The Audit Process

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THE AUDIT PROCESS

The Audit Process is of utmost importance since this is the stage at which it is going to be determined how different tax cases are going to be treated; in our case, whether gains received from immoveable property are going to be treated as trading receipts or as capital gains.

A tax audit is an examination of a taxpayer’s business records and financial affairs in order to ascertain the correct amount of taxes that should be reported and paid. A tax audit is an essential feature in a self-assessment tax regime, as it ensures full compliance with tax laws, deters any behaviour that can lead to loss of revenue to the State. A taxpayer can be selected for audit at any time. However, it does not necessarily mean that a taxpayer who is selected has committed an offence. The Audit function is carried in accordance with Standard Operating Procedures (SOPs) of relevant departments as set out below so as to ensure uniformity.

  • Selection of cases
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Cases, in order to be selected must be:

  1. meeting certain criteria,
  2. a case where import/purchase details are available
  3. one already assessed for income tax but where no corresponding assessments have been made for VAT and vice versa,
  4. one where there are material differences between supplies declared in VAT returns and turnover declared in income tax returns and vice versa
  5. one which has been audited and assessed in previous years showing a decline in income/turnover/profit margin and other apparent anomalies
  6. one which has not been audited during the last 5 income years
  7. subject to random selection with the assistance of the IS Department.
  • Allocation of cases

After undergoing a selection process, the files are then to be allocated to officers by the team leader.

  • Preliminary Examination/ File Review

During the preliminary examination stage, the following needs to be satisfied.

  • Ensure that all relevant records and documents are available in file, as soon as a file is received.
  • Make a note of any returns and accounts not submitted.
  • Examine the relevant returns and accounts.
  • Make a summary of all returns (VAT, Corporate Tax, PAYE) under examination.
  • Gather all information from Information Module and Taxpayer’s website in case such information is not already available in file. Here, we can through the Casier Hypothequaire (CH) obtain the number of transactions carried out by a taxpayer, determine the period of ownership of the immoveable property and thus ascertain whether there has been trade or not. It is important to note that even if many similar transactions establish that there has been trade, one single isolated transaction may still be considered as trade.
  • Carry out preliminary examination through an analysis of returns submitted as well as all information available in file. It is necessary to find out the nature of the taxpayer’s business in case this is not known already. Moreover, the CH may, for instance, be compared with the returns made in order to trace mismatches, if any, thus giving rise to further enquiring procedures.
  • Compare figures as declared in returns with those gathered through third party information. For example, through the CH and website of property dealers, we may come to find out the projects which have been completed already and see if these actually reflect on their respective accounts. As such, schemes which have been entered into such as sales done through the setting up of Societes, the different people involved thereon, may be traced.
  • Review reports of previous audits if any, or if available, audit findings for similar business. Furthermore, the type of returns previously filed may be compared with the current return to examine the type of revenue declared.
  • Prepare a brief history of the taxpayer based on information available. This will include non financial information such as type of business taxpayer operates in, the length of time he has been in business, the size of the business, among others.
  • Look for any suspicious items and note specific points which should be addressed.
  • Determine the areas on which the audit will focus.
  • If preliminary examination reveals that the case is not worthwhile, specific points which are to be noted before file is closed and returned.
  • If preliminary examination reveals that the case is worthwhile, determine the areas on which the audit will focus, together with a summary of discrepancies or inconsistencies noted and a list of queries to be made and documents to be produced.
  • Proceed with Desk Audit.
  • Desk Audit
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A desk audit is held at the MRA’s office. Desk audits are normally concerned with straight forward issues or tax adjustments which are usually dealt with via correspondence. A taxpayer may be called for interview at MRA’s office if further information is required. The following steps are to be followed.

  • Request for information and other particulars such as bank statements or invoices by means of written letter.
  • Grant taxpayer a delay to furnish information and other particulars since even if they usually do not prepare accounts, they will be required to submit these.
  • Prepare a list of documents submitted and information acquired from them such as breakdown of expenses.
  • Make copies of relevant documents so as to substantiate the assessment at objection/appeal stage, documentary evidence establishing the presence of trading such as the badges of trade where the intention of taxpayer, the number of transactions done, among others, are shown are very important.
  • Hold meeting with taxpayer and/or representative.
  • Analyse the information/ explanation provided.
  • Prepare the audit report
  • Vet report and give recommendations
  • Establish if field visit is required or not
  • Field Audit

A field audit is one that takes place at a taxpayer’s business premises. It involves the examination of the taxpayer’s business records. In the case of a sole-proprietorship or partnership, if the taxpayer’s business records are incomplete it may involve the examination of non-business records such as personal bank statements. A taxpayer will be given notice prior to a field audit. A field audit is carried out as follows:

  • Contact the taxpayer and apprise the latter that his case has been selected for a Field Audit after completing the preliminary examination and inform him in advance of periods and records that will be audited.
  • Make arrangements for an initial meeting with the taxpayer at his/her business premises and prepare the list of points to be raised at the Field Audit and confirm when and where the audit of the books and records will take place.
  • Carry out a risk assessment in order to focus on those items that have a high level of risk. Use analytical procedures and intelligence works in order to help in the understanding of the entity and to identify areas of potential risks.
  • Evaluate the reliability and accuracy of the taxpayer’s books and records. The more reliable the taxpayer’s records the more they can be used to determine the correct amount of tax that is required to be paid. Verify at the same time that the taxpayer is complying with the relevant provisions of the revenue Acts concerning the keeping of records.
  • Determine if the taxpayer has implemented any internal controls and whether these internal controls are strong or weak.
  • Trace the information from the source documents through the accounting systems. Information such as Land Registration fees, infrastructural costs, a lists of property acquirers, the cost apportionment basis, among other important information may be obtained hereby. For instance, we may confirm transactions show on the Casier Hypothequaire.
  • Confirm the validity of the data in the taxpayer’s accounting systems and the correctness of the amounts reported on his/her tax returns.
  • In case of an individual taxpayer, carry out additional tests to compare lifestyle of taxpayer with reported income.
  • Notify taxpayer of the proposed tax adjustments and the rationale for making such adjustments
  • Give the taxpayer the opportunity to state his views and give explanations and the proposed tax adjustments
  • If taxpayer is agreeable, the amended proposal is maintained, but in case he is not, he shall be issued with an assessment.