The difference between an on-site and a desk tax audit

Legal regulation. What types of tax audits are provided for by the Tax Code of the Russian Federation?

Tax authorities are given the right to carry out control measures, including conducting audits.
Art. 87 of the Tax Code of the Russian Federation (hereinafter referred to as the Tax Code of the Russian Federation) allows for desk and field tax audits (hereinafter referred to as KNI and VNP) in relation to payers of taxes and fees, and tax agents. When assigning desk and field tax audits, the following are guided by:

• Ch. 14 Tax Code of the Russian Federation;
• by order of the Federal Tax Service of the Russian Federation dated May 30, 2007 No. MM-3-06/ [email protected] , approved. The concept of a planning system for on-site tax audits and parameters for assessing the activities of a taxpayer (hereinafter referred to as the Concept);
• letter of the Federal Tax Service of the Russian Federation dated July 25, 2013 No. AS-4-2/13622, giving general recommendations on the procedure for conducting GNP;
• letter of the Federal Tax Service of the Russian Federation dated July 16, 2013 No. AS-4-2/12705, explaining the KNI procedure;
• letter of the Federal Tax Service of the Russian Federation dated July 17, 2013 No. AS-4-2/12837, concerning the implementation of control measures during tax audits;
• Order of the Federal Tax Service of the Russian Federation dated 05/08/2015 No. ММВ-7-2/ [email protected] , which established the forms of documents used in the process of carrying out control measures, and other regulations.

Tax audits will not be canceled due to quarantine measures and other consequences of the COVID-19 pandemic. However, new on-site inspections will not be scheduled temporarily until 06/01/2020. The pandemic did not affect desk inspections. A ready-made solution to the questions of which inspections will be suspended, whether it will be possible to execute the order later or submit documents can be found in the ConsultantPlus system. We offer to open access to the system temporarily (link to free 2-day access) or permanently (price list).

What other tax audits are there?

Based on the volume of information studied, a tax audit can be comprehensive (data on all taxes for a certain period are analyzed) and thematic (the procedure for paying one tax is monitored). If CIT is carried out separately for each submitted declaration (clause 2 of Article 88 of the Tax Code of the Russian Federation), then GNP can be assigned for several taxes simultaneously (clause 3 of Article 89 of the Tax Code of the Russian Federation).

Based on the order of assignment, inspections can be divided into scheduled and unscheduled. KNI are carried out regularly, regardless of the presence of risk criteria in the payer’s activities. The inclusion of a taxpayer in the IRR plan is related to the indicators of the submitted reports and other collected documents. In accordance with paragraph 11 of Art. 89 of the Tax Code of the Russian Federation, in the event of reorganization or liquidation of a legal entity, it is necessary to conduct an unscheduled GNP.

IMPORTANT! The activities of the Federal Tax Service bodies do not fall within the scope of the Law “On the Protection of Rights...” dated December 26, 2008 No. 294-FZ, therefore information about future control activities is not publicly available and is not communicated to the taxpayer at the beginning of the year by posting it on the departments’ websites.

Another type of tax audit under the Tax Code of the Russian Federation is repeated GNP, carried out to monitor the activities of lower-level inspectorates or when submitting an updated declaration that reduces the amount of tax payable.

Subject and period of tax audit

A desk tax audit refers to a separate declaration, and within its framework, inspectors analyze the payment of a specific tax or contribution. Accordingly, the audited period corresponds to the tax period, i.e. can last from a month to a year.

An on-site tax audit does not concern a separate report, but the calculation of mandatory payments as a whole. This can be either one or two taxes, or all mandatory payments that the company transfers.

The “spectrum” of an on-site tax audit is determined by the tax authorities themselves. But there is also a limitation on the period - the audit can cover no more than the previous three years (clause 4 of Article 89 of the Tax Code of the Russian Federation).

By what criteria do KNP and GNP differ?

The main differences between desk and field tax audits, in addition to the timing and location of control activities, are the scope of powers granted to employees of the Federal Tax Service:

During the internal inspection, inspectors have the opportunity to use alternative sources and methods of obtaining information. For example, data on the property of an enterprise can be confirmed by the results of an inventory and inspection of premises and documents.

