Recently a lot of companies I know have been getting tax audited.
My friends tell me that it seems more common these days, certainly if you have had a quiet couple of years and you get audited, it will be a shock to the system, Generally it occurs just at the worst moments when you are busy on other projects, of like now with the economy starting to stagnate, you are busy just trying to keep revenues above expenses.
A tax audit can be a very stressful event and usually results in the tax department handing over an assessment that you haven’t paid enough taxes. I have only ever heard of a few tax audit that went the other way with the tax department actually saying that a company has paid too much. Yes, it does happen.
What is the reason for a tax audit?
Generally the tax department wants to audit companies once in their first 3 years of establishment and then periodically from then on. If you are a SOHO company, you may be lucky to avoid an audit for a long time, the only reason is that there are bigger fish for your local tax department to go after and you are just plain lucky. As Benjamin Franklin said, in this world, nothing is certain but death and taxes and the Japanese tax department is certainly going to track you down. After all they are here to harvest your yen in the 2nd largest economy in the world.
The best offense is a great defense.
The best way to defend your company during an audit is to have good books and an accountant that is happy to be called with little notice to spend 2-3 days in your offices with the tax guys. For your tax accountant that is part of the hazards of the job, for you, that is one of the reasons that you are paying a higher monthly fee than you think reasonable.
Keep decent audit trails like doing all the bill payment via the bank so you can recognize all expenses and not netting things off, otherwise your accountant is not going to be able to properly describe these to the tax people, and worst than that, if the tax auditor decides he needs a reason to claim you are not properly filing your profits, they will pick up on anything grey and demand explanations. Going back to find receipts of activities 3 years ago is a nightmare, particularly for the average small company with dozens of small expense transactions every month.
So, the end of the audit arrives and you sit down to hear the final conclusion from the tax inspection. Generally it will go along the lines of their disagreeing with some level of expenses, therefore your profits are understated and you owe several millions, or several tens of millions of back tax.
What do you do?
If you accept and think you are lucky because they didn’t pick up on a whole lot of other dodgy expenses, agree, thank them for their kindness and submit the amended tax returns.
If you disagree, which I think includes 99% of the small business community, then your only choice is to dispute the assessment. Your tax accountant’s experience of the tax department here is going to be crucial, how far can you push them? If it is a young guy straight out of college, then he isn’t going to be very brave against a veteran tax inspector with 20 years auditing experience. If you have a tax accountant with a similar lengthy experience, he may tell you that pushing back on some items will raise the stakes for the tax auditor, and the auditor will lose face at the department if you win, so he’ll back down before it becomes a departmental issue. Each situation is different, but, understanding the game, and how the opposition are placed will give you a much better outcome than just focusing on whether your expenses are deductible or not.
Good luck.
