Proving and Declaring Credits: Credits over £10,000 that remain outstanding at the end of the year are included in the annual tax return.
Similarly, loans granted or received during the previous five years in excess of BGN 40,000 and outstanding at the end of the current year must be declared.
The mere declaration of loans is insufficient – appropriate evidence, such as bank statements or receipts, must accompany the declaration.
Proving and Declaring Donations: Although donations are not compulsory to include in the annual tax return, they can be declared at the request of the individual, usually by producing the relevant bank transfer records.
Identification of Available Funds: Tax audits may focus on funds originating up to five years prior. In such cases, evidence of available funds, such as bank statements, may serve as supporting documentation.
Avoiding Penalties during Tax Inspections and Audits
Maintaining a cooperative and honest approach during tax inspections and audits can help you avoid relevant penalties.
To avoid penalties when preparing an audit report, it must be challenged within two weeks of receipt.
This should be done administratively, before the relevant director of the Directorate of Appeals and Tax and Social Security Practice at the NRA headquarters.
An application for appeal shall be submitted through the territorial directorate of the NRA.
It is important to note that an appeal against an act does not automatically suspend its execution. Therefore, it is necessary to request a stay of execution in addition to lodging an appeal.
In order to secure a stay of execution, security must be provided in the amount of the principal and interest accrued from the date of the request for a stay.
The security may take the form of cash, an unconditional and irrevocable bank guarantee, or securities of equivalent value.
The Arbitral Tribunal shall have the power to confirm, amend, or annul the part of the act under review.
If necessary, the revision acts may be further challenged before the courts. The time limit for appealing to a court is again two weeks, starting immediately after receipt of the decision subject to appeal.
By ensuring compliance, providing the necessary evidence, and adopting a respectful approach during tax audits, individuals and organizations can manage these processes effectively while reducing the risk of penalties or adverse outcomes.
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