Tax Audits in the Czech Republic: A Comprehensive Guide for Businesses

Tax audits are a reality for all businesses operating in the Czech Republic, irrespective of size or industry. This guide will shed light on the different types of tax audits, their procedures, and how you can proactively prepare for them.

Tax audits in the Czech Republic are governed by the Tax Code (Law No. 280/2009). This law outlines two primary audit procedures:

1. Procedure for Eliminating Doubts (Article 89): Initiated before a tax is assessed, this procedure is designed to address specific concerns or discrepancies that can be quickly clarified. If doubts remain unresolved, the tax administrator may notify the taxpayer, who then has 15 days to request additional evidence. If the issue is not resolved, a formal tax audit may follow.
2. Traditional Tax Audit (Article 85 et seq.): This is a more comprehensive and time-consuming procedure. The scope of the audit can be broad and may evolve throughout the process. It typically focuses on a specific tax and period (e.g., value-added tax for March 2023). The primary goal is to verify a business’s tax compliance.

Key Points

• Timeframe: The standard timeframe for initiating a tax audit is within three years from the end of the relevant tax period.
• Preparation: Businesses should proactively maintain accurate records and ensure compliance with tax regulations to facilitate a smooth audit process.

Red Flags for Tax Authorities: What Makes Your Business a Target?

A tax audit’s purpose is to prevent tax evasion. As a result, the tax authority typically only checks those organizations that appear suspicious to it. Below, we provide risk indicators that increase the likelihood of an audit:

Long-term losses

Companies reporting long-term losses may face suspicions of underreporting their income or mismanaging their business. Long-term losses may indicate that a company lacks a viable business model or is evading taxes.

Re-Amended Tax Returns

If a company or individual repeatedly amends its tax return, it may raise suspicions with the IRS. Such corrections could suggest incorrect filing of the original return, potentially prompting a closer examination of accounting records and tax practices.

High deductions or VAT refund claims

If a company or individual makes unusually high deductions or claims for VAT refunds, this may raise the suspicions of the tax authorities. Having well-documented and legitimate deduction claims is crucial for audit defense.

Businesses in high-risk sectors

Some industries are considered to be at higher risk for tax fraud. For example, the hospitality and retail industries have a high proportion of cash transactions, which can help conceal income. The construction and service industries are other sectors where there is an increased risk of tax fraud or abuse.

Companies and individuals with a high turnover rate

Large companies and high-income individuals have more transactions, and their accounting may be more complex. This factor increases the likelihood of errors or violations, which may result in a higher audit risk. The Tax Inspectorate often conducts audits of businesses where the likelihood of tax evasion may be greater.

Conducting a Tax Audit: A Step-by-Step Overview

The tax authority can initiate an audit within a three-year period from the end of the relevant tax period (Article 148 of the Tax Code). The process begins with a formal notice that outlines the tax type, period under review, required documents, and submission deadlines. This notice provides valuable information for you to prepare effectively.

Document Preparation

After receiving the notice, your next step is to gather all requested electronic and paper documents. Tax authorities typically focus on key records such as:

• Invoices (issued and received)
• Bank statements
• Accounting books
• Employment contracts
• Supplier contracts
• Property documents

Remember the mandatory retention periods for these documents:

• Financial statements and annual reports: 10 years
• Accounting documents, books, and inventories: 5 years
• VAT documents: 10 years
• Payroll and pension documents: 45 years

Audit Location

Coordinate with the tax authority to determine the audit location. You can choose to conduct the audit at the tax office (delivering all documents) or have the tax administrator visit your company premises.

Requesting Extensions

If you need more time to submit documents, request an extension before the original deadline. The tax authority must grant an extension of at least the remaining days before the initial deadline. Any further extensions are at their discretion (Section 36 of the Tax Code).

Cooperation and Burden of Proof

During the audit, cooperate fully with the tax administrator. Remember, the burden of proof rests with you. Any information in your tax return must be verifiable through documents, expert opinions, witnesses, or property inspections.

Duration and Conclusion

Tax audits can range from weeks to months, even years in extreme cases. The duration depends on the complexity and scope of the audit. The audit officially concludes when you receive a notice of completion along with a tax audit report detailing the findings and assessment.

Potential Outcomes

If the audit reveals unexplained discrepancies, you may be liable for back taxes, penalties, and interest for late payment.

You can appeal the tax assessment as an additional payment.

The amount of the penalty under the Tax Code is the same as in the Civil Code – the two-week repo rate plus 8% per annum. For example, in the first half of 2024, late payment penalties will be 14.75% per year.

We calculate the penalty based on the total amount of tax that has accrued:
(a) 20% if the tax is increased,

(b) 20% if the tax deduction is reduced,

(c) 1% upon reduction of tax loss.

Therefore, it is crucial to prepare for a tax audit and have all the necessary documents to avoid underpayment and fines.

Checking with the tax office doesn’t have to be stressful if you’re well-prepared. For this reason, it is advisable, for example, in large transactions, to have as much detailed documentation as possible, which you will keep on file for an appropriate time.

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