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A tax audit doesn't start with a raid. It starts with a letter. The tax authority notifies you that an audit has been initiated, calls for your cooperation, and requests that you submit documentation.
The problem lies in how most people react to an audit. They either panic and hand over everything they have, hoping to dispel any doubts. Or, conversely, they downplay communication with the tax authority and let deadlines pass. Neither reaction is ideal.
The audit itself has several phases. First, the tax authority reviews your tax return and accounting records. Then, they will ask you to explain specific items that may not add up for them. This is followed by an oral hearing where findings are discussed. Finally, you will receive a tax audit report, to which you can respond.
The entire process typically takes several months. In more complex cases, it takes even longer. And throughout the entire time, one basic rule applies.
The tax office records even telephone conversations in the form of official notes. Every answer you give and every document you voluntarily provide beyond what was requested becomes part of the file.
If you decide in good faith to dispel doubts by providing the tax authority with extensive documentation, you risk the office starting to ask questions about areas they weren't even checking before.
That is why we recommend insisting on written requests in every serious case. Answer only what the tax administrator asks. Nothing more. And most importantly: consult your strategy with an attorney before providing your first response.
During a tax audit, you have rights that business owners often fail to exercise simply because they are unaware of them. Under Section 86 of the Tax Code, you have the right to be present during meetings with your employees, to submit evidence, to propose the production of evidence that you do not have at your disposal, and to refute the tax administrator's doubts.
"On the other hand, you have obligations that cannot be bypassed. You must provide the necessary information about your organizational structure, submit evidence to support your claims, and not conceal evidence when you know its location. That last obligation is crucial. If you know that key documents are held by a third party, you must inform the tax office," warns attorney Petr Motyčka.
Written communication. Insist that the tax administrator provides their requests in writing. Verbal requests lead to misunderstandings, and you will have no proof of exactly what was asked of you.
Precise answers. Answer only what was requested. Be thorough, but do not volunteer extra information. Every additional document is a potential new avenue for the audit.
An attorney from the start. Involve your attorney before the audit even begins. An ill-considered approach in your dealings with the tax administrator can close off your options for further defense.
Stay calm. Stay calm. A tax audit is not an accusation. It is a process. And how you fare in it depends on how you manage it.
One of the first questions entrepreneurs ask us: how far back can the authorities go?
The standard limitation period for tax assessment is 3 years from the end of the tax periodin which the obligation to file a tax return arose. However, this period can be extended. It is enough for the tax administrator to take action aimed at assessing the tax, for you to file an additional tax return, or for steps to be initiated toward criminal prosecution for tax evasion during that time.
The maximum period is 10 years. After that, the right to assess tax expires without exception.
Archive all documentation for at least ten years. And if you know that your tax structure contains more aggressive elements, expect that the tax office may return to it even after several years. You can read more about this topic in a separate article – When tax optimization turns into tax fraud.
VAT-focused audits have their own specifics. The tax administrator focuses primarily on the legitimacy of claimed deductions. They examine whether the taxable supply actually took place, whether the supplier exists and is genuinely doing business, and whether the entire chain of transactions makes economic sense.
Sole traders often tend to perceive tax audits as something that mainly concerns corporations. However, the tax office audits individuals just as thoroughly. And in some areas, even more thoroughly.
"For individuals, audits most often focus on the ratio between declared income and standard of living, the legitimacy of claimed expenses (especially with flat-rate expenses), rental income, and income from abroad. The tax administrator has access to bank statements, the land registry, and other registers. If your declared income does not match what the office sees in the data, an audit will follow," summarizes attorney Petr Motyčka.
Audits are particularly specific when transitioning between flat-rate and actual expenses,where entrepreneurs often make mistakes regarding transitional provisions. This also applies to audits of capital income, where the tax office focuses on the correct taxation of dividends, interest, and profit shares.
In practice, we encounter cases that look hopeless at first glance. An entrepreneur receives a notice of a tax audit for the past year. Their accounting was handled by a relative with whom they had a falling out. The documents have disappeared. The entrepreneur has neither a paper nor an electronic version of the records. Yet, they claim everything was in order. They paid their taxes, filed returns, and submitted control statements. They just have no way to prove it.
You can download bank statements for the entire audited period. The bank archives them and will provide them upon request. You can find filed tax returns in your data mailbox or on the MOJE DANĚ portal. You can request duplicates of invoices from your customers, suppliers, and e-shops. Contracts, orders, confirmations, and everything that went through email can be retrieved from your inbox.
