Modernisation of tax audits and the role of the internal control system

Viktor Rebant works as a manager in the Tax Technology department at Ebner Stolz in Hanover. His main areas of focus are digital tax audit, tax data analysis and the establishment of a functioning internal control system in a digital context. He sees himself as the link between IT and tax law. As an internal control expert, he begins by taking a holistic view of the internal control system, which is designed to address the organisation’s overall risk. The aim of an ICS is to address and mitigate all internal and external risks facing the company. Dealing with these risks falls within the remit of risk management.

Viktor compares the ICS to a Lego set. Risk management is part of the set – and the compliance management system acts as the building instructions. It is important that management sets the rules. Paul sums it up for himself: An ICS is based on the assumption that senior management engages with the processes within the organisation, looks into tax-related issues and matters, assesses risks and establishes control measures. Any incidents that are discovered are recorded in the Tax Compliance Management System fetched.

Viktor adds that the distinction depends very much on the size of a company. The Federal Chamber of Tax Advisers has published a paper on the Topic: Tax Internal Control System carried out. The report described how SMEs almost never ICS, risk management or TCMS. These companies are far too small for that. The term ‘tax ICS’ was chosen to reflect this situation. The larger the company, the more clearly these areas are separated from one another. Ultimately, the aim is to avoid dependencies. These could include, for example, dominant suppliers, but also too many responsibilities concentrated on a single person.

Having an ICS does not mean that nothing can ever go wrong again. However, should something do go wrong, it will be recorded. According to Viktor, most errors occur during media breaks. The introduction of a standardised data format is a key component of the digital tax audit the future. As far as he can tell at present, this will involve standardisation in terms of both content and structure. The tax authorities will therefore retrieve the Z3 export, check the data against standardised criteria and visualise it. Any problems or anomalies that come to light will have to be explained by the tax adviser or the client. Viktor believes that law firms and consultancy firms are not sufficiently prepared for this situation.

One of the key skills that Viktor believes will be required in law firms in the future is data analysis. He has noticed this in the tax audits he supervises. There, as part of the digital tax audit We no longer talk about supporting documents, but only about data. Once data standardisation is in place, tax consultancy firms will have no choice but to carry out regular checks. It goes without saying that firms must prepare for this now. Admittedly, the responsibility for IKS and Co. at the client’s premises. At the very latest when the first digital tax audit using standardised data takes place, the relationship between the firm and its clients will be shaken if irregularities and incidents become rife. Law firms cannot turn a blind eye, particularly in the case of clients whose business models are scalable. Otherwise, any incidents will be scaled up along with the business.

Data analysis will become a task for specialist professionals. It will not be possible to cover this new area alongside day-to-day business. But what does Viktor suggest law firms do to prepare for the introduction of the data standard? The expert suggests starting to look now for colleagues who can cover the field of data analysis. And not (just) within the tax sector, but everywhere. Viktor doesn’t want to scare anyone, but simply to highlight the reality of the situation. The tax authorities are stepping up their game, yet he does not get the impression that law firms are doing the same.

Let us now assume that the law firm is ready. How can clients be persuaded? Especially at the outset, Viktor recommends selecting a client who brings a specific case to the firm and has a very good relationship with the person providing the advice. This client can be used as a test case, and a fair fee can be agreed upon – one that the client would have no problem paying. That way, both sides benefit. However, Viktor is quick to point out that the handover period for the firm could be very long. After all, every client works with a different data system.

According to Viktor, the most important thing is to put the necessary arrangements in place to be able to check the data provided by the tax authorities. He has already found that this data has been incorrect on occasion. Not out of malice. The tax authorities are also still learning the ropes.