As part of the wave of digitalisation Tax audits are also changing. This means that consultants, as well as businesses and tax advisory firms, are set to face a host of new developments. That is why „hsp live at 11“ is devoting three weeks and three episodes to the major topic of the future of tax audits. Experienced tax auditor Gregor Danielmeyer will be sharing his personal views on the matter. In the second part of the series, we’ll be discussing how companies and tax consultancy firms can best prepare for a digital tax audit.
Gregor Danielmeyer works for the North Rhine-Westphalia Tax Authority; more specifically, he is a case officer in the Field Audit Unit at the Regional Tax Office. In the livestream, he is expressing his views as a private individual. He has ten years’ experience in business taxation audits and previously worked as a field auditor for payroll tax. As a result, he has witnessed the entire technological transformation and the changes that have taken place.
It is only two weeks before a tax audit that the company finds out it is due to take place. Consequently, neither the company nor the tax consultancy has time to react in any way. Accordingly, according to Gregor, preparations for a tax audit begin much earlier – in fact, years in advance.
Nowadays, even young children are being introduced to digitalisation, whether through digital toys or smartphones and tablets. A fully digitalised generation is growing up. Meanwhile, however, many law firms are not digitalised at all. They are unfamiliar with the tools and do not engage with digital processes. Yet it is only a matter of time before the boat has sailed. Here, Gregor emphasises that there are plenty of software solutions available that could help with the digitalisation of processes. It is important to look into them. Then one will also be better prepared for tax audits.
Procedural documentation as the starting point?
Paul asks here how a business should get started. Should I start by exporting the data I have – or draw up procedural documentation and see where I have which data that I should analyse? Gregor has a clear view on this: a company should examine its processes and understand them. The next step is to document them so that the information gathered can ultimately be reviewed. There are various tools available for this purpose.
Suppose a company has not yet drawn up any procedural documentation. Should the company start with the current situation – or go back in time and document developments year by year from memory? Gregor believes that hardly anyone can remember business details from years ago. Accordingly, his recommendation is: start now with the current situation – better late than never.
Paul wants to know what happens if a company has only documented the current year, but the auditor wishes to examine the last three years. In response, Gregor points out that even in the absence of documentation, certain records always exist. For example, it is never a problem to refer to manuals and the like. No documentation is required for this. Furthermore, there is the possibility that the company can explain the processes from previous years verbally. If the explanation is plausible, the procedural documentation can thus be provided verbally – in some countries, this is sufficient. It is important that procedural documentation is summarised. To this end, its validity period is recorded, specifying the start and end dates.
Plausible and understandable
The pandemic brought about changes to VAT. At the same time, many businesses were dealing with exceptional procedures. In hindsight, it is almost impossible to understand the overall situation without documentation. It is therefore vital to have comprehensive procedural documentation to ensure that the next tax audit does not turn into an ordeal. After all, the tax auditors are aware of the changes to VAT. However, if the data provided is incorrect, it will be impossible to trace where and how the errors occurred without documentation.
The following section addresses the question: How can I assess my own business? Here are Gregor’s personal suggestions:
Checking goods purchases: Check that purchases are plausible and compare them with sales of goods. Have receipts for items that were once paid for privately been recorded correctly? Or are purchases far too high compared with sales?
Check your electricity and water bills: Are the consumption figures plausible? Or are there any outliers on the high side or unusually high costs? The aim is to be able to explain to the auditor why these costs were incurred.
At this point, Gregor asks the tax advisers to offer a service such as a trial audit. There are tools available on the market for this purpose.
In the meantime, Paul reads out a question from a viewer from last week: In what format should a documentation be submitted – as a PDF or as a thick paper folder? Gregor personally prefers the PDF, which he can work through efficiently.
Intent or not?
Paul then turns to the topic of the internal control system. To what extent does an internal control system that is actively implemented influence the audit process? ‘Actively implemented’ means that the company not only documents the internal control measures but also their results. Gregor’s personal view on this is that as soon as he can see that a company is implementing and putting measures into practice, this significantly speeds up the audit. With an ICS in place, a company also counteracts any suspicion of intent in the event of irregularities. Drawing on real-life experience, Gregor recounts an incident where a technically flawless till was left open at all times. Receipts were only entered when a customer specifically asked for a receipt. If this is what day-to-day operations look like, even the most thoroughly documented ICS is, of course, of no use.
If a company identifies errors, it should report them to the authorities of its own accord. It should also work to eliminate the sources of these errors. Personally, Gregor believes that honesty is key here. Even if an error occurred some time ago, companies should approach the investigating authority of their own accord.
How can software manufacturers help?
Gregor then asked Paul how the software developer hsp could help with a tax audit. Paul pointed out that one of Opti.Tax’s objectives is not only to simplify the preparation of procedural documentation, but also to generate added value for businesses and law firms. The aim is to produce practical, well-organised documentation which, as an added bonus, will also be of assistance during the next tax audit.
Gregor Danielmeyer is currently writing a non-fiction book on the digitalisation of tax audits. What happens to the data records? How are they processed by the tax authorities? How are they incorporated into risk management? What happens if data records are not received or errors are not reported? Readers will find answers to these questions and much more in the book, as well as in the e-learning course that Gregor is developing in collaboration with hsp for the hsp Academy.
Next week: Talk-Arena on digital tax audits
Next week, the grand finale of the tax audit weeks awaits you on „hsp live at 11“. Alongside Gregor Danielmeyer, Paul will be welcoming three fascinating guests: Viktor Rebant, Martin Weidemann and another tax adviser as a surprise guest. In the Talk Arena, we’ll be tackling the question together: auditors, advisers and clients – one common goal? Look forward to it!
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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