The list of information that can be requested from the KNI is specified in Art. 88 Tax Code of the Russian Federation. As a general rule, only a declaration is submitted. If inconsistencies are identified, the taxpayer additionally confirms the legality of the declared deductions and benefits, the correctness of the calculations with explanations, appendices to the declaration and documents at his discretion (clauses 3, 4, 7 of Article 88 of the Tax Code of the Russian Federation).

For VNP, the following can be studied:

• tax reporting;
• constituent documents;
• contracts, licenses, orders;
• accounting registers, primary accounting documents, etc.

The list is not closed (clause 5.1 of the letter of the Federal Tax Service of the Russian Federation dated July 25, 2013 No. AS-4-2/13622).

The conduct of the VNP may be suspended while receiving responses from third parties, conducting an examination, and translating documents. The timing of the submission of the requested information and the need for additional activities and the involvement of specialists do not affect the progress of the KNI.

Below is a table comparing desk and field tax audits.

Cameral view

A desk audit is characterized by the fact that the company submits documents to the tax authority, where they are checked.
Those. Representatives of the Federal Tax Service do not need to travel anywhere for this event. They analyze the tax reports provided to them and draw conclusions based on them in their place. Most often, tax returns are examined here, but other documents, such as transport documentation, may also be examined. When an inspector sees a violation, he sends the company a letter demanding that the violation be eliminated. If everything is fine with the papers and there are no complaints against them, then in this case the organization will not receive any notification.

Often, during a desk check, typos and errors in document execution are discovered.

Most often, during a desk audit, typos and errors in document execution are discovered. It happens that papers are prophesied, i.e. they were submitted to the tax authority late, which is already considered a violation. When an order is received to eliminate all deficiencies, the company must work on it and then send a corrected version of each paper to the Federal Tax Service.

For a desk audit, tax officials do not need to receive special instructions from their superiors, which must be the case during an on-site audit. Tax officials have 3 months to thoroughly check all declarations. This event is regulated by Art. 88 Tax Code of the Russian Federation.

Documents older than 3 years cannot be verified.

Are the results of KNI mandatory for the following control activities?

KNI and GNP are types of tax audits, while KNI may precede GNP. If, during the conduct of the tax inspection, obtaining any information is difficult or impossible and there are grounds to suspect the taxpayer of tax evasion, the information is transferred to the planning department to resolve the issue of assigning an income tax (clause 13 of the letter of the Federal Tax Service of the Russian Federation dated July 16, 2013 No. AS-4- 2/12705).

Carrying out control measures in relation to declarations (periods and taxes) previously studied during the KNI cannot be considered the purpose of repeated inspections. GNP is an in-depth form of tax control. In the decision of the Constitutional Court of the Russian Federation dated December 20, 2016 No. 2672-O, the revision of the results of the KNI during a subsequent on-site audit does not infringe on the rights of the taxpayer, but guarantees compliance with the balance of public and private interests.

Even if a person successfully challenged the results of the tax assessment in court and was exempted from additional assessments, but during the conduct of the tax return previously undetected violations were discovered, when considering the results of the tax return, the court can support the tax authority, citing new evidence (definition of the Constitutional Court of the Russian Federation dated March 10, 2016 No. 571 -ABOUT). If inspectors use the legal IRR mechanism solely for the purpose of correcting their own mistakes made during the IRR, the court may side with the taxpayer (resolution of the Federal Arbitration Court ZSO dated November 29, 2012 in case No. A46-17546/2012).

The Constitutional Court explained the differences between desk and field tax audits

The Constitutional Court of the Russian Federation issued Ruling No. 2116-O on a complaint against a number of provisions of the Tax Code of the Russian Federation, including regarding the payment of penalties and fines based on the results of an on-site audit, although such violations were not identified by tax authorities during a previous desk audit.

Reason for applying to the Constitutional Court

Based on the results of a desk audit of PJSC Joint Stock Company, the tax authority ordered the taxpayer to return the overpaid income tax and refund VAT. Nevertheless, based on the results of a subsequent on-site audit, the tax authorities assessed additional taxes to the company for payment, penalties and a fine. The reason for this was the disagreement of the fiscal authority with the inclusion in profit expenses, as well as for the purposes of calculating and paying VAT, the costs of servicing and maintaining the housing stock, incurred after the transfer of the relevant property to municipalities.