"If a third party handled your accounting and you know where the documents are, you have the right to propose that the tax administrator use evidence that you do not have at your disposal. You can propose questioning that person as a witness. The tax administrator will conduct the witness testimony because, according to the Tax Code, every person is obliged to testify about important circumstances regarding the administration of taxes concerning other persons, if they are known to them," says attorney Petr Motyčka.
The first step after receiving a notice should be requesting an extension of the deadline for submitting documents. The tax administrator can extend the deadline, and in the vast majority of cases, they will do so if they see that you are actively cooperating.
At the same time, it is wise to proactively inform the tax office about the situation. Explain why the situation occurred, describe the steps you are taking to reconstruct the records, and feel free to state which documents you objectively cannot obtain. This openness can work in your favor.
If, even after your efforts, the tax office is unable to assess the tax based on the provided evidencethey will proceed to "tax assessment based on aids." The authority will take a business owner in the same field with a similar turnover and number of employees and estimate your tax based on them. However, they will also take into account any explanations provided and undisputed evidence.
The law imposes an obligation on the tax administrator to also take into account any established circumstances that result in advantages for the taxpayer, even if you did not claim them yourself. But you have no control over the result, which can be a problem. You can appeal against a tax assessment based on aids only on the grounds that the legal conditions for this procedure were not met, not because of the amount of the tax itself.
And if the tax cannot be determined even using aids, the final option comes into play: tax negotiation. The tax administrator will negotiate the tax with you. It sounds reasonable, but there is a catch. You cannot file appealsagainst a decision on tax negotiation. What you agree on is final.
If a tax audit ends with the discovery of discrepancies that you cannot explain or prove, it will lead to an additional tax assessment and associated sanctions.
The penalty is assessed automatically. If the tax administrator assesses a higher tax than what you declared, you will pay 20% of the assessed difference. If they reduce your tax deduction, it is also 20%. This penalty does not apply if you file an additional tax return yourself, which leads to the additional assessment. In other words: if you find and admit the error before the tax office finds it, you do not pay the penalty.
A late payment interest is added to the penalty. Its rate corresponds to the CNB two-week repo rate plus 8 percentage points per annum. In practice, this meant an interest rate of 14.75% p.a. in the first half of 2024. When tax is assessed retroactively for multiple years, interest accumulates and the final amount can be quite a surprise.
If the tax administrator finds that you have failed to fulfill your obligation to retain accounting records pursuant to Section 31 of the Accounting Act,í, you face a fine of up to 3% of your total assets. For a company with assets of 10 million, this means a potential fine of 300,000 CZK. Just for not having the documents.
In addition, there are other possible penalties: a procedural fine of up to 500,000 CZK for obstructing tax administration, and a penalty for late tax filing if you failed to meet reporting obligations due to missing documentation.
What entrepreneurs often don't know: you can apply for a waiver of penalties, interest, and fines.If you can prove that the situation arose due to circumstances beyond your control (theft, natural disaster, actions of a third party) and that you actively cooperated in rectifying the issue, the tax administrator may reduce or waive the sanctions. You are not entitled to this, but submitting an application is always better than giving up.
Not every audit ends in an additional tax assessment. And not every assessment turns into criminal prosecution. But There are signs that suggest your situation is heading in the wrong direction.
The tax administrator begins asking questions that go beyond a standard audit. They ask about the purpose of transactions, relationships between individuals, and the timing of specific steps. They want to see email communication, meeting minutes, and internal documents. The audit expands to cover additional periods and other taxes.
At that point, you are no longer dealing with a standard audit. You are dealing with a potential accusation of abuse of rights, or even tax evasion. And that is exactly the moment when you need someone by your side a lawyerwho also understands the criminal law aspect.
We discuss what happens if an audit actually escalates into a tax assessment, and what to do if the matter moves toward criminal prosecution for tax evasion, in our follow-up article – Tax evasion, tax assessments, and potential criminal prosecution. How to defend yourself.
Article prepared byPetr Motyčka, an endors partner specializing in criminal law. If you are dealing with a tax audit and want to be sure you are proceeding correctly, reach out to us at trestni@endors.cz or call us at +420 721 208 275. We respond within 24 hours.
We have prepared a series of three articles that guide you through the entire spectrum of tax risks. From legal optimization and tax audits to criminal prosecution for tax evasion.
→When tax optimization turns into tax fraud
→ What to do when a tax audit arrives? You are currently reading.
→Tax evasion, assessments, and potential criminal prosecution. How to defend yourself
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