Procedural violations during a tax audit: current case law

The quarantine, introduced in March 2020, allowed the business to rest for a certain time from the visits of tax officials. But they did not have time to be happy with the introduced moratorium, as the Cabinet Resolution No. 89 partially canceled the ban on conducting certain types of inspections of legal entities. And from February 9, 2021, the tax authorities again began to implement the function of tax control. And no matter how the payers deny the legality of this Decree, it is valid until it is canceled in a court of law, and therefore the checks will continue. Therefore, we again observe and analyze the facts and trends of violations, not only from the side of business entities, but also from the control bodies themselves. We will talk about procedural violations that are often committed by auditors both before and during a tax audit.

1. Departure by the controlling body beyond the scope of the established type of inspection.
Judicial practice shows that tax officials often start one type of audit, and in the process may cover issues that should be investigated in the order of another audit. In such cases, the court supports the taxpayer's position. For example, the Resolution of the Sixth Administrative Court of Appeal dated March 31, 2021 in case No. 640/3253/19 established that only tax reporting, i.e. tax declarations, calculations, etc. The subject of the internal audit does not cover the analysis of the timeliness and completeness of tax payments, and therefore the supervisory authority, having discovered such violations of tax legislation, must appoint and conduct a documentary audit, during which such violations will be investigated.
The court came to the conclusion that the controlling body went beyond the scope of the cameral inspection when it started investigating the timeliness of the payer's payment of the sums of money obligations from the land tax determined by him independently. Therefore, the tax notices and decisions issued as a result of the chamber audit were recognized as illegal.
The same opinion is expressed in the Resolution of the Sixth Administrative Court of Appeals in case No. 640/18803/18 of September 10, 2021, where the court did not recognize as admissible evidence in the case the audit report, which was obtained in violation of the tax audit procedure. That is, the facts that can be the subject of a documentary inspection were established by the camera inspection.
The Supreme Court confirmed its position in the Resolution dated January 21, 2021 in case No. 813/2519/17 .
The court emphasized that during the in-camera audit, other issues than the information specified in the tax report cannot be checked. Therefore, the controlling body went beyond its powers when, in the course of the internal inspection, it established the unreality of the economic transaction due to the lack of technical conditions for the provision of services and qualified labor resources at the payer. That is, the controlling body analyzed the procedure for determining the composition of tax liabilities by the payer and the completeness of their accrual, which is provided for by a documentary check, not a camera check.
2. Improper notification of the taxpayer about the start of the tax audit.
Quite often, tax authorities neglect the need to properly notify taxpayers of the date and place of the audit before it is conducted. This leads to the recognition of the performed inspection and its results as illegal and is the basis for canceling the tax notices-decisions.
Yes, the Second Appeals Administrative Court in the Ruling dated October 28, 2021 in case No. 520/1195/2020 indicated that only compliance with the conditions of paragraph 2 of Article 79 of the Criminal Code of Ukraine entitles representatives of the tax authority to start a documentary on-site inspection of the taxpayer. We are talking about the fact that unscheduled on-site documentary inspection should be carried out exclusively on the basis of the decision of the head of the controlling body, which is accompanied by an order. Evidence must also be provided of sending the taxpayer by registered mail with a notice of delivery, or handing over to him or his authorized representative, under receipt, a copy of the order to conduct such an audit and a written notification of the date of commencement and place of such an audit.
In this case, the supervisory body did not confirm the timely sending to the taxpayer of a copy of the order and notification of the start and date of the audit, which did not give the taxpayer the opportunity to get acquainted with them before the audit began, and to submit relevant documents and explanations. Thus, the court stated that the entity subject to the audit must be informed of the order on the appointment of the audit, information on the start and place of the audit before its commencement in the manner determined by tax regulations.
The Supreme Court also came to this conclusion, adopting the Resolution dated February 9, 2021 in case No. 804/3329/15 .
The court emphasized that the controlling body has an obligation to notify the payer of the date and place of the audit, and the payer has the right to appeal the results of such an audit. The court decision rightly states that the implementation of such a right of the payer in the absence of the obligation of the controlling body to notify about the inspection before its implementation would be impossible. Therefore, the court decision was issued in favor of the taxpayer, and the court found the results of the audit to be illegal.
3. The absence of the taxpayer at the tax address does not mean his refusal of admission to the inspection and is not a basis for a documentary on-site inspection.
Documentary scheduled or unscheduled on-site inspection, actual inspection is possible only if there are legal and formal grounds at the same time. We are talking about the existence of legal grounds for their conduct and compliance with the requirements for sending properly executed orders and referrals for conducting an inspection, as well as providing official ID cards of the persons specified in such referrals.
The decision of the Supreme Court dated June 10, 2021 in case No. 808/881/16 recorded a violation of the above procedure by the DPS of Ukraine. The controlling body decided that if the taxpayer is not present at the tax address at the time of the planned on-site document inspection, it is automatically possible to conduct an off-site inspection on the premises of the controlling body based on the available documents, and not at the location of the taxpayer. Such actions of the tax office are illegal, as well as tax notification decisions made as a result of its implementation.