Subsequently, arbitration courts of various instances supported the corresponding decision of the tax authority. They came to the conclusion that these expenses cannot be classified as justified expenses of the taxpayer, since they are not related to the development of natural resources and are not provided for in agreements with local governments.

Contents of the complaint to the Constitutional Court of the Russian Federation

In its complaint to the Constitutional Court of the Russian Federation, the company challenged a number of provisions of the Tax Code of the Russian Federation:

• clause 1 and clause 8 of Art. 75, defining the concept of penalties and the grounds for not accruing them;
• clause 1 art. 109, which establishes circumstances that exclude a person from being held accountable for committing a tax offense;
• subp. 3 p. 1 art. 111, recognizing as one of the circumstances excluding a person’s guilt in committing a tax offense, the taxpayer’s compliance with written explanations given by the tax or other authorized government body within its competence;
• clause 1 art. 122, establishing the grounds for charging a 20% fine on the unpaid amount of tax in case of non-payment or incomplete payment of tax amounts (fees, insurance contributions);
• clause 1 art. 252, which allows the taxpayer to reduce the income received by the amount of justified and documented expenses incurred, as well as revealing the concept of such expenses;
• subp. 3 p. 1 art. 253 that costs associated with production and sales include costs for the development of natural resources;
• para. 5 p. 1 art. 261, according to which expenses for the development of natural resources, in particular, include expenses stipulated by contracts (agreements) with government bodies of the constituent entities of the Russian Federation, with local governments and (or) tribal, family communities of indigenous peoples;
• clause 16 art. 270, which provides that when determining the tax base, as a general rule, expenses in the form of the value of gratuitously transferred property and expenses associated with such transfer are not taken into account.

According to the applicant, some of the provisions he disputed deprive the taxpayer of the opportunity to take into account for tax purposes the forced expenses for the maintenance of property transferred by him to municipalities, due to the latter’s lack of the resources necessary for this. A number of other controversial norms allow the collection of penalties and fines from the taxpayer for non-payment of taxes based on the results of an on-site audit, although the decision to return (reimburse) taxes was made by the tax authority itself based on the results of a desk audit.

Conclusions of the Constitutional Court

Having studied the materials of the complaint, the Constitutional Court found no grounds for accepting it for consideration. He recalled that tax legal relations are always based on the authority and subordination of the parties. The public legal obligation to pay taxes corresponds to the need for a detailed explanation of the grounds and limits of their payment.

With reference to Resolution No. 3-P/2004, the Constitutional Court noted that judicial control is not intended to check the economic feasibility of decisions made by business entities that have independence and broad discretion in the business sphere. Indeed, due to the risky nature of such activities, there are objective limits in the ability of courts to identify the presence of business miscalculations in it.

“Consequently, the norms of paragraph 1 of Art. 252, sub. 3 p. 1 art. 253, para. 5 p. 1 art. 261 and paragraph 16 of Art. 270 of the Tax Code of the Russian Federation require the establishment of an objective connection between the expenses incurred by the taxpayer and the focus of his activities on making a profit, and the burden of proving the unfoundedness of the taxpayer’s expenses rests with the tax authorities. As for the issue of the admissibility of holding a taxpayer liable for non-payment (incomplete payment) of taxes and fees identified as a result of an on-site tax audit, it is the taxpayer who has the obligation to pay legally established taxes (including in the amount and in the manner established by tax legislation ), and, consequently, liability for violation of the legislation on taxes and fees, in particular for non-payment (incomplete payment) of taxes and fees (Articles 23 and 122 of the Tax Code of the Russian Federation),” noted in the definition.

The Constitutional Court also explained that, unlike an on-site audit, a desk audit is aimed at the timely identification of errors in tax reporting and the prompt response of tax authorities to detected violations. This, in turn, allows taxpayers to mitigate the consequences of their incorrect application of the tax law. An on-site audit is focused on identifying those violations of tax legislation that cannot always be detected during a desk tax audit. As a rule, it is within the framework of such audits that violations caused by taxpayer abuses in the tax sphere and the desire to evade taxes are revealed.

“The specified provisions of the Tax Code of the Russian Federation do not imply duplication of control measures carried out within the framework of tax audits of the specified types - on-site and office. In this regard, they do not rule out the detection during an on-site tax audit (as a more in-depth form of tax control) of violations that were not discovered during a desk tax audit,” the Court explained.

Taking this into account, the Constitutional Court of the Russian Federation recalled that the rules for conducting an on-site audit, which provide for the possibility of revising the amount of a taxpayer’s tax liability for a specific tax period in comparison with its previously established amount as part of a desk audit, cannot violate the constitutional rights of taxpayers. With reference to its own Determination No. 571-O of March 10, 2021, the Court noted that, being provided with judicial control, they represent a mechanism for determining the actual size of the taxpayer’s tax liability in order to maintain a balance of private and public interests in the payment of taxes and fees.

AG experts commented on the Court’s findings

Senior lawyer of the Freytak and Sons Bureau of Attorneys Andrey Belik highlighted two aspects in this case. “Regarding the company’s claim about the impossibility of taking into account for tax purposes the forced expenses for the maintenance of property transferred by it to municipalities, the Constitutional Court of the Russian Federation predictably referred to the general provisions of Art. 252 and 270 of the Tax Code of the Russian Federation. The justification of any expenses depends on specific factual circumstances, and this is clearly not a question for the Constitutional Court. Regarding the company’s position on the illegality of additional penalties and fines accrued to it based on the results of an on-site inspection, if previously there were no similar claims within the framework of a desk inspection, the Court did not say anything new. He pointed out that the detection of violations during an on-site audit (as a more in-depth form of tax control) that were not discovered during a desk audit does not contradict the Constitution of the Russian Federation,” the expert explained.

According to Andrei Belik, this position has already been repeatedly expressed by the Constitutional Court of the Russian Federation, and it is difficult to disagree with it. “Because otherwise, the possibility of additional fines and penalties being assessed to the taxpayer is, in principle, impossible, since de facto, as part of an on-site audit, past periods are always checked for which the corresponding tax returns were provided and desk audits were carried out,” the lawyer concluded.

Tax practice partner at AB KIAP Andrey Zuikov believes that the approach of the Constitutional Court of the Russian Federation formulated in the commented judicial act is not new for judicial practice. “In particular, earlier, by Determination No. 571-O/2010 on the complaint of Chebarkulskaya Ptitsa LLC, a position was already formulated according to which tax authorities, as part of on-site tax audits, have the right to revise their decisions made as part of desk audits,” he noted.

According to the expert, this circumstance greatly increases uncertainty in the tax sphere, since it does not allow businesses to make decisions and evaluate the economy quickly, based on the results of promptly conducted desk audits. “After all, from the commented judicial position it follows that the decision on reimbursement or refund (offset) of taxes based on the results of a desk tax audit or the absence of tax claims after these audits can be disavowed based on the results of on-site audits of the same periods and taxes that were “closed” by desk audits . Which, undoubtedly, increases the dependence of business on tax discretion on the part of government bodies and negatively affects the investment background in the country,” concluded Andrey Zuikov.

Lawyer, senior partner, head of tax practice at Borodin and Partners, Alexey Paul, believes that in the definition of the Constitutional Court, the main problem concerned the possibility of applying, based on the results of an on-site tax audit, a fine and penalty for incorrect calculation of tax, which was previously “approved” by the tax authority within the framework of desk tax audit. “Such seemingly contradictory behavior of tax authorities often causes a negative reaction from taxpayers. In this case, the question arises about the principle of consistency (consistency) in the actions of tax authorities. In addition, additional doubts may arise due to the fact that, taking into account clause 8 of Art. 75 and sub. 3 p. 1 art. 111 of the Tax Code of the Russian Federation, penalties and fines are not assessed if the offense was committed as a result of compliance with written explanations from the tax authority on the procedure for calculating and paying taxes,” he noted.

According to the expert, the specified provisions of tax legislation, which exclude the application of penalties and fines, apply to other cases: “a decision based on the results of a desk tax audit cannot be considered as an explanation from the tax authorities.”

Alexey Paul added that the Constitutional Court has long drawn attention to the fact that the detection of offenses during field audits after desk audits is a normal circumstance and is due to the different goals, depth and scope of control activities that are possible within these two types of tax audits. “In this regard, the identification of offenses and the corresponding additional accrual of penalties and fines based on the results of on-site inspections for the periods for which a desk audit was carried out does not contradict the meaning of tax control procedures,” the lawyer concluded.

Counter audits by tax authorities

Counter checks are not considered types of checks. This definition conceals the right to demand the submission of documents about the taxpayer or a specific transaction from counterparties in accordance with Art. 93.1 Tax Code of the Russian Federation.

The authorized person conducting the inspection contacts the tax authority at the place of registration of the counterparty with an order to request documents. The requested information is submitted by the taxpayer to his inspectorate on the basis of a copy of the order and the request made on its basis.

The Tax Code of the Russian Federation does not contain a closed list of documents that may be required during control activities. The person being checked must independently analyze the volume of the requested data to determine its compliance with the instructions and requirements.

Documents must be submitted no later than 5 working days (Clause 5, Article 93.1 of the Tax Code of the Russian Federation). If there is a lack of information or the need for more time to make copies of documents, the taxpayer must notify the tax authority about this under threat of liability under Art. 126 of the Tax Code of the Russian Federation.

Since countering is one of the methods of control, the number of requests about the activities of counterparties is unlimited.

Desk inspection and its features

In addition to the Tax Code, the procedure for implementing this type of control is determined by the Regulations for conducting camera tests, registration and implementation of their results, approved by Order of the Ministry of Taxes of the Russian Federation No. BG-4-06/24 dsp dated 08/21/2003. According to this document, desk audits are divided into several stages, during which the following are checked:

• Completeness of presentation of tax reports in accordance with the law;
• Correct filling of papers;
• Arithmetic calculation of the indicated indicators;
• Timely submission of declarations;
• Justification for the use of benefits and interest rates;
• Correct calculation of the tax base.

This audit is carried out on the basis of declarations submitted by the taxpayer to the inspectorate.

A desk audit can be carried out for a period more than 3 years old if the taxpayer provides an update for this period of time.

This type of control has a number of features:

• Carried out without an order from the head (deputy) of the Federal Tax Service;
• The audit takes place on tax territory;
• The duration of the inspection does not exceed 3 months from the date of filing the declaration (calculation);
• Cannot be suspended or extended;
• The event covers one specific tax;
• All declarations are checked without exception;
• The inspector does not have the right to demand documents from the payer, except for the cases specified in Art. 88 NK.

The task of the desk audit is to identify errors in the calculation figures and in its completion, lateness in recording transactions and paying taxes. If errors are identified, the controller will assess additional tax and impose fines and penalties.

The taxpayer can provide the tax authorities with explanations regarding the detected inaccuracies, as well as additional documents confirming the accuracy of the figures reflected in the reporting.

Features of inspections of separate divisions of legal entities

CIT and GNP can be carried out in relation to registered separate divisions of legal entities (branches and representative offices) that submit declarations (calculations) and pay taxes at their location.

If the activities of a branch (representative office) are investigated within the framework of the GNP together with the activities of the parent organization, control activities are carried out by the tax authority at the location of the organization with the participation of inspection staff at the location of the unit. The Federal Tax Service has the right to carry out an independent IRR at the location of the branch (representative office). In this case, its period cannot exceed 1 month.

IMPORTANT! The number of individual GNP branches (representative offices) is not taken into account when calculating the total number of inspections carried out in relation to a person (clause 5 of Article 89 of the Tax Code of the Russian Federation).

Results of KNP and GNP

In the absence of claims from the tax authority, the tax return will end without notifying the payer, except in the case of a VAT refund based on the results of a desk audit of the declaration. The GNP will end with the drawing up of an act.

If violations are detected, CNI and VNP have similar negative consequences for the person. The procedure for making a decision and appeal is the same and is provided for in Art. 101 Tax Code of the Russian Federation. For information on how and why to challenge a tax audit report, read the article Objection to a desk tax audit report – sample. The tax authority has the right to apply interim measures (impose a ban on the alienation of property, suspend transactions on bank accounts) until the decision enters into legal force.