It is not just financial accounting or bookkeeping that are becoming increasingly digital. Tax audits are also adapting to these developments. But what does this Digitalisation What does the future hold for tax audits, and what changes are on the horizon? To shed light on these fascinating questions, „hsp live at 11“ will be devoting three weeks and three episodes to the major topic of the future of tax audits. We – and you – will be joined by the experienced tax auditor Gregor Danielmeyer. In the first part of the series, we’ll be discussing the modernisation of tax audits. What exactly is being modernised and how, and what does this mean for the parties involved?
Gregor Danielmeyer works for the North Rhine-Westphalia Tax Authority; more specifically, as a case officer in the Field Audit Department at the Regional Tax Office. In the livestream, he is expressing his views as a private individual. He has ten years’ experience in tax audits and previously worked as an external income tax auditor. As a result, he has witnessed the entire technological transformation and the changes that have taken place.
Paul begins by asking: Where do tax audits stand today? What does digitalisation mean for tax audits? In fact, the digitalisation of tax audits began in 2002 with the entry into force of the GDPdU. That said, the first steps were still very tentative.
Gregor recalls the early days, when financial accounting was first digitised. Nowadays, he feels, financial accounting has become more of a by-product. In his view, many business transactions take place in ancillary systems and upstream systems, such as ERP systems, till systems and inventory management systems. Consequently, the focus is much more on these areas these days than on financial accounting.
Tax audits are changing
Paul now turns his attention to the process of a tax audit. If, for example, he wishes to make data from the merchandise management system available for the audit, data quality plays a major role. Gregor confirms this from an auditor’s perspective. The process has changed significantly over time. Gregor reports that the first data deliveries from inventory management systems were virtually unusable. Errors and other factors led to inconsistencies that made it difficult or even impossible to assess the data.
Data quality has now improved significantly, which makes the auditors’ work considerably easier. Paul then asks directly how a digital tax audit is carried out. Gregor describes the process as follows:
Step 1: Invitation to a tax audit: The audit notice is served.
Step 2: The data exports are carried out for the purposes of the tax audit; this relates to the financial accounts and the data processing systems used.
Step 3: The person carrying out the check imports the data and analyses it for completeness and validity. They investigate the facts on the basis of the data records.
This is what happens during a tax audit
Paul asks how Gregor, as a tax inspector, can tell whether data-processing systems are being used. Gregor first mentions the balance sheet, where, for example, leasing charges for such systems appear. But Gregor also learns a great deal from other sources, such as during the initial interview or through the site visit. Particularly where legacy systems are in place, the Procedural documentation is highly relevant. It enables him to answer questions such as: How do the systems work? What needs to be taken into account when collecting data? What is the significance of the data to be assessed?
Next, Paul wants to know what a dream scenario would look like for the tax auditor Gregor Danielmeyer. Gregor replies straight away: „That it isn’t just some standard template procedural documentation. Because you very often find all sorts of standard template procedural documentation on the internet that isn’t actually suitable for the business at all.“ The best documentation, he says, is that which reflects the management having engaged intensively with their business in advance, for example with the IT systems. Paul asks whether Gregor considers it a top priority, when conducting a tax audit, to first understand the company and its processes. Gregor can only confirm this.
Tax audits are not a favour
Paul then asks what, in Gregor’s opinion, might influence the atmosphere during a tax audit. The tax auditor replies dryly that, strictly speaking, he simply needs usable data. Whether he has to follow up several times or can work through the process smoothly, he is simply doing his job. However, it means significantly more stress and risk for companies if complete and accurate data is not available.
Gregor Danielmeyer is now showing a visual representation of the evolution of tax audits on his screen. He expects data to be made available in real time in the near future. He also anticipates the use of blockchain technology in tax-related areas.
Paul then gives a specific example: the ice-cream parlour. Does the auditor arrive with a USB stick and extract the data from the till? Gregor says no. As an auditor, he does not go to the till. Usually, this is done by the taxpayer, the bookkeeper or the tax adviser. Whoever takes on the task copies the data onto a storage device and makes it available for the audit. Work is currently under way on a standardised national audit software programme which, using a QR code on a receipt, can directly show whether the figures are valid.
You can practise for tax audits too
Gregor recommends that companies carry out a mock tax audit every year and cash register inspection to carry out. After all, businesses should take a keen interest in what happens to their data. And whether the data entered into the till is correct or not. In this way, businesses can prepare themselves effectively for actual tax audits and know in advance whether all their data is complete and in order. Many tax firms and tax advisers offer such services specifically.
Tax consultancy firms should highlight to their clients that one of the added benefits of such a service is that it enables them to ensure data quality at an early stage. Often, it is not even possible to begin investigating the facts because the data is of insufficient quality or is simply not available. Gregor states quite clearly that most companies only take action once they have been hit hard by a tax audit.
Companies should be aware of their data
As a general rule, Gregor advises everyone who runs a business to familiarise themselves with digital processes and their own company’s data. This is because tax audits are constantly evolving, and the methods used are becoming increasingly digital. Anyone who fails to keep up will soon fall behind and face major problems during tax audits.
Next week, Gregor will be discussing the topic: „Digital tax audits: how to prepare“. Do join us again.
Disclaimer: Gregor Danielmeyer is a tax auditor; however, the views and assessments he expresses here in our stream are purely his own personal opinions. Recommendations, descriptions and forecasts of any kind are his subjective views and do not constitute official or legally binding statements.
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