Publication

Tax audits of legal entities conducted by the Latvian Tax Authorities are being widely discussed, but the audits of individuals are rarely mentioned. This topic has not been widely discussed, as many individuals are reluctant to disclose that they are being audited. It should also be noted that in many cases the Tax Authority indicates that the audit of an individual will result in a tax surcharge as soon as it initiates the audit. This issue is becoming more and more relevant given the so-called automatic exchange of information between countries where Latvia first exchanged information for 2016 in September 2017.

In 2017, the Latvian Tax Authority carried out 885 tax audits (746 audits of legal entities, 139 audits of individuals including foreigners), of which 830 tax audits were effective (effectiveness: 94%), i.e. resulting into addition tax payments into Treasury.

The number of audits of individuals initiated by the Tax Authority tends to decrease. For example, 240 audits of individuals were carried out in 2015 (which constituted around 20% of all audits carried out that year). However, audits have become more targeted, i.e. before the Tax Authority carries out an audit of an individual, it scrupulously observes potential tax evaders and makes preliminary estimates of tax surcharges.

The Tax Authority must give a notification of an audit at least 10 working days before the start of the audit. However, experience has shown that the Tax Authority tends to announce a planned audit three or even six months before its start date. Prior to the start of an audit, the individual can make corrections to the respective annual income report and thus allows the individual to decrease risk of possible fines.

It is important that  contact with a tax expert is established upon receipt of a notification from the Tax Authority that an audit has been initiated. Following the decision to initiate an audit, the Tax Authority may and has the right to request detailed information about the non-cash turnover in the individual’s bank accounts during a given period. Information from the foreign tax authorities may be requested, if necessary.

When analysing the economic transactions of a individual, a tax expert may be able to estimate the potential risks and suggest corrections to the annual income report, if needed. If, in turn, the person has not carried out any unreported transactions that would have been subject to tax, the participation of a tax expert is still essential in both the initial audit negotiations and the subsequent audit process in order to avoid potential misunderstandings in communication with the Tax Authorities during both stages.

Even if the audit of an individual results in a tax surcharge, the tax expert will be able to assist in preparation of a complaint regarding the audit decision, and the decision may be revoked in whole or in part by another decision of the Director General of the Tax Authority. The tax expert will also continue to effectively participate and defend the rights of the taxpayer in Latvian courts.

Experience has shown that the senior management of the Tax Authorities is willing to cooperate and is ready to listen to taxpayers’ arguments and accept additional evidence. In one instance an additional personal income tax in the amount of approximately EUR 100,000 (including penalties and late payment fees) was calculated for an individual because of an Tax Authorities’ audit. A tax expert was timely involved and the expert’s scrupulous and dedicated work on the audit complaint resulted in complete cancellation of the surcharge by the Director General.

In the light of the above mentioned, we recommend taking the following steps if the Latvian Tax Authorities announce a tax audit of an individual:

(1) involve a tax expert upon receipt of a notification from the Tax Authorities that an audit has been initiated to immediately assess the potential risk of a tax surcharge and receive valuable recommendations for resolving the situation;
(2) submit or correct tax returns after consulting with the tax expert, thereby reducing the risk related to the amount of the potential surcharge;
(3) together with the tax expert elaborate a strategy for the tax dispute to effectively defend the taxpayer’s rights;
(4) prepare all the documents requested by the Tax Authorities in due time, thus demonstrating cooperation with them which, with the help of the tax expert, may result in reduction of the potential surcharge amount in case of a surcharge or complete revocation of the Tax Authorities’ decision.