From Invitation to Explain to Settlement: Taxpayer Rights During an Audit

For most taxpayers a tax audit begins with an unexpected notice. Yet the process is governed from start to finish by specific procedural rules and deadlines. Knowing those rules directly determines the quality of the defence.

Stage 1 — Invitation to Explain

Where the administration makes a preliminary finding pointing to a tax loss, it may invite the taxpayer to explain rather than opening an audit immediately. This works in the taxpayer’s favour: if the explanation is accepted, no audit follows; and even if it is not, filing a return at this point can attract a reduced penalty.

The period running from service of the invitation is short and cannot be extended. The technical response prepared at this stage must address the underlying data of the preliminary finding point by point.

Stage 2 — The Audit

Once an audit begins, the taxpayer’s principal rights are as follows:

• To be informed of the subject and scope of the audit
• To have views and objections recorded in the audit minutes
• To request a reasonable period for books and documents
• To be represented technically by a licensed professional

The critical task at this stage is document management. The date and scope of every document submitted must be recorded in writing.

Stage 3 — Settlement

Once the report is issued, pre-assessment or post-assessment settlement may be pursued. Settlement offers the possibility of a reduction in both the principal tax and the penalty, and concludes far more quickly than litigation.

The settlement application and the litigation deadline interact. Which route to take should be decided after assessing the technical strength of the file.

The Governing Rule

At every stage the decisive fact is the date of service. As soon as a notice arrives, deadlines should be calculated, the file reviewed as a whole and the defence strategy set from day one. An application left to the final day can lose a technically sound case on procedure alone.