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A tax audit from the Czech tax authority: how to prepare

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Today, notifications that a tax audit is starting mostly arrive in a company's data box, and this catches a lot of companies off guard, since they do not know what is expected of them at that point. A company with its documentation in order, however, can get through an audit without unnecessary stress and without the risk of a high additional assessment.

How the audit works and what the tax authority checks

Since 2021, tax audits have been initiated by correspondence: the tax authority delivers a notification stating the tax under review, the period covered, and the scope of the audit, or invites the company directly to arrange an in-person meeting. The scope of the audit can be unlimited, or narrowed to specific suppliers or particular taxable supplies, and the notification itself tells you what to focus on. The tax authority most often reviews the evidentiary quality of VAT documents, the justification of operating costs, and, for companies with foreign ties, the setup of transfer pricing.

The audit itself can take anywhere from a few weeks to several months, depending on how many documents are under review and how quickly the company supplies what is requested. A taxpayer has the right to submit evidence throughout the audit, not only at the very end, and that alone often shapes how the audit ultimately turns out.

How to prepare in advance

Invoices, contracts, and supporting documentation, for example for marketing services, need to be traceable and need to match each other, otherwise they become the first weak point during an audit. Cooperation with an accountant or tax advisor is best arranged through a power of attorney for representation during the audit, which saves time and nerves during the actual proceedings with the authority. Before filing a return, it is worth reviewing risk areas, such as representation expenses, home office costs, or intercompany transactions.

In practice, companies most often run into trouble not because documents are missing, but because the documents that do exist do not match up across the sales ledger, VAT control statements, and the accounts. Reconciling these three data sources should be a standard part of closing the books.

Ignoring the notification or failing to respond to requests for cooperation is one of the worst possible strategies. If a company does not cooperate during an audit, the tax authority can resort to assessing tax by estimation, which tends to be less favorable for the taxpayer than open cooperation from the start.

What to watch out for

  1. Deadlines for responding to the tax authority's requests are binding, and missing them can complicate the entire course of the audit.
  2. During the audit, you have the right to be present at meetings, to inspect the file, and to comment on the results, so it is far from a passive wait for a verdict.
  3. An additional payment assessment can be appealed, and the important thing is not to let the appeal deadline lapse.

An audit itself is not a problem; being unprepared is. At CATO, we help companies through audits from the first notification all the way to a potential appeal.

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