The court rejected the position of the appellate court that the creation of obstacles to the on-site inspection entails the possibility of off-site inspection. The Supreme Court determined that the absence of a taxpayer at a tax address does not mean that the taxpayer refused to conduct an audit, and even more so, it does not indicate that the supervisory authority can conduct an audit within its premises. In addition, according to the materials of this case, the plaintiff did not make a decision regarding the admission of tax officials to the inspection.
Therefore, a planned on-site documentary inspection must be carried out in accordance with legal and formal grounds and only at the location of the taxpayer or the location of the object of ownership, in respect of which such an inspection is carried out. There is no rule that gives the control body the right to conduct a documentary off-site inspection instead of a documentary on-site inspection. A similar opinion was expressed by the Supreme Court in the Resolution dated April 22, 2021 in case No. 820/2993/16 .
4. The control body's request to submit information must contain clear circumstances that confirm the violations committed by the taxpayer.
The decision of the Supreme Court of July 29, 2021 in case No. 320/7159/19 stipulated that only that inspection is considered legal, before the appointment of which (on the relevant grounds provided for in Article 78 of the Code of Ukraine), the taxpayer was sent a request, taking into account the the law of demands to him, to which no answer was given. However, non-compliance by the controlling body with the mandatory requirements provided for in Clause 73.3 of Article 73 of the Criminal Code of Ukraine when sending a request exempts the taxpayer from the obligation to respond to it.
That is, the request will be considered proper if it contains the signature of the manager or authorized person of the controlling body, as well as specific grounds and clear circumstances that may indicate that the payer has violated the requirements of tax legislation. Also, the request must include a list of the requested information and documents that the control body proposes to provide, as well as the seal of the control body.
In case of violation of the requirements for drawing up, processing and sending the request, its legal significance is nullified, which, in turn, does not create any legal consequences for the taxpayer himself.
In the analyzed case, the court successfully emphasized that the supervisory body's request did not specify clear grounds for its referral and reference to the facts of violations of the law. In addition, in the very order to conduct the audit, which was issued as a result of the taxpayer's failure to provide an answer to the request of the tax authorities, no factual grounds for the audit were specified.
The Supreme Court correctly pointed out that "the illegality of the results of the inspection established by the courts due to the violation of the procedure for its conduct is a sufficient independent ground for annulment of the decisions made as a result of its conduct." And this makes it impossible to go to the essence of the tax offenses based on such decisions, considering that the panel of judges of the Supreme Administrative Court did not even analyze the remaining arguments of the cassation appeal.
The Supreme Court expressed the same conclusions in the Resolution dated 04/21/2021 in case No. 816/501/16 .
5. Abuse of the statute of limitations during the inspection.
According to the general rule, the control body must conduct an inspection no later than 1095 days, and in the case of an inspection of controlled operations – 2555 days, following the last day of the deadline for submitting a tax declaration, a report on the use of income (profits) of a non-profit organization, or the deadline for payment of monetary obligations fees charged by the controlling body, and in the case of submitting a tax return later – according to the date of its actual submission. If the taxpayer submits a clarifying calculation to the tax declaration, the amount of tax liabilities is determined within 1095 days from the date of its submission.
In case of non-compliance with these terms for determining the monetary liability, the taxpayer is released from it, and, accordingly, disputes arising in connection with such determination are not subject to consideration, either administratively or judicially.
The Supreme Court, in its Resolution dated May 2, 2021, in case No. 520/4238/19, emphasized that "when planning, organizing, conducting documentary checks, calculating monetary obligations based on their results, the supervisory authorities must take into account the statute of limitations specified in clause 102.1 of the article 102 of the Criminal Code of Ukraine, which also apply to the period of activity that can be covered by the inspection."
The court of cassation reached the correct conclusion that the controlling body violated the legal deadlines for conducting the inspection, and the courts of previous instances did not examine whether the period of activity planned to be inspected in the disputed inspection order (taking into account the submitted declarations) corresponds to the terms provided for in paragraph 102.1 of Article 102 of the Criminal Code of Ukraine.
Therefore, the tax authority is obliged to take into account the provisions of the article, both regarding the deadlines for determining the tax liability, and regarding the period that will be covered by the tax audit.
Therefore, the analysis of current judicial practice on issues related to the appeal of the results of tax audits shows that the detected violations do not always concern only taxpayers. As later determined in a court order, control bodies can also take actions that do not sufficiently comply with the norms of tax legislation, in particular, in terms of compliance with the tax audit procedure.
At the same time, in the case of proper confirmation of the facts and consequences of procedural violations committed by the tax authority, taxpayers, armed with effective legal support, still have the opportunity to prove the illegality of the actions of the controlling authority during the tax audit, and, as a result, the illegality of tax decisions adopted as a result of it notices-decisions, which allows taxpayers to reach a court appeal.